Friday 2018-06-08 11:30M EST


US Flow of Funds household wealth illustrates again the working of massive monetary ease. Household assets (stocks and housing mostly) came to about 790% of disposable personal income in 1Q, down slightly with the mini-equity correction. We live in a time of extreme changes in asset valuations and limited ones in inflation, although central banks continue to force their policy into an inflation-control framework. I was sure it was time for a joint tightening across the system by 2014,and certainly by 2017, but so far we see little change in Europe or Japan and only a slow tentative process of raising rates in the US.

Conclusion: Muted global tightening means US asset values are higher now as a share of income than in 1999 or 2007. We know these were unstable, so I assume the best that can happen now is a series of little crashes rotating across asset markets as policy tightens too late to prevent excesses. A form of this is happening in emerging markets where Turkey and Brazil are in the headlines.

Thursday 2018-06-07 9:45M EST


Yesterday's trade report showed a striking swing toward balance. As I have been arguing, the surge in imports after our late-2017 hurricanes had a big impact Storm hit regions dug deep into their finances-- insurance payouts, savings, and even deferred mortgage payments--to effect emergency repairs. Goods that they needed came fast, but much of it was imported. See the spike in imports beginning late last year and continuing into early 2018. As American manufacturers catch up with demand, which comes down after emergency buying is completed, imports can fall, as we see. If this single month of the quarter is any harbinger of the quarter overall, we could see a massively higher 2Q GDP with 4.5% growth.

Conclusion: Trump's advisers have complained loudly about in the worsening trade balance through 1Q, and that may have triggered their irascible boss to revisit his trade-destroying ideas. But the imports were actually a good thing: global production, much of it in China, met our emergency needs promptly when needed. Would scarcities and shortages in the devastated areas really have been the preferred solution? Or a spike in national inflation? And in a short time all balances return to more nearly normal, with the big GDP catch-up I expect in 2Q. If only the damage Mr. Trump can do to the global trading system would pass as quickly.

Wednesday 2018-06-06 9:45M EST


BIS bank lending has been notching down for some emerging markets. BIS data was revised for 4Q 2017, illustrating the point the Reserve Bank of India made again overnight: we are in a period of dollar shortage for emerging markets. Mainly dollar borrowers, these are one the marginal creditor classes that gets closed off first when lenders are full up. The process is not uniform: Russia has been paying back funds since 2009, Brazil since 2014, and China's access to offshore funds (shown on a separate axis because it is so much bigger) has been cycling up and down with the tentative tightening of its own financial markets.

Conclusion: Everything seems stable this morning as investors tilt toward thinking Trump's trade threats are idle posturing without long-term impact. Maybe so, maybe not. In the meantime, core central banks are still tightening and the Reserve Bank of India adds that US government issuance at the short-end is crowding out funding markets for EM borrowers.

Tuesday 2018-06-05 9:30AM EST


Oil prices are down as the US seeks higher Saudi and Russian oil production. Certainly US production (shown in purple) is up steadily as the shale revolution rolls on. Saudi cuts in 2017 (blue), together with cuts in the Gulf client states (not shown) have gradually drained an enormous amount of oil from once-bulging global inventories. That process is helped by a recovery in global growth and demand for oil, and by the collapse in oil production in Venezuela to what may be minimal domestic needs What has bothered oil traders is the possibility that Iranian production could be down another 1 mbpd if US sanctions can cut off some part of its exports again. Hence the request to push Saudi production back into overdrive again, as during 2015-7 in order to stabilize prices around $60 a barrel.

Conclusion: Effectively, the US will be appealing to Saudi self-interest in taking back markets from sanctioned Iran. The trouble is that this political move assumes Iran will not find a way to strike back at Saudi, the US, and global oil prices when they see what is being done.

Monday 2018-06-04 9:00AM EST


US bank lending shows inventory credit into 2Q. Bank lending traces out some of the same behavior we see in the business data. In particular, the big consumer credit growth to pay for recovery from last year's hurricanes is clear but tailing off. Replacing it has been a surge in commercial and industrial lending: often this credit is used for short-term inventory purposes. For some time I have been saying an end to de-stocking would lead to a one-time surge in production to refill inventories, which is also consistent with ISM and payroll reports we have seen in the second quarter.

Conclusion: The strong economy gives Mr. Trump a strong platform, for the moment, from which he can distract attention from his legal problems with a whirl of sanctions, negotiations, and provocations. The full cost of these headline-grabbing measures may become clearer later on, after mid-year, in a slower environment where they may interfere with investment spending, which thrives in a predictable environment.

Friday 2018-06-01 10:30AM EST


Payrolls were stronger and wages up less than I expected. Partly this reflects the stronger 2Q that we are finishing up. Looking at the employment to population participation ratio, which catches workers who are alive but not employed for whatever reason, we can see a long cycle that corresponds to the spike in younger working-age persons in the population through 1990. A long, 15 year average, that reaches through average business cycles shows the underlying trend. Worker participation has turned down because a) of an aging population, b) the shock of 2008, and c) a grim rise in opiate addiction and deaths of despair among less-educated workers. But where is the return to normal? A simple 15 year average says we are already near a cyclical peak recovery in participation. A more optimistic, hand-drawn, alternative is also shown. In that case we could go for another few years before a meaningful labor shortage develops.

Conclusion: Today's mix of more hiring and subdued wage gains is positive for a long-lived recovery because it argues, to a degree, for ongoing room to run in labor markets before wage inflation really comes back. It also means that highly disruptive trade sanctions to defend narrowly selected US workers, a plan hatched after 2008 by the Trump team, is mostly unnecessary while it can still create potentially enormous damage to the world economy.

Thursday 2018-05-31 8:30AM EST


US business profits were up in 1Q on tax cuts. BEA estimates, allowing for inventory valuations, actually show a heroic peak in pre-tax profits in 2014. A deeply political choice to cut business taxes this year yielded a boost to after-tax earnings that might be confused with a sustainable continued upward path. To me, that was a backward-engineered earnings path to justify the equity bubble then underway, seemingly to certify its success. It worked briefly but ran almost immediately into a volatility derivative bust in February. Now the real issue will be how growth holds up through some very volatile trade and inventory changes, to drive underlying earnings. At the same time, I expect the super-surge in earnings through 2014 to continue to wane as the cycle slowly shifts earnings power to workers from companies.

Conclusion: We continue to probe for weak points in elevated global asset prices. US payrolls tomorrow will give some hints on the business profit outlook: more inflation and wages with slower total sales growth would be the worst possible outcome for equities. Meanwhile, Italian populists figured out that an early election was not such a good idea after all, because it could become a referendum on the euro, with big capital outflows hanging on the balance. For now, risk aversion was down overnight.

Wednesday 2018-05-30 10:00AM EST


A little jumpy, aren't we? Investors certainly reacted to the risks of a populist rejection of Italy's EU agreements. They may be more jumpy than reasonable. One way to understand the Italian political situation is as a bid by the Northern League (green, left) to break out of the pack of for leading parties in a new election if a coalition cannot be formed that satisfies Italy's president it will follow constitutional rules--including the EU agreements. (The chart left shows Italian party polling since the general election.) By taking an extreme line, and waxing indignant about how Europe, markets, and the president are infringing on Italian voter sovereignty, the League has seen a spike in its support. Why stop a winning policy now? The League was in coalition talks with the Five Star Movement (yellow) and Berlusconi's old Forza Italia (blue.) But the League's discovery of the electoral value of strident populism leads it to seek an early election, now set for 29 July, to solidify its position in those talks.

Conclusion: Markets are jumpy because any fundamental news threatening the recovery, including US sanctions on China, has a disproportionate impact on investors who know they are nearing the end of momentum-driven asset market bubbles. But not all shocks are for real. I expect the Northern League to make increasingly strident claims for Italian independence from austerity in the coming electoral round, but to back off any implementation that must necessarily sink the nation's debt and financial system. Because what the League claims it will deliver to wishful-thinking voters is not part of the actual choice set it will face in office.

Tuesday 2018-05-29 10:15AM EST


Italian bonds sold off hard, most of all at the short end. That is consistent with a brief crisis of confidence but no final inflationary escape from the nation's debt burden. That is certainly one possibility; others could be much worse. Populist politicians have cynically proposed spending plans that are unaffordable if they also plan to service the nation's debt at inevitably higher rates. Italy's President rejected the populist coalition's economy minister, the prospective prime minister resigned, and a new election may be inevitable. If so, the public is going to have to decide whether populist spending is worth the loss of credibility on the enormous public debt outstanding. Italy's constitutional republic is being tested: can its institutions avoid a populist experiment that could easily turn into disaster? I suppose so, but it could be a nail-biter.

Conclusion: Populist appeals to national sovereignty do not repeal economic laws with magical thinking. As the European Commission pointed out last week, EU limits on spending and debt are offset by the super-low rate that makes old debt cheap to carry as part of a system. Throw out some of the EU deal and you may lose all of it. And remember, the owners of Italian government debt are almost all Italian banks and savers. Merkel even mentioned the Greek experience, a nation that is still painfully recovering from its populist experiment. For me all this is a folly and should not be happening. While we wait to see if the Italian public is really taken in by half-baked populist solutions, the situation certainly presents a target of opportunity for short-sellers who I expect are on the prowl across global macro once again.

Friday 2018-05-25 9:50AM EST


The European Commission points to the favorable "snowball" of European rates on Italian public debt, so far. Rather than wait for the incoming coalition to implement tax cuts and spending increases that obviously attracted Italian voters, the Commission implicitly points to the dangers of Italy's high public debt. The Commission even suggests that an austerity budget is called for, not an expansionary one. In real terms (simply minus inflation), debt to GDP ratios can only come down when GDP grows faster than the interest posted on outstanding debt. Italy is on course after many years of negative rates on new debt issued, to slowly bring down the average interest rate on its big debt. So Italy's debt to GDP ratio has been expected to stabilize. The Commission does not say it, but the analysis depends absolutely on the negative Euro-zone rates prevailing on new debt, which will have to end eventually. Any Italian experiment on going it alone will lead to suddenly much higher rates and a reverse "snowball". Populists have been warned.

Conclusion: A tough negotiation is coming up on how an immature populist coalition that has contracted to expand its deficit will resolve the contradiction with Europe's current constitution. Their desire to hand out goodies to reward local voters is obviously not going to fly if it comes at the expense of other nations and their electorates. And Italy cannot service its current debt outside the union because it is too close to a run-away snowball, the possibility of which would require higher rates to cover investors, which increases the snowball risk, etc, etc.

Thursday 2018-05-24 9:15AM EST


The Fed's Minutes seems less militant about fighting inflation now. "It was also noted that a temporary period of inflation modestly above 2 percent would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective." They mean to tilt toward holding back rate hikes even if inflation passes its target. One way to see this intent is to compare three month annualized inflation on a range of underlying PCE inflation components compared with the Fed's funds rate. (See left.) Ordinarily and in the long run we expect funds to 1-3% over CPI. Getting there is the problem: we paused in the needed hikes in 2016 because of the Chinese currency-global corporate bond sell off, we paused in 2017 when inflation briefly dipped. Now the Fed considers a) a new dip in inflation or b) a financial upset as risks to set against the need to eventually cover ground in raising rates. It tilts toward concluding that it can tolerate 3% or higher actual inflation for a time before catching up with funds rates.

Conclusion: Taking more risk with higher inflation means Fed Funds might eventually have to go higher, to 3%-5%, to catch up with inflation. Today's Trump proposal to impose tariffs on imported cars will certainly increase import prices, oil prices are already up nicely, and underlying inflation is already running around 3%. So the Fed may be tested in how much inflation it can tolerate. For me, all the risk now lies with the possibility that longer-end rates are going to sell-off looking at the growing possibility of greater, but deferred, funds rate hikes.

Wednesday 2018-05-23 9:00AM EST


Another example of strong-man comedy. In Turkey, the President has some home-grown theories about how low interest rates promote low inflation. He insists the central bank reduce rates at the risk of otherwise losing some of its independence, even as inflation rises to a 12% pace. Capital accounts are free and over the last three days someone does not like this idea because the lira has started to accelerate down, losing about 10% of its value (left). Many years of EM experience tells us that this is the point where roughly a 15-30% interest rate defense is needed promptly before the falling currency triggers much faster price hikes and provokes inflation expectations to become un-moored from around 10% recently. Inflation expectations reporting show that process is just beginning but it could get much, much, worse. At an extreme, expectations can shift one-to-one to the cost of foreign exchange, now up 30% in twelve months.

Conclusion: Want-to-be dictators actually have far less power than they think in a globalizing world. Trying to roll back the logic of global lowest cost supply according to a variety of home grown crank theories, like President Erdogan's low interest rate-low inflation theory, can lead to surprisingly severe costs because capital is free to panic, which is when the comedy turns into tragedy. Are you listening, Mr. Trump?

Tuesday 2018-05-22 9:30AM EST


More details on how the US and China defused a trade war, for now. Apparently, a US cut-off of ZTE parts is to end, and China agreed to increase imports of agricultural and energy products from the US, while cutting car import tariffs from 25% to 15%. For technology trade impacted by the ZTE affair, a quick look at the structure of China-US trade shows the tech trade involves limited direct export of US parts to China, while Chinese assemblers put together parts that have passed through the rest of Asia into final products then sent back to the US. See chart left, where Chinese assembled communications and computer exports to the US were $140 billion, but direct parts imports from the US are only $7 billion. This is one of the ways an exclusively bilateral trade balance analysis is childish. As I am sure the Chinese negotiators politely insisted.

Conclusion: China's still humble labor-intensive assembly of US parts into tech products depends on free access to these parts. Dependent on global trade supply chains, Chinese business must be shocked by the ZTE parts ban. A structural industry of this scale cannot be threatened by the US with impunity, as I am sure Xi explained to Trump. Even if this dispute blows over the Chinese are almost certain to work to avoid being caught in the same trap again, including by developing their own very expensive chip-making industry. That could rock the US out of its globally dominant position in the industry, which was up to now not under any visible threat. Well done, Mr. Trump.

Monday 2018-05-21 10:15AM EST


Taiwan's export orders are coming back from an unnerving dip. A key indicator of global trade health, Taiwan's export orders turned down sharply in February, partly because of the deep shut-down in China for an unusually extensive new year celebration. The impact was felt across global trade, to a degree perhaps not fully understood, and a sign of how integrated global trade has become. At the same time, I believe this dip only served to amplified the effect of an end to a long trade and inventory refilling cycle that has run its course.The good news is that Taiwan's export orders are back up somewhat, although not so much in the information equipment area.

Conclusion: While global trade seems to be stabilizing after a hiccup, the news over the weekend was mostly political. Italian coalition formation is worrying investors, because the coalition promises are inconsistent with Monetary Union. At the same time, an agreement not to impose trade sanctions between China and the US takes out a big global risk factor, at least for now. Taken together, these new political developments, one destabilizing, and the other stabilizing, have partly cancelling effects for market risk.

Friday 2018-05-18 9:45AM EST


The Italian coalition contract, which has been leaked for some days, was published. In it the two populist parties, Five Star and The League specify exactly what they agree on for policy. Because both are anti-establishment and ran on popular public sector give-aways, these got into the contract without correction. But once you fix exchange rates and the local fiscal balance, as Italy has done in the Monetary Union, the only variable left is to cut local costs to expand output and production. This is something that is extremely difficult to do in Italy's political culture, which is why we see enormous unemployment particularly for younger workers. Solving the problem with government spending obviously seems plausible on the surface, but it is not viable inside a continued monetary union. So, I assume the contract proposals will run into an institutional wall of resistance, including some immediate suggestions on budget correction.

Conclusion: Monetary Union in Europe depends on a process of excess deficit correction suggestions during the budget cycle. But these have been largely toothless in the case of France's long history of ignoring them has made apparent. So it is possible the two parties in Italy will charge ahead with big give-aways regardless of their impacts on an already enormous Italian public debt or any suggestions otherwise. It seems impossibly destructive because it removes the basis of the euro, or at least Italy's place in the currency union. Are these politicians really ready for so radical an experiment? I do not think so.

Thursday 2018-05-17 10:00AM EST


Brent crude prices reached $80/barrel overnight. Investors are operating with an idea that oil prices were up temporarily, but in a contained fashion, but maybe not. We are about half way back to the low-inventory environment of 2013-14 as the inventory rundown in 2017 continues into 2018. Early in the year inventories usually build, so we are at an inflection point where US crude inventories should start to come down further through September. This implies that a continued tighter market balance due to global growth, Saudi-Russian cuts, the implosion of Venezuelan output, and now the threat of sanctions on Iranian oil. Well done, Mr. Trump.

Conclusion: Higher oil prices will be turning up in CPI reports soon enough. With an upside event increasingly likely in US 2Q GDP, that will make anything but four Fed rate hikes hard to comprehend. Markets are adapting to the new picture, first of all in bond yields.

Wednesday 2018-05-16 7:30AM EST


Yesterday's report on US Inventories was a little on the low side through March. Broadly speaking, US inventories were kept down from 2015 to 2016, and have turned up more normally during 2017 to 2018. Because GDP is reported as quarterly changes at annual rates and inventories impact GDP as changes of changes, this produces an overall positive shock to GDP. In the quarterly reports that comes out as a seemingly random but predominantly positive series of quarterly shocks. With the March report we find the GDP impact is negligible for the three months to March, roughly as reported in 1Q GDP. Assuming an upward trend in inventories as normal, that should produce one last upward jolt from inventories for this cycle in 2Q. Right now it looks like it could be enough to get us to 4% GDP while underlying demand remains closer to 2.5%-3.0%.

Conclusion: We are about to see US growth that looks stronger than that abroad by a considerable margin. Today's drop in Japanese 1Q GDP follows a big slowdown in European GDP reported earlier. Underlying demand is not that much different among the areas, but try explaining that to a trading desk. The inventory surge will fall out in 3Q when underlying demand will be more clearly exposed, and lower. Until then the Fed is going to have to stay militant with effect on the dollar and US bond yields.

Tuesday 2018-05-15 10:30AM EST


Chinese production seems steady into early 2Q. Industrial value added was up 7.0% in April, with big gains in real estate development, in other infrastructure, and in raw materials extraction. The authorities also make much of stronger investment in high-tech manufacturing but it seems a little subdued to me. Offsetting these gains, electricity generation is quite a bit lower on an underlying basis, suggesting broad weakness. Trade is up, but imports are growing far faster than exports in line with a gradual trade adjustment. Although activity is moving along for now, the authorities are quite concerned about "elements of imbalanced growth", which I think means US trade sanctions linked to China's trade surplus. Activity is slowing slightly in China and could fall off more depending on how unstable global trading conditions become.

Conclusion: Global risk appetites are a little off today, perhaps on the view that deaths on the Gaza fence could be a precursor to war in the region. With that risk hanging over us, the underlying economic picture remains one of gently slowing global growth, in China and in Europe, amid tighter US monetary policy.

Monday 2018-05-14 10:15AM EST


ZTE gets a reprieve from its US parts ban. Local press ties this to the announcement of a visit by Lieu He, a special envoy, to the US. Presumably some exchange of benefits will follow that ratchets down the risk of a disorderly trade war. Relief for ZTE is useful for China right now because the administered credit crunch is already finding weak credits, including LeTV, an internet business, that is coping with losses and liquidity strains. But the whole ZTE affair may have lasting impact as local press is urging policy to replace China's dependence on US chip supplies for the future to avoid so traumatic a shock ever again.

Conclusion: As suddenly as it came, a source of trade friction with China seems to be lifted. Presumably there is some hidden logic to all this, linked perhaps to pressure on North Korea to accommodate Trump in upcoming negotiations on de-nuclearization. China-US trade is many times more important for global growth than Iran's recently sanctioned trade, so we should be looking at a net positive for the global outlook, for now.

Friday 2018-05-11 7:00AM EST


Chinese Social Credit keeps expanding steadily. Within the total, credit is being squeezed out of trust and entrusted loans, areas where banks use their broad credibility to front for company finance at high rates by dubious borrowers. As long as this bank backup credibility is not tested, the ponzi schemes can continue: now that these funds are being withdrawn we should expect a wave of defaults. That is, if banks do not take on the dubious borrowers directly: given the surge in direct renminbi bank lending we cannot exclude that case completely. The good news is that after a pause around the repricing of bond yields in 2017, direct bond and equity financing flows are up.

Conclusion: Global risk appetite snapped back yesterday, possibly on the impression that a real war will not result from Trump's unilateral sanctions on Iran. That stronger risk appetite may continue to prevail if also investors see Chinese policy as I do. That is, Chinese policy is squeezing down on the credit balloon one step at a time in a process that has taken M2 money growth down from 10-11% at this time last year to 8.3% in April. I retain the view that this mild administered squeeze can work to dampen demand and cut credit risk.

Thursday 2018-05-10 10:15AM EST


Chinese inflation dipped and US inflation picked up. In China, the rise was held back by a continued slide in the cost of foreign exchange (in SDR terms) and a low point on the pork-price cycle. In the US, inflation is drifting up under the pressure of higher oil prices and the higher cost of imports because of the weak dollar (at least until last month.) So underlying US ex-food and energy prices ticked up solidly in the month--see chart left. Within the US report there was more detail: used car prices continue to drift down and new car prices are starting to weaken, too, as the hurricane replacement surge abates. Meanwhile home prices move up relentless, as homes are far more slowly rebuilt than cars and are rising as an asset class.

Conclusion: Oil is up, predictably, after the US unilaterally reimposed sanctions on Iran amid increasing military risks in the Middle East. But the dollar also just started moving up over the last month, lowering US non-oil import costs. That yields a mixed picture for the US going forward that probably still means a gentle rise in US inflation and policy rates from here.

Wednesday 2018-05-09 9:00AM EST


Trump's bellicosity works with voters. His net disapproval among likely voters is now only 7% compared with 19% in December. A strong economy, tax cuts, relentless partisanship, and now a shift toward confrontation with Iran are working for him, more than I had thought possible. The trouble will come if bullying Iran by sanctions leads to Iranian military responses before the country can be again crippled by sanctions, instead of simply agreeing to additional missile controls and a permanent limit on nuclear work. If Iran takes such a military approach, Israel will certainly try to pull the US into a conflict with Iranian proxy forces in Lebanon, Yemen, and Syria, and ultimately an attack on Iran's nuclear capacity directly. Once we go down that road, Iranian interference with oil flows through the Straights of Hormuz become a possibility. Great. $100 a barrel for oil anyone?

Conclusion: I see a tug-of-war here between the slow revelation of Trump's private financial dealings and his implied defense that he should be given a pass to continue to conduct the people's pressing business with Korea and Iran. For me, the question of where Trump got the money to buy $500 million worth of country clubs over the last ten years, and the habitual use of intricate shell companies by his "lawyer", Michael Cohn, are all highly relevant. These and other facts are dripping out that will surely end up pointing to big-league money laundering in Trump's past. How better to cover this up but to change the topic to nuclear weapons and war risk? But stumbling around like this between unattractive alternatives, driven by the polls, is no way to run a great country.

Tuesday 2018-05-08 9:00AM EST


Fed Chairman Powell downplayed the impact of gently rising US rates on emerging markets. He claims capital flows are more driven by growth differentials and business opportunities than by rates only, although I would think both things should move together. He also claims that corporations in emerging markets with high interest due compared to earnings is high, but the risk is concentrated in China where it is beginning to recede. (See chart left.) I would not call that an overly comforting picture, however. And I am not sure it fully covers the risk on dollar debt in freely floating exchange rate nations outside of China.

Conclusion: With the hyper-active Mr. Trump stirring confusion over China tariffs, a North Korean nuclear deal, and an old Iranian nuclear deal, we have plenty of political risk. Meanwhile the program of steadily moving up US rates can also create financial risk, something Chairman Powell seems very aware of. His elaborate rejection of any idea that US rate hikes should be held up out of fear of what they can do to Emerging Markets gives him away.

Monday 2018-05-07 9:30AM EST


China's Current Account balance was in surprising 1Q deficit. This number slipped out late last week but it is so important I feel obligated to mention it now. In recent years, the first quarter has been weaker than the year's average, but not by much. Extrapolating, I get near balance on China' s global current account balance in 2018. Coming at a time of extreme US trade demands, the published global current account points to the irrelevance of any narrow, bilateral, goods trade balance as a meaningful measure of balance. Not that I expect the US economic team to change its views based on the evidence.

Conclusion: China's remarkable financial expansion of credit and money means there is always room for funds to leave the country, driving down the currency, and promoting further outflows, as in 2015. (See purple bars above, where my estimate of implied capital outflows compare with a smaller current account surplus) Without China's global current account surplus to pay for capital outflows, that puts the PBOC back in a position to start losing reserves to capital outflows, attracted among other things by higher US short-term interest rates. And several other emerging markets are having the same problem. Perhaps Mr. Trump's team should consider how trade will look with a 10-20% cheaper CNY.

Friday 2018-05-04 10:00AM EST


US Payroll Employment was solid and last month was revised up a bit. The story here has been how unusually warm February weather brought forward some outdoor work that would normally have started a few months later. So now that we can see April date, it looks like underlying job gains have been solid over the last three months taken together. (See Chart left.) Earlier, the baseline BED data showed that the drop in jobs in September is seriously understated in the Payroll estimate, but we do not know how badly the payroll report has been tracking reality since. Still, with this low level of unemployment (last seen in 2007, and before that in 1968!), separately measured in the household survey, we have to assume workers are becoming scarce and so wages will move up.

Conclusion: I expect higher wages, as shown in the ECI report but barely visible in this morning's less accurate Payroll Report. Once we hit the bottom of the barrel on unused labor, companies must start to bid up wages, while workers will push for higher wages after seeing higher inflation. It will be hard to avoid. The only way the cycle continues then is with investment that yields offsetting productivity gains. Trade-rule uncertainty does not help businesses plan for this critical investment.

Thursday 2018-05-03 10:30AM EST


US initial unemployment claims came in unexpectedly low. The four week average for this global and hard series (no fudge factors or wishful thinking are included) is at its lowest since 1973! Hard to believe and beginning to clash with my assumption of economic slowing into mid-year. I had assumed initial unemployment claims would drift back closer to 250 thousand, but today's report means a stretched labor market and incipient wage inflation is closer than I thought.

Conclusion: Initial unemployment is not always tied exactly to GDP. It is perfectly possible that scarce workers are hard to come by and so firings that lead to initial unemployment claims are falling. That could be happening even as new hiring remains soggy, in which case more inflation and less output growth is a coming closer. Yesterday's Fed statement included a line about how inflation is no longer approaching, but has arrived at the policy target. Soon we may soon find out exactly how much inflation overshooting the Fed is really ready to allow.

Wednesday 2018-05-02 9:00AM EST


Big 3 (US, Europe, and China) GDP is slowing moderately. European GDP came in this morning, completing the big three GDP picture, which certainly seems to be slowing on average (by market value), led down by Europe. Further slowing is not yet visible in this morning's EU unemployment, or US ADP employment which were both flattish. I claim the European GDP slowdown comes because Europe is leveraged more to the global trade which is pausing (Notice that I am using my own estimate of Chinese GDP for 2015 which I think was much slower than reported.)

Conclusion: An environment of moderately slowing growth promotes trade wars. Unfortunately, aggressive behavior in trying to grab share for one nation will lead to retaliation that can only slow global growth further. Hopefully, even the US Treasury and Trade Representatives journeying to China must understand this. But we shall see.

Tuesday 2018-05-01 9:00AM EST


US Treasury borrowing will be less than planned in 2Q. What they really know is that Treasury over-borrowed in 1Q, ending up with higher than expected cash balances, which in turn will allow a cash run-off that should reduce net market borrowing needs in 2Q. (See Chart with a lower market borrowing need in 2Q, where 2017/8(R) is the newest revision). Why the miss? One possibility is that business activity was indeed stronger in 1Q than the BEA has estimated, raising tax revenue (my preferred explanation), or, alternatively, that the tax cuts were not fully implemented as fast as expected.

Conclusion: Whatever the reason for its over-borrowing in 1Q, the big news is that Treasury borrowing will resume at a high pace later in the year and as far as the eye can see. Also, it is worth noting that the 1Q ploy of concentrating a very high share of net borrowing in the short end, driving up short rates and holding down long rates, is not easily repeatable. If continued it will leave the Treasury open to roll-over risk and higher short rates.