Sunday, October 30, 2016

Today's links

1--Inflation, Long Quiescent, Begins to Stir --Fed’s preferred measure reached a two-year high in the third quarter

Nonetheless, it could portend a significant repricing in financial markets, which had come to assume inflation would be too low forever. Since early July the U.S. 10-year Treasury yield (which moves in the opposite direction to price) has climbed half a percentage point to 1.85%. Yields in other countries have risen somewhat less. ...

Wage growth is still weak, but less weak than it was. The employment cost index released by the Labor Department Friday showed that excluding jobs paid via incentives, such as sales commissions, wages were up 2.4% in the third quarter from a year earlier, the fastest since 2009. Though well below the 3% to 3.5% that prevailed before the crisis, current wage growth is roughly in line with the sluggish pace of productivity growth.

Another potential worry is inflation expectations. On Friday, the University of Michigan said consumers’ long-term expectations had slipped to 2.4%, the lowest on record. However, this measure has been sliding for a while and this is because a minority of people who had expected runaway inflation have thrown in the towel. A growing share now expect inflation of exactly 2%. That leads Goldman to believe the public’s views on inflation really haven’t changed much in the past decade, a view top Fed officials share....

That same week, Fed Chairwoman Janet Yellen spoke approvingly of allowing unemployment to fall to levels typically associated with accelerating inflation. to undo some of the damage that years of joblessness have done. And in September, the Bank of Japan committed to not just meeting but exceeding its 2% target.
Of course, aiming for higher inflation is one thing; achieving it another. The Bank of Japan and the European Central Bank both pushed short-term interest rates below zero and bought large quantities of bonds in an effort to spur lending, growth and prices, but the costs of those policies are rising. 
Zero to negative rates are crushing banks’ lending margins, which could undermine their ability to lend. One reason bond yields now are rising is a belief that the ECB and BOJ want to protect their banks from further pressure.

Even as central banks lose their appetite for stimulus, elected governments are rediscovering theirs. Governments in Britain and Japan have relaxed their budgets, and many think the U.S. is likely to as well, regardless of who wins the presidential election. Morgan Stanley predicts fiscal policy will add to growth in the developed economies next year, for the first time since 2010...

While higher inflation and more fiscal stimulus portend more upward pressure on interest rates, there still seems little chance they will get to the 4% or above that investors once took for granted.
The U.S. grew just 1.5% in the year through the third quarter, the Commerce Department reported Friday, which may be the new trend given the drag from an aging population and lackluster productivity. Sluggish growth saps investment and borrowing and limits how high interest rates can go.
The expansion is also getting old, suggesting odds of a recession are also rising. The Fed may be on the verge of getting inflation back to normal, but getting growth back to normal remains as elusive as ever.

2--Sorry, but the economy's growth spurt isn't going to last--excluding "transitory" effects, the actual growth rate would have been closer to the 1.5 percent rate of the past four quarters.

The U.S. economy grew in the third quarter at its fastest pace in two years, due largely to factors that are unlikely to last.
Gross domestic product increased at a 2.9 percent rate, above expectations and at the best rate since the 5 percent posted in the third quarter of 2014. The positive surprise comes as the Fed contemplates its second interest rate hike in more than 10 years, and Americans are set to elect a new president in less than two weeks.
However, a look under the hood shows that the U.S. is likely stuck in the same growth trap in which it has found itself since the Great Recession ended in mid-2009.
Many of the gains came due to a surge in soybean exports.
Soybeans? Yes, there has been a record bumper crop this year in the U.S., and strong demand from China helped fuel an export bonanza. However, that's not expected to last, and the U.S. also is likely to face competition in the market.
But there were other factors besides soybeans not to like in this report.

'Nothing here to write home about'

Consumer spending cooled to 2.1 percent from 4.3 percent in the previous quarter, residential investment tumbled by 6.2 percent, equipment purchases declined by 2.7 percent and the growth rate of final sales to domestic purchasers increased by just 1.4 percent.
"Accordingly, a reasonable case could be made that this is actually a disappointing GDP report," Paul Ashworth, chief U.S. economist at Capital Economics, said in a client note.
In addition to the soybean-led export growth, the GDP report also was aided by a 0.6 percentage point gain in inventories.

Excluding "transitory" effects, the actual growth rate would have been closer to the 1.5 percent rate of the past four quarters, even including Friday's reading, according to David Rosenberg, chief economist and strategist at Gluskin Sheff.
"In other words, nothing here to write home about," he said in his morning note.

Regardless of the outcome of the election, the environment for investment remains weak due to a combination of higher wages and weak pricing power for firms, which have caused profits to decline during the past two years."
A separate report from the Labor Department showed compensation costs for the quarter rose 2.3 percent from the year-ago rate, compared with a 2 percent gain registered in September 2015

3--Year over year growth consumer credit

4--Labor force growth has slowed appreciably in the 21st century and particularly after the crisis. The slowdown is a chief factor explaining a slowdown in GDP. Since 2009, the labor force has grown at just a 0.5% pace


Demographics pay a large role in potential GDP growth and additionally on the supply/demand for savings/investment. Having a simple demographic measure such as that has historically had a degree of accuracy, which offers a neat tool for gaining insight. The aging US population and the slowdown in immigration are captured indirectly in the labor force statistic.

We concluded at the time:
"If indeed Japan fails to encourage "wage growth" in what seems to be a "tighter labor" market, given the demographic headwinds the country faces, we think Japan might indeed be on the "Road to Nowhere. Unless the Japanese government "tries harder" in stimulating "wage growth", no matter how nice it is for Japan to reach "full-employment", the "deflationary" forces the country faces thanks to its very weak demographic prospects could become rapidly "insurmountable". - source Macronomics, June 2016
Either you focus on labor or on capital, end of the day, Japan has to decide whether it wants to favor "wall street" or "main street".

Our final chart displays US debt growth relative to EBITDA and comes from JP Morgan's Credit and Market Outlook and Strategy note from the 20th of October:
"The ongoing deterioration of credit fundamentals remains the key market risk, however. Debt issuance continues to grow much faster than EBITDA, even if the expected uptick in revenue growth this quarter materializes. Investors are aware of this, but are focused on the strong technicals outweighing these risks. This has been the right view since 1Q of this year. However, our sense is that some investors are uncomfortable with market valuation given these technicals, and if there is a catalyst for a risk off market, this concern about fundamentals would reassert itself.

5--Wall Street banks look for fiscal stimulus in 2017

6--The Five Lamest Excuses for Hillary Clinton’s Vote to Invade Iraq

7--Big Central Bank Assets Jump Fastest in 5 Years to $21 Trillion 

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