On the heels of Janet Yellen’s testimony to Congress, bonds are falling and the dollar is moving higher. But this is not business as usual because these are dangerous times.
Here is what Peter Boockvar wrote today as the world awaits the next round of monetary madness: The NFIB small business optimism index held its recent sturdy gains at 105.9 for January vs 105.8 in December. It’s at the best level since December 2004. Plans to Hire rose another 2 pts to 18, the most since before the recession. After spiking by 38 pts last month, those that Expect a Better Economy fell by 2 pts as did those that Expect Higher Sales (after jumping by 20 pts). Those that said it’s a Good Time to Expand rose to the highest since 2004. Compensation plans continued to improve with it matching the best level in 15 years. This is because Positions Not Able To Fill continues to rise to match 15 yr high. Earnings trends are still negative but less so. On inflation, Higher Selling Prices fell 1 pt but holding around 2 yr highs. The disappointment within was the capital spending plans which fell 2 pts to 27 and is back to where it was before the election. Hopefully tax policy will encourage an improvement there.
Bottom line, “Small business owners like what they see so far in Washington” said the NFIB CEO. Bill Dunkelberg added “The continued surge in optimism is a welcome sign that economic growth is coming. The very positive expectations that we see in our data have already begun translating into hiring and spending in the small business sector.” Some key components of this index has gone parabolic since the election and now the rubber meets the road in terms of what policy comes next and the extent taxes can be cut and regulatory relief can be had that would satisfy this optimism…
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On corporate tax reform that is generating a lot of the business optimism, the battle lines are being drawn on how to pay for lower tax rates. In case you didn’t see, the front page of today’s FT: “Brussels gears up for high stakes challenge to US border tax plan”, “Lawyers for the EU and other trading partners have begun laying the groundwork for a legal challenge to a US border tax proposal that could trigger the biggest case in WTO history.” Reuters today is reporting that “Chief executives of some of America’s largest retailers, including Target and Best Buy, are headed to Washington this week to make their case that a controversial tax on imports would raise consumer prices and hurt their businesses, according to people familiar with the plan.” The group of 8 CEO’s will be meeting with Kevin Brady, a key architect of the Ryan Better Way Plan.
These Are Dangerous Times
In China, aggregate financing growth further spirals out of control. In January it totaled 3.74T yuan, well above the estimate of 3T, up more than 2x from December and higher by 8% y/o/y. The one caveat though is because of the January holiday, a lot of lending is front loaded. Thus, it’s better to see February and combine with January to get the true picture. Bank loans made up 2.03T of this which was actually below the estimate of 2.44T and therefore non banks providing the balance. Bottom line, this data explains why the PBOC has recently raised repo rates and every night seems to be tinkering with some money market facility in order to tame this explosion in credit growth. Dangerous times.
German ZEW economic expectations index on their economy disappointed in February. It fell to 10.4 from 16.6 vs the estimate of 15 and that’s a 4 month low. Current conditions held in better and were little changed. The ZEW said, “The downturn in expectations is likely to be the result of the recently published unfavourable figures for industrial production, retail sales and exports. Political uncertainty regarding Brexit, the future US economic policy as well as the considerable number of upcoming elections in Europe further depresses expectations. Nevertheless, the economic environment in Germany has not significantly worsened.” We’ll see if this is followed up by actual business confidence within the IFO index next week.
Lastly in the UK, input price pressures continues to skyrocket but it is still only slowly filtering into consumer prices. January input prices rose 20.5% y/o/y, above the estimate of up 18.5%. Something last seen in 2008. Output prices were up just 3.5%. Hello margin squeeze. Headline CPI was up by 1.8% y/o/y with a core rise of 1.6% and both were one tenth less than expected. The headline gain is the most since June 2014 and the core rate holds at the most since August 2014. The market is focused on the CPI miss and its why inflation breakevens are down by 5 bps for both 5 yr and 10 yr maturities. The pound is back below $1.25.
Regarding Janet Yellen:
Janet Yellen is NOT committing herself to a March rate hike but she’s doing what I thought she should do and that is put March on the table (try to get rate hike odds nearer to 50%) vs a market that essentially took it off (with odds at 30%). She talked about the continued progress made on the employment front and the inflation stats moving to their target goals.
On the possible monetary policy response, she repeated “waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.” That’s what puts March on the table.
“Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations.” Keep in mind, when the Fed reaches their goals, the fed funds rate should be at their long term target of 3% vs .625% now. Rate hike cycles should not begin in earnest when you have reached the Congressional mandates. I highlight this to repeat how far behind they are in adjusting policy. They counter this by continuing to rely on their econometrically measured ‘neutral rate’ which the Fed estimates to be “well below pre crisis levels, a phenomenon that may reflect slow productivity growth, subdued economic growth abroad, strong demand for safe longer term assets and other factors.” She though expects this ‘neutral rate’ to rise over time as those factors diminish in their impact.
It wasn’t until the 2nd to last paragraph of her testimony that she touched upon upcoming fiscal policy by saying “changes in fiscal policy or other economic policies could potentially affect the economic outlook. Of course, it is too early to know what policy changes will be put in place or how their economic effects will unfold.” I appreciated that she didn’t use the word ‘uncertainty’ but this commentary basically implies that.
She finished by saying they will continue to reinvest maturing securities but I would hope she’s asked about when the balance sheet will start shrinking. That will be a major market event when it starts to happen but likely not to the end of this year or into 2018.
Yields are jumping as March is on the table. The 2 yr note yield is up 4 bps on the day to the highest since December 28th and the 10 yr yield is up by 4 bps as well to 2.48% and puts it a touch above the multi month range of 2.30-2.60%. Rate hike odds as of this writing is up to 36% for March vs 30% just prior and up from 24% last week.
***KWN has now released the remarkable audio interview with Peter Boockvar and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***ALSO JUST RELEASED: Reflation Trade Creates Historic Breakouts – What This Means For The Gold & Silver Markets CLICK HERE.
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