The Financial Times – The long wait for a productivity resurgence Improvement in living standards depends almost entirely on rising output per worker
You can see the computer age everywhere but in the productivity statistics.” Today, we could repeat this celebrated 1987 statement by Robert Solow, Nobel laureate founder of modern growth theory, with the substitution of “technology” for “computer”. We live in an age judged to be one of exciting technological change, but our national accounts tell us that productivity is almost stagnant. Is the slowdown or the innovation an illusion? If not, what might explain the puzzle? The slowdown, if true, matters. As Paul Krugman, also a Nobel laureate, argued, “Productivity isn’t everything, but in the long run it is almost everything.” Improvements in standards of living depend almost entirely on rising output per worker.
Most market participants expect the Fed to raise rates Wednesday. Investors also will be trying to determine whether the central bank plans to accelerate the pace of its rate increases this year. Expectations of higher rates tend to make the dollar more attractive to yield-seeking investors. Robust consumer-price data reported Tuesday argues for the Fed to signal an increasing risk of two more rate increases this year, analysts at Commonwealth Foreign Exchange wrote in a note to clients. “Such a scenario would likely keep the dollar broadly supported,” the note said.
Federal Reserve Chairman Jerome Powell is considering holding a press conference after every policy meeting rather than every other meeting, and his appearance Wednesday could help him decide whether it’s worth the trouble. At issue for the Fed: Since beginning press conferences in 2011, the central bank has fallen into the pattern of making major policy changes only at meetings followed by a news conference. The tactic has helped the Fed leader communicate its policy changes in more detail than its heavily scrutinized, jargon-filled postmeeting statement. But the practice has lulled markets into thinking the central bank won’t act between press conferences. “We’ve evolved to a place where the market only thinks we’ll move if there’s a press conference,” Atlanta Fed President Raphael Bostic said in an interview earlier this year. This is “a sign that what we’re doing right now isn’t working,” he said.
The New York Times – E-Commerce Might Help Solve the Mystery of Low Inflation
Unemployment is sinking and businesses are churning out more goods and services. Yet even with the economy standing on tippy toes, prices and wages are climbing a lot more slowly than anyone has expected. Now a growing body of research is putting the blame more pointedly on e-commerce. The spectacular growth in online shopping, it turns out, is not only tamping down inflation more than previously thought, but also distorting the way it is measured.
Given the anchoring of inflation expectations, Mr. Kashkari said it is no surprise that inflation is unresponsive to low unemployment today. “The more credibility we have with the market and with employees and employers, the less responsive they are going to be to minor changes in the economy,” he said. In the late 1960s, when inflation began to accelerate just months after the unemployment rate dropped below 4%, the Fed cut interest rates, partly due to political pressure. “Nobody on this committee will allow that to happen,” said Mr. Kashkari. “I just don’t see any echoes of that today.”
The Financial Times – Citi issues stark warning on automation of bank jobs Investment banking leaders eye future in which machines take over ‘lower-value tasks’
Citigroup’s investment bank has suggested that it will shed up to half of its 20,000 technology and operations staff in the next five years, as machines supplant humans at a faster pace. The forecast by Jamie Forese, president of Citi and chief executive of the bank’s institutional clients group, was the starkest among investment banking bosses in a series of FT interviews to mark the 10th anniversary of the financial crisis. Mr Forese said the operational positions, which make up almost two-fifths of investment bank employees at Citi, were “most fertile for machine processing”
Companies with plenty of cash and not as much debt are crushing it. Goldman Sachs’ basket of stocks with strong balance sheets has outperformed its selection of cash-strapped companies by 8% this year, the bank’s equity strategists said in a note on Friday. That’s also a better performance than the S&P 500, which has gained 4.02% this year. The firm again recommended buying its basket of strong-balance-sheet stocks, but highlighted a risk that could work against them. Many of the companies with the strongest balance sheets also have the strongest earnings growth. They include big names like Facebook and Alphabet that led the market higher last year, as momentum-driven investors looked to profit from their upward trend.
The race to a trillion is on and Apple Inc. remains the odds-on favorite. Despite Friday’s dip, Apple’s gains since reporting stronger-than-expected earnings and a big share buyback program in May have put it within a stone’s throw of becoming the first company to ever post a $1 trillion market cap. As of Wednesday’s close, Apple shares only needed to increase about 5% to reach the astonishing 13-figure mark.
Any details on the coming shift from easy to tight monetary policy will definitely draw attention. Officials in March expected to cross that threshold in 2020 when their median estimate saw rates reaching 3.4 percent. That lies two quarter-point hikes above the 2.9 percent they estimate as the longer-run neutral level — the one that will neither support nor slow growth. Powell acknowledged back in March that such a policy path would be modestly restrictive, but added that out-year estimates are “highly uncertain.”
CNBC – Jeff Cox: The Fed has a surprise in store that could mean an early end to interest rate hikes * The Fed at its meeting this week is expected to announce a quarter-point interest rate hike, and a 0.2 percent increase in interest on excess reserves. * The maneuver is targeted at holding back the target rate and could signal that the Fed is nearing the end of its balance sheet rolloff. * A preliminary end to the reduction in the bond portfolio also could signal a quicker end to the rate-hiking cycle than the market anticipates.
The mechanics are a little complicated. Yet it suggests that what once appeared to be an operation to shrink the amount of bonds the Fed owns that would have run well into the next decade could be wrapped up next year, or early 2020 at the latest. Instead of reducing the balance sheet from its peak of $4.5 trillion to $2.5 trillion or so as some Fed officials indicated, the impact could be far less — perhaps, some suggest, to $3.5 trillion or even a little more.
In the turmoil that has struck emerging market currencies over the past six weeks, the headlines have been grabbed by the Turkish lira, the Argentine peso and in the past week, the Brazilian real. But what of the Mexican peso, traditionally seen as a bellwether of sentiment towards emerging markets as a whole? It crashed to an all-time low against the US dollar after the election of Donald Trump to the US presidency in November 2016. After staging a comeback, it is heading back in that direction, shedding 12 per cent of its dollar value since mid-April. Worse may lie ahead. Analysts say the Trump administration’s renewed abrasive attitude to trade and a likely runaway victory in Mexico’s July 1 election for the leftist Andrés Manuel López Obrador, known to all as Amlo, could send the peso into uncharted territory.
The Guardian (UK) – Kenneth Rogoff: Are debt crises in Argentina and Turkey a global warning sign? We should not be complacent about the risks a recession could pose to advanced economies
Economists who assure us that advanced-economy debt is completely “safe” sound eerily like those who touted the “great moderation” – the supposedly permanent reduction in cyclical volatility – a generation ago. In many cases, they are the same people. But, as we saw a decade ago, and will inevitably see again, we are not at the “end of history” when it comes to global debt and financial crises.
After a long period where investors mostly shrugged them off, political risks are once again taking a front seat in moving markets. For investors, that promises to bring further uncertainty during one of the market’s most volatile stretches in years. In recent years, global economic growth and central bank stimulus have drowned concerns over political risk. Now it’s back. On Monday, markets mainly climbed as Mr. Trump prepared to meet with Kim Jong Un and Italian media reported Rome’s antiestablishment government had ruled out leaving the euro. But a bad-tempered meeting of the Group of Seven major economies reignited some investors’ worries about trade tensions.
Rob Arnott thinks fund managers should move more slowly. The founder of the investing firm Research Affiliates says some of the world’s cheapest index funds track their benchmarks too closely, a “self-inflicted wound” that ends up costing investors billions of dollars. When index providers announce which companies will be added or deleted—typically days or weeks ahead of time—newly added stocks get a boost while those cut from the index tend to fall. Fund managers who move quickly to mimic the index end up buying high and selling low, Mr. Arnott said. “Most index fund managers are far more interested in reducing tracking error than in adding value,” Mr. Arnott wrote in a paper due out later this month titled “Buy High and Sell Low with Index Funds!”
“The reason why the bond default rate remains quite low in China is still because of government intervention,” said Zhu Chaoping, a Shanghai-based economist at J.P. Morgan Asset Management. “The government is focused on maintaining stability, financially and socially.” In the past, Beijing has often leaned on banks and local governments to extend a lifeline to struggling state-owned enterprises, and even private companies if they are large employers, Mr. Zhu said. The authorities have also stepped in with more sweeping action when there are broader signs of market stress, as in January when Chinese government-bond prices fell to a three-year low. The central bank cut the amount of cash it requires banks to hold with it in reserve, unleashing around 450 billion yuan of liquidity into the market.
Central banks in the U.S. and Europe are both expected to move this week to unwind stimulus policies adopted since the global financial crisis a decade ago. But the likely steps mask a recent divergence in the fortunes of the world’s top two economic blocs, which looks set to keep the central banks on different interest-rate tracks for many months to come. The Federal Reserve is likely to raise short-term interest rates Wednesday and pencil in more increases in coming years, to keep the U.S. economy from over-heating. The ECB could signal on Thursday it won’t start raising rates for some time even as it moves to phase out its €2.5 trillion ($2.95 trillion) bond-buying program. ECB officials are pondering the causes of a recent slowdown in eurozone growth that appears to have continued through the spring, as well as the risks posed by international trade spats, higher oil prices and political turbulence in the bloc’s number-three economy, Italy.
Bloomberg – Fed to Stick With Gradual Hiking as Risks Balance Out Upside risks fade and trade seen as dominant threat to outlook
The Federal Reserve won’t steepen the path of interest-rate increases this year in the face of accelerating U.S. growth, according to economists surveyed by Bloomberg. In a poll conducted June 5-7, the proportion of respondents who expect at least three additional rate hikes in 2018 dropped slightly, compared with the survey in March. The median estimate from economists now sees two more increases this year, which matches the Fed’s own projections back in March. All 37 respondents predicted a quarter-percentage-point rate hike when policy makers conclude their two-day meeting in Washington on Wednesday.
Bloomberg – What to Expect From the Fed and ECB This Week Both central banks will continue to unwind their extraordinary measures, but at different paces.
This week will confirm that two systemically important central banks are continuing their gradual shift to a policy approach that is more normal and less unconditionally supportive for markets. The two meetings will also highlight continued divergences in the speed of monetary-policy normalization that, along with a widening difference in prospects for economic performance, may have a more important impact on market valuations in the months ahead.
A South Korean cryptocurrency exchange said it suffered a “cyberintrusion,” prompting bitcoin prices to fall sharply toward year lows. Bitcoin dropped more than 10% over the weekend, falling below $6,700, according to research site CoinDesk. The largest cryptocurrency has lost more than half its value this year, falling by nearly two thirds from its record high near $20,000 in December. Its low for the year came in February at less than $6,000. Other large cryptocurrencies like Ethereum, ripple and bitcoin cash have all fallen more than 11% over the past 24 hours. EOS, the token backed by startup block.one which has raised more than $4 billion, is down 20%, according to research site coinmarketcap.com.
On Sunday, the price of Bitcoin continued to fall, losing 5 to 6 percent of its value.
According to CoinMarketCap, since an all-time high of near $20,000 per bitcoin on December 17, 2017, the cryptocurrency has lost more than half of its value, currently trading at around $7,200. Overall, Bitcoin’s price is up by about 150 percent compared with this same time last year, when it was trading around $2,800. Such fluctuations don’t seem to have stopped demand for setting up new mining operations, particularly in areas where electrical power is relatively inexpensive. Demand is so high in one part of Canada that Hydro-Québec, the province’s energy utility, recently said that it would “temporarily” stop accepting energy requests from cryptocurrency mining companies “so that the company can continue to fulfill its obligations to supply electricity to all of Québec.”
The Chainalysis data quantifies this distinct shift in the make-up of bitcoin owners from longer-term investors — those who held the asset for more than a year — to short-term investors who have traded more recently, by analysing how regularly coins have changed hands. Last November — before December’s pricing peak — the amount of bitcoin held for investment was roughly three times that held by traders. However, by April 2018, the data show the amount held by investors — about 6m bitcoin — was much closer to the amount held by short-term speculators, with 5.1m bitcoin. Indeed, Chainalysis estimates that longer-term holders sold at least $30bn worth of bitcoin to new speculators over the December to April period, with half of this movement taking place in December alone.