- The Financial Times – Diverging US economic data raise questions over ‘Trump bump’
Gap between hard numbers and buoyant mood of companies and consumers is widening
Since his inauguration, Donald Trump has enthusiastically trumpeted surging confidence readings, as well as stock market gains, as evidence that his presidency is yielding quick dividends for the US economy. Yet the gap between buoyant indicators of companies’ and consumers’ mood and hard data such as retail spending has been widening, leading to scepticism among economists about how real the Trump bounce will turn out to be.
- Equity and bond markets are not in agreement regarding GDP growth, specifically the government spending component. Bonds are not believers in an ultra-rosy growth outlook.
- High uncertainty in consumer and business surveys are not being matched by the bond market. Term premiums are falling along with economists’ forecast ranges.
- Inflation will remain on center stage as continued growth in core measures are likely. The decline in market-based inflation expectations will soon run its course.
- CNN/Money – Consumer confidence soars under Trump. Here’s what it means
It’s also worth pointing out that the Conference Board’s consumer confidence index surged right after last November’s election as well — to the highest level since July 2007. The Great Recession began in December of that year and lasted until June 2009. All of this is not to say that the economy is about to enter another downturn just because the notoriously late to the party consumer is suddenly feeling giddy. It’s understandable why there is suddenly more hope on Main Street these days. While the Conference Board didn’t mention President Trump by name, it would appear that average Americans — much like small business owners and CEOs — are excited about the possibility of tax reform and stimulus.
- Consumer and business confidence rocketed higher post-Trump win, however, this does not square with ultra-low approval ratings.
- The deviation between confidence and approval ratings is nearly its highest ever.
- Similar divergences have historically been followed by higher equity volatility and draw-downs in the year ahead.
- The Financial Times – Global surveys or hard data – which are the fake news?
In conclusion, we believe that the hard data in the US are understating activity growth in that economy, and consequently in the official GDP series for the global aggregate. We expect to see this reflected in much stronger growth in US hard data and the official GDP series for 2017 Q2. Global activity growth is unlikely to be maintained quite at the elevated levels identified by our nowcasts in Q1 (because there is statistical mean reversion in the forecasts), but we expect consensus forecasts for global growth in the 2017 calendar year to be revised upwards, perhaps substantially.
- Bloomberg – It’s a Big Week for One of the Most Important Debates in Markets
The gap between soft data on confidence and other surveys that capture the optimism of the moment and expectations for policy, and hard data such as consumer spending that show actual performance, has been a hallmark of the economy this year. Figuring out which set is a better predictor of the economy in the coming months is critically important to the decisions companies and investors make this year.
- The Wall Street Journal – This Is a Dangerous Time to Own Emerging Markets
Some worry a recent buying spree has resulted in lofty valuations as geopolitical tensions rise
A crack is forming in the emerging-market resurgence. Almost $60 billion went into assets of developing economies during the first months of 2017, helping emerging-market stocks and currencies enjoy their best quarter in two years. Now, worries are setting in that the buying spree has resulted in lofty valuations as geopolitical tensions escalate. Yield-seeking portfolio managers, who made widespread purchases, could be just as indiscriminate when it comes to selling, market watchers say. And downturns could be long lasting: the MSCI Emerging Market Index fell three years straight before notching a gain in 2016.
- The Wall Street Journal – ETFs Show Limits in World of Emerging-Market Bonds
Debt issued by governments and companies in emerging economies can be harder to buy and sell, while higher transaction costs have resulted in tracking errors
Exchange-traded funds have jolted stock picking with their low costs and strong performance. But in emerging-market debt, they are facing greater competition from active investors. ETFs, baskets of assets that trade like stocks, have exploded in popularity as a low-cost way to access specific countries or markets. They have become impossible to ignore in the $3.6 trillion emerging-market bond market. Already in 2017, an iShares ETF has attracted more than $2 billion to become the world’s largest fund for developing-nation debt. But in a year when emerging markets are in the spotlight as big winners, underperformance by the ETFs is also raising concerns over whether they are suitable instruments for betting on volatile developing nations.
- Macro Musings – James Bullard on Life as a Fed Bank President and Monetary Policy in 2017
In this week’s episode, Jim Bullard, the president and CEO of the Federal Reserve Bank of St. Louis, joins the show to discuss his work as a Federal Reserve executive and as a researcher in monetary policy. Bullard shares his thoughts on why inflation has been so persistently low since 2008 and whether the Fed should pursue a more symmetric inflation target. He and David also discuss the Fed’s plans for monetary policy in 2017. In Bullard’s view, the Fed should focus on reducing its balance sheet before it turns to raising rates further.
- Bloomberg – The Fed Could Take a Summer Vacation
March data has shown a slowing of inflation, as well as growth, which takes pressure off the Fed in its push to fulfill half of its dual mandate — that of containing inflation. In data released April 14, the total and core consumer price index fell month over month, though they remain up year over year. Although the Fed uses the core PCE for policy purposes, the drop in core CPI to 2 percent is dovish for Fed policy and bearish for the dollar, since this is the lowest level of core inflation since October 2015.
- The Wall Street Journal – Economists React to the March Jobs Report: ‘Mostly Just Weather-Related Noise’
What economists and analysts said about Friday’s jobs report from the Labor Department
The disappointing 98,000 increase in nonfarm payrolls in March will be seized upon by the usual suspects as confirmation that the U.S. economy is poised for collapse, but the truth is this is mostly just weather-related noise. After the unseasonably warm January and February, which pushed monthly job gains back above 200,000, there was always going to be some payback in March, when the weather snapped back to seasonal norms, including some heavy snowstorms.
- The Financial Times – US earnings season sees play between hard and soft economic data
Signs are promising despite divergence in consumer confidence versus unemployment
A handful of big banks led by JPMorgan this week kicked off one of the more eagerly anticipated earning seasons in recent memory, with investors desperate for evidence that a revenue turnaround is gathering pace and the rotation back into technology is justified. Hopes are high. Headline earnings per share for the S&P 500 as a whole is expected to expand 9 percent year on year this quarter, the fastest growth since the third quarter of 2011. Assuming the usual number of results beat forecasts, the US blue-chip gauge will comfortably see a healthy double-digit earnings per share jump. But the closely watched metric will be flattered by the energy industry’s woeful start to 2016, which will make this quarter seem golden in comparison. Strip out that sector and EPS growth is expected to tick in at a respectable but more modest 5 per cent, which would actually be a slower pace of expansion than in the past two-quarters, David Kostin of Goldman Sachs notes.
- Bloomberg Business – Fed June Hike Odds Below 50% After Inflation Expectations Tumble
Traders are pulling back from bets the Federal Reserve will raise interest rates in June as inflation expectations crumble. The odds of a hike have fallen back to about 44 percent from more than 60 percent earlier this month, based on a gauge compiled by Bloomberg. Yields on federal funds futures contracts for June and July are retreating as investors scale back forecasts for a move. Two-year Treasuries, among the most sensitive to Fed policy expectations, are poised for their first two-month rally in a year. Investors are questioning the strength of the U.S. economy and the Fed’s plan to raise rates three times in 2017 after a weaker-than-expected March jobs gain and a surprise monthly drop in consumer prices. They’re also voicing disappointment that President Donald Trump’s proposed tax cuts and infrastructure spending plans have yet to materialize.
- Bloomberg Business – Markets Start to Ponder the $13 Trillion Gorilla in the Room
Fed officials discuss when to start reducing asset holdings
After heading into the uncharted territory of quantitative easing, the world’s central banks are starting to plan their course through the uncharted waters of quantitative tightening. How the Federal Reserve, European Central Bank and — eventually — the Bank of Japan handle the transition could make the difference between a global rerun of the 2013 “taper tantrum,” or the near undetectable market response to China’s run-down of U.S. Treasuries in recent years. Combined, the balance sheets of the three now total about $13 trillion, equating to greater than either China’s or the euro region’s economy. Former Fed Chair Ben S. Bernanke — who triggered the 2013 sell-off in risk assets with his quip on tapering asset purchases — has argued for a pre-set strategy to shrink the balance sheet. Current Vice Chairman Stanley Fischer says he doesn’t see a replay of the 2013 tantrum, but the best laid plans of central bankers would soon go awry if markets can’t digest the great unwinding.
- Bloomberg Business – Bond Traders Stare Down Short Squeeze as Yields Test Key Levels
Bond bears beware — the risk is building that Treasury yields go even lower. With yields across maturities reaching the lowest levels since November, and in some cases breaching key technical marks, traders are abandoning bets on higher interest rates. Hedge funds and other large speculators reduced net short positions in five-year note futures by about 86,000 contracts in the week through April 11, though more than double that amount of net shorts remain, the latest Commodity Futures Trading Commission data show.