Posts filed under “Inflation”

Soft Spots Go Beyond Employment

One of the odder bits of analyses we have happened across over the holidays is this bit of explicative: “Of course employment has lagged prior recoveries, as we have been adding jobs from unusually high levels of employment.”

As you may have surmised, we find this explanation
wanting. First, it fails to address the issue of NILFs – the millions of people who are no longer in the Labor force (See Participation
Rate, 2000-2005
). As we
have noted before, the basis for this is the false comparison with prior post
WWII recoveries, rather than post-Bubble
environments
.

Second, it fails to recognize that across the
entire economy, the recovery has been sub-par. As the nearby chart reveals,
excepting Real Estate, all other areas show relative weakness to prior
recoveries, including GDP, Personal
Income, Consumption, Equipment
and
Software
.

Indeed, recent data has revealed several ominous
signs about the economy. The holiday shopping season was significantly
below
consensus
. We also expect that prevalent deep
discounting will affect Retailer’s profit
margins
; we interpret these data
points, combined with the generally weak December Retail, as proof
the consumer has finally started to tire. And, it has only begun to bite into
sales.

Also noteworthy is that even Real Estate has started to show
signs of distress
. Inflation, driven primarily by overseas
commodity demand, remains robust, and the Fed can do little about it, short
of inducing a global slowdown. And as recent events in Nigeria and Iran have made all too clear, the world’s economy is hardly insulated from the impact of yet another energy shock.

Thus, it is against this backdrop that we begin what is likely to be the last earnings season of double digit growth. With 67 S&P members reporting this week, and nearly half – about 30 – in the financial sector, we will get an early read on
how the flattened and just inverted yield curve is impacting earnings of this key sector. We are expecting only a modest influence on
financials as of yet. The more pronounced effects may not be felt until later
this year.

Besides, the bulk of the S&P500 year-over-year
earnings gains have not been reliant on the financial sector. Instead, about
half of the gains have been a function of energy sector earnings. We can chalk
up about a third of the year-over-year
gains
to the half a trillion dollars
in share buybacks last year
. Thus, market gains remain perversely dependent
upon high energy prices and share repurchases – hardly the historic basis for
sustained performance . . .

Category: Earnings, Economy, Employment, Inflation, Real Estate, Retail

Has the Fed Kept Inflation in Check?

Category: Currency, Federal Reserve, Inflation

Fed Minutes

Category: Federal Reserve, Fixed Income/Interest Rates, Inflation

A World of (mostly) Flattening Yield Curves

Category: Economy, Federal Reserve, Fixed Income/Interest Rates, Inflation

Gold & The Wizard of Oz

Category: Commodities, Federal Reserve, Inflation

2 Studies on the Flattening Yield Curve

Category: Federal Reserve, Fixed Income/Interest Rates, Inflation, Technical Analysis

Explaining Yield Curve Inversions

Category: Economy, Federal Reserve, Fixed Income/Interest Rates, Inflation

Inverted Yield Curve: Its different this time (not)

Category: Federal Reserve, Fixed Income/Interest Rates, Inflation, Technical Analysis

Economists React to Fed

WSJ 

The Federal Reserve, as expected raised interest rates for the
13th consecutive time Tuesday, lifting the federal-funds rate by a quarter
percentage point to 4.25%. The central bank suggested it would raise rates
again, but also hinted that it is less certain on its future rate actions than
it has been in over a year. In the accompanying statement, the Fed said growth
remained "solid", inflation excluding food and energy prices had "stayed
relatively low," and inflation expectations were contained. But it also warned
that the possibility of further erosion of spare productive capacity and high
energy prices "have the potential to add to inflation pressures."

What do
economists and other analysts make of the changes? Here’s a sample of their
commentary:

* * *

The Fed has finally taken the step that we have been
pointing to for a while, in separating the two concepts of reaching neutrality
and finishing the rate cycle. They kept "measured," as we thought they might,
but now it refers to "some further measured policy firming" as opposed to
removing accommodation at a measured rate. So, rather than being on automatic
pilot in raising rates toward neutral, the FOMC now sees itself in the second
stage of the rate hike cycle — further moves will be perceived by Fed officials
as taking policy toward a restrictive stance.

– Stephen Stanley, RBS
Greenwich Capital

* * *

The message from the FOMC appears to be that barring a
major change in the tone of economic data, another 25bp tightening move will be
implemented at Chairman Greenspan’s last meeting on January 31. At that time, it
is quite possible that the "measured phrase" will be jettisoned, leaving
incoming Chairman Ben Bernanke with a clean slate for the next meeting on March
28. Our own view remains that the evidence concerning economic growth should be
sufficiently strong in coming months to spur another three 25bp tightening
moves, lifting the Fed funds target to 5.00% in the second quarter of the year.
We think that growth will then be moderating sufficiently for the FOMC to cease
tightening, even if core inflation drifts up mildly from its current
levels.

– Joshua Shapiro, Maria Fiorini Ramirez Inc.

* * *

The Fed announced: "Core inflation has stayed relatively
low in recent months and longer-term inflation expectations remain contained."
Quite frankly, we do not believe them. We know that beyond the rises in food and
energy prices, nearly everything — from healthcare to building materials to
education costs to insurance to commodities — costs more. And gold, the world’s
best inflation indicator, is well over $500 per ounce. Where ever we look, we
see evidence that prices have limited stability and an upward bias.


Barry Ritholtz, Maxim Group

* * *

 

Read More

Category: Economy, Federal Reserve, Inflation

What Data is the Fed Watching?

Category: Economy, Federal Reserve, Inflation