With headline fatigue setting in over the Ukraine crisis, and the mounting Iraqi upheaval stirring concerns about an all-out sectarian war in the Middle East, the world is seeking a temporary diversion from the World Cup. The quadrennial event provides an apt metaphor for the next few months in the markets - many countries have high hopes for a strong showing, things may get a bit contentious as national interests collide, and there will be a few upsets, but in the end we can only watch and wait for the scores to come in. To copy the 2014 World Cup slogan, economic leaders seem to be all in one rhythm, pausing for more data before making their next moves. Lets get to the matchups. US vs Expectations The initial three months of 2014 were decidedly disappointing for the US economy, as the final tally on Q1 GDP came in at -2.9%, even worse than expected, due to horrendous winter weather. Markets largely ignored those temporary factors as did the Fed, which has continued to steadily taper its QE program on the expectation and recent materialization of better jobs and growth data. After the decidedly slow start to the year, monthly non-farm payrolls in the first five months are now averaging over 200 thousand new jobs, enough to keep unemployment on a downward trajectory. The next reading comes on July 3, an unusual Thursday release of the jobs data because of the Independence Day holiday. Forecasts are for another payroll report in line with the average, though more breakout numbers like the nearly 300 thousand jobs gained in April are not out of the question and could help ease the Fed transition into its next policy phase. Chair Yellen and other senior Fed officials have already begun to lay the groundwork for next year when they are likely to move rates away from near-zero. To get people accustomed to the idea, Yellen has started the discussion of future rate hikes, though stressing that rate policy will be entirely data dependent. At her last press conference she also brushed off some recent higher CPI data as noise, insisting that inflation is developing within Fed expectations. This seems to indicate the Chair is pleased with market reckoning of the first rate hike coming around mid-2015, but this outlook could be toppled by more hot inflation data (due out toward the middle of each month). With stronger inflation in view, Fed hawks are positing the scenario that the recovery will kick into high gear and unemployment will fall to normal levels sooner rather than later. Philadelphia Fed chief Plosser recently expressed discomfort with rates still near zero while inflation is rebounding toward the 2% target. The more moderate St. Louis Fed President Bullard has worried out loud that the Fed may get behind the curve if joblessness falls faster than expected, and set his personal forecast for the first rate hike in early 2015 (though still data dependent). Meanwhile the Richmond Feds Lacker has proposed the Fed should starting trimming back reinvestment of balance sheet holdings before looking at raising rates, so discussion of that may come into vogue as the policy agenda for normalization gels. Representing the dovish team, San Francisco Fed President Williams has suggested that the most recent data is consistent with the first rate hike coming in the latter half of next year. On the US policy scoreboard, so far it is QE 3, and fiscal policy nil. The grand fiscal bargain that was often speculated about in the last few years now seems impossible. Congress and the Administration are so at odds that the President has resorted to small scale policy tweaks through executive orders on things like the minimum wage for federal contractors and immigration policy. The unprecedented primary loss of House Republican majority leader Cantor to a poorly funded Tea Party newcomer who ran to Cantors right portends more intense gridlock in Congress. Another two dozen state primaries will be conducted over the next two months, and if the GOP fringe experiences a resurgence headed into the November mid-term elections, Tea Party purists in the next Congress may choose to ignore the political lessons of 2013 government shutdown. Europe vs Deflation As in the US, the next two months are expected to be a wait and see period for Europe. The biggest monetary policy move of recent months was the ECBs new package of negative rates and targeted LTROs to spur economic growth and more lending. The IMF and other observers applauded the move but immediately urged the ECB to follow up with a full on quantitative easing scheme. The ECB has acknowledged that is an option in its playbook, but central bank President Draghi has made it clear that he wants to wait some time to gauge the impact of the just launched program before unloading another monetary volley
Posted on: Fri, 11 Jul 2014 08:26:37 +0000
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