The Federal Reserve should wait on any further rate increases until it is clear inflation is reliably heading to the Fed’s 2 percent target, St. Louis Fed President James Bullard said on Friday, highlighting the central bank’s struggle over how to weigh a recent slip in the rate of price increases.
“Recent inflation data have surprised to the downside and call into question the idea that U.S. inflation is reliably returning toward target,” Bullard said at an Illinois Bankers Association conference. “The Fed can wait and see how the economy develops before making any further adjustments to the policy rate.”
PG View: Kashkari apparently is not alone: Too bad Bullard is a non-voter.
Bank of Japan Governor Haruhiko Kuroda said maintaining the current easy monetary conditions is appropriate because prices are lagging improvements in the economy and remain distant from the central bank’s inflation target.
…”Our economy is on firmer footing, but we are still distant from our 2 percent inflation target,” Kuroda said.
“It is appropriate to keep monetary conditions easy with our current market operations framework.”
Chicago Federal Reserve Bank President Charles Evans said on Tuesday he is increasingly concerned that a recent softness in inflation is a sign the U.S. central bank will struggle to get price pressures back to its 2 percent objective.
“I will say that the most recent inflation data made me a little nervous about that. I think it’s much more challenging from here on out,” Evans said in an interview with broadcaster CNBC.
…If inflation remains in a slump, the Fed may require a shallower path of rate rises, he added.
The gold market was able to resist a fairly optimistic Federal monetary policy statement, but was unable to hold its daily gains after what appeared to be hawkish comments from the Fed Chair Janet Yellen.
While gold has been steadily giving up its early morning gains as the market digested the latest Federal Reserve statement and economic projections, the yellow metal attracted renewed selling pressure as Yellen shrugged off weak inflation concerns.
…While acknowledging that prices pressures are currently weaker than expected, Yellen said that conditions are in place for inflation to eventually pick up.
PG View: I’m not convinced that inflation is really on the verge of picking up, but even if it does, that would be bullish for gold. At this point, I think the market is just a little confused. Those that bought on expectations of a more dovish Fed are moving to the sidelines, it there is indeed evidence of renewed inflation expectations, those investors will be buyers as well.
The U.S. economy has been growing for 96 straight months, its third longest expansion on record, and if this were any previous expansion, the Federal Reserve’s decision on Wednesday would be a no-brainer: It would be time to raise interest rates. The unemployment rate, at 4.3 percent, is at its lowest level since 2001 and job growth has remained strong for this stage of the recovery. Most importantly, the Fed currently has its target rate set at just 0.75-1.00 percent, far below historic levels. After eight years of unusually low interest rates, the conditions appear ripe to bring them back up.
But one critical economic indicator is saying otherwise: inflation. Normally when the economy is humming, inflation starts to rise, but in this case, the Fed’s preferred measure of annual inflation has actually declined for three months in a row, hitting 1.7 percent in April. If you exclude volatile food and energy prices, inflation is even lower, at 1.5 percent. (The Fed’s inflation target is 2 percent.) And on Monday, the New York Federal Reserve reported that consumer inflation expectations had declined as well; expectations for inflation three years from now hit their lowest point since January, 2016.
U.S. inflation expectations tumbled last month, with one key measure hitting its lowest level since early 2016, according to a Federal Reserve Bank of New York survey that could amplify the central bank’s concern over a broad slump in prices.
The survey of consumer expectations, an increasingly valuable gauge for the Fed, showed on Monday that median three-year-ahead inflation expectations fell to 2.47 percent last month, from 2.91 percent in April. That brought the measure to a 16-month low after it had hovered near a record high the last six months.
PG View: Falling inflation expectations has to be particularly vexing to the Fed, after a nearly a decade of near-zero rates and trillions spent on asset purchases with the expressed goal of generating inflation.
The European Central Bank has trimmed its medium-term inflation forecasts despite acknowledging the strength of the eurozone’s accelerating economic growth.
In its latest set of forecasts released today, the ECB said inflation would average at 1.6 per cent in 2019, down from a previous forecast of 1.7 per cent and further below its target of just under 2 per cent (see table above).
Inflation this year would average 1.5 per cent from a previous forecast of 1.7 per cent and fall to just 1.3 per cent next year.
Bloomberg/Paul Gordon & Alessandro Speciale/06-07-17
The European Central Bank is preparing to cut its inflation outlook across its forecast horizon at this week’s policy meeting because of weaker energy prices, according to euro-area officials familiar with the matter.
The ECB’s draft projections now show consumer-price growth at roughly around 1.5 percent each year in 2017, 2018 and 2019, the officials said, asking not to be identified because the information is confidential. The previous projections in March foresaw rates of 1.7 percent, 1.6 percent and 1.7 percent, respectively.
The St. Louis Fed’s Price Pressures Measure has fallen to its lowest reading since February of 2016.
The indicator peaked in February of this year at a 5-year high. That would suggest that if the December 2016 rate hike wasn’t a mistake, the one in March of this year almost assuredly was.
FT/Pan Kwan Yuk/05-30-17
A key measure of US inflation fell for a third straight month in April, easing pressure on the Federal Reserve to step up the pace of interest rate rises beyond the three it has penned in for this year.
The core personal consumption expenditures price index (PCE), eased to a year-on-year pace of 1.5 per cent last month, compared to the 1.6 per cent rate it was at in March, according to data released Tuesday morning by the Commerce Department.
PG View: I’m not sure if this is enough to give the Fed pause…but it probably should…
BusinessInsider/Pedro Nicolaci da Costa/05-16-17
Goldman Sachs chief economist Jan Hatzius has become distinctly less confident in his expectation that the Federal Reserve will raise interest rates twice more this year and make a major announcement about reducing its bond holdings.
Hatzius’ skepticism is due to US inflation, which has been undershooting the Fed’s 2% official target for most of this economic recovery, and continues to lag despite constant warnings to the contrary.
…”We have shaved our subjective odds of a June rate hike to 80%, from 90% earlier, and have also become a bit less confident in a September hike,” Hatzius added. “If the outlook deteriorates significantly, the committee might simply delay any further tightening steps.
A “noticeable softening” in US inflation over the past two months ratchets up the pressure on the Federal Reserve to defend its rate rise plans, Pimco said on Monday as it reduced its target for price growth this year.
A disappointing reading on consumer price growth in March may have seemed like a one-time blip, but a repeat performance the following month raised eyebrows at the big US bond manager.
“…unlike in March – when weakness was primarily attributable to the largest-ever monthly decline in wireless services – April’s weakness was broad-based, reflecting softness in a range of core goods and services,” said chief US economist Tiffany Wilding.
For the 3rd month in a row, US Producer Prices have risen at a faster rate than The Fed’s mandate. April healdine PPI rose 2.5% YoY – the most since Feb 2012, and well above the highest anayst estimate, despite disinflationary credit impulse pressures from China being seen in industrial metals. The biggest driver is surging costs for investment advice!
…So Q1 saw The Fed hike as GDP growth plummeted (weakest quarterly growth for a rate hike since 1980) and inflation surged… this won’t end well.
BusinessInsider/Pedro Nicolaci da Costa/05-03-17
[I]nvestors may have been missing a rather dovish signal sent by the Fed, and one crucial to the future path of interest rates: A rather sheepish description of inflation.
…This is really important because the Fed views both core inflation and inflation expectations, especially market-based ones, as particularly good predictors of future inflation.
Yes, this is a Federal Reserve that appears bent on raising interest rates even if economic conditions, while treading water, are hardly booming in a way that might generate too much inflation.
But if either inflation or inflation expectations edge too much lower, expect the dovish chatter to begin returning from some of the Fed’s more influential quarters.
Oil fell a sixth day as the ramp-up of U.S. drilling signaled further production gains in the world’s biggest crude-consuming nation.
Futures extended last week’s 6.7 percent decline in New York. U.S. explorers added 5 rigs last week to cap the longest stretch of gains since 2011, Baker Hughes Inc. data show. An OPEC committee concluded that a six-month renewal of an output-cut deal is needed, delegates with knowledge of the matter said. Money managers boosted wagers that U.S. oil futures would increase in the week to April 18, government data showed. Oil rose earlier along with global equities while the dollar weakened after the first round of the French presidential election.
BusinessInsider/Pedro Nicolaci da Costa/04-17-17
The Fed’s June rate hike is suddenly sliding off the table.
…The possibility that inflation was finally moving higher, which had been the main justification for the central bank’s stated desire to push interest rates higher, suddenly disappeared as consumer prices fell in March for the first time in over a year. Core prices, which exclude food and energy costs and are closely watched by Fed officials, also slipped 0.1%, making for their first decline since January 2010.
At the same time, US retail sales, a key barometer of growth for an economy two-thirds reliant on consumer spending, fell for a second straight month.
Crisis-stricken Venezuela’s money supply has surged over 200 percent in a year, its fastest rise since records began in 1940, putting it on track for what is likely the world’s highest inflation.
Soon after a month-long hiatus from publication, the central bank said late on Friday the total amount of local currency in circulation – known as M2 by economists – as of March 24 was 13.3 trillion bolivars, up 202.9 percent from a year earlier.
In contrast, the United States’ money supply was up 6.4 percent in the same period.
Venezuela is in a major economic crisis, with millions struggling with food shortages and inflation thought to be in triple digits – though no official data is available.
BusinessInsider/Pedro Nicolaci da Costa/03-15-17
His argument was fairly straight forward: Why tighten monetary conditions when inflation remains below the Fed’s target, inflation expectations are subdued, and the job market is probably still not operating at its full potential despite the low jobless rate?
…Add to that the uncertainty generated by some of the recent political chaos in Washington, and the case for a near-term Fed rate hike becomes much less compelling.
Oil hovered around three-month lows on Monday, as rising U.S. inventories and drilling activity offset optimism over OPEC’s efforts to restrict crude output.
…The price has fallen by more than 8 percent since last Monday, its biggest week-on-week drop in four months, and analysts said the slide may not have much further to run.
“The market is bearish because sentiment has turned. The risk is still towards the downside, but we are nowhere near the precipice,” PVM Oil Associates Tamas Varga said.
PG View: Subtract energy prices from the inflation equation and is there any inflation at all? And then is there an need to raise rates to check inflation expectations?
Euro zone inflation is likely to be sharply higher in 2017 than projected but will still dip towards the end of the year, Bundesbank president Jens Weidmann said on Wednesday, arguing that accommodative monetary policy remains appropriate.
With inflation surging on higher oil prices, and criticism of the European Central Bank (ECB) mounting in Germany ahead of September’s elections, pressure has increased on the ECB to at least start a discussion about when and how it would scale back its extraordinary stimulus measures.
But the ECB has so far pushed back, arguing that growth is fragile, upcoming elections cloud the outlook, and the rise in inflation is temporary, still requiring years to rise sustainably towards its target of just under 2 percent.
BusinessInsider/Pedro Nicolaci da Costa/02-17-17
Economists are worried that Donald Trump’s plan to introduce a so-called border tax on imports could cause a spike in inflation, and rightly so.
The logic here is simple: Lots of goods consumed in the US are made overseas, from Mexico to China. Companies aren’t going to eat the tariffs Trump wants to slap on these — and so they’ll pass on the higher costs to consumers instead.
Consumer prices surged 0.6% in January from December, double the consensus forecast of a 0.3% rise. The sharpest monthly increase since February 2013, according to the Bureau of Labor Statistics.
…So here is what inflation does to workers and consumers: it eats up the purchasing power of their wages. In that vein, the Bureau of Labor Statistics also reported today that real (inflation adjusted) average weekly earnings dropped 0.6% in January from a year ago, as nominal wage increases were more than wiped out by inflation.
U.S. consumer prices recorded their biggest increase in nearly four years in January as households paid more for gasoline and other goods, suggesting inflation pressures could be picking up.
…Inflation is trending higher as prices for energy goods and other commodities rebound as global demand picks up.
PG View: And what is the preferred hedge in times of inflation? Gold of course . . .
Yahoo Finance/Julia La Roche/01-04-17
“Today, global markets are at the beginning of a tectonic shift from deflationary expectations to reflationary expectations. What happens to economies at maximum leverage when interest rates begin to rise? Reconciling the potent strengths of the world’s largest economies with their inherent weaknesses has revealed various investable anomalies. The enormity of the apparent disequilibrium is breathtaking, making today a tremendous time to invest,” Bass wrote in a year-end letter to investors seen by Yahoo Finance.
PG View: If reflation is to be the new order of the day, gold is likely to shine. As for the rhetorical question about the implications for highly leveraged (indebted) countries . . . well, higher rates means higher debt servicing costs. As those costs account for a greater and greater percentage of a country’s budget, spending elsewhere must be cut and you get austerity measures. Or, the central bank just reverses course and takes rates back tot he zero-bound (or even negative).
The Wall Street Journal/Ira Iosebashvili/12-27-16
“We still think you should not count out gold,” said George Gero, managing director at RBC Capital Markets, in a note to clients. “Most of the dollar strength has been discounted, and inflation eventually may help gold become a factor in asset allocations again.”
PG View: Gold has fared well during the deflationary environoment of the past decade, but if inflation is really about to return (I’m not so sure) the yellow metal will likely really shine.
15-Nov (FT) — Donald Trump’s election victory heralds the beginning of a new era that will be marked by the retreat of globalisation and rising bond yields, according to Bridgewater’s Ray Dalio.
Mr Dalio, the founder of the world’s biggest hedge fund group, said in a note on Tuesday that “there is a good chance that we are at one of those major reversals that last a decade”, similar to the outbreak of stagflation in the 1970s and the shift back to strong, non-inflationary growth in the 1980s.
Although the iconoclastic hedge fund manager, whose firm manages about $150bn, stressed that the new era might not be anything like the 1970s or 1980s, he warned that it could last a decade and would also be characterised by aggressive government spending, and quicker US growth accompanied by accelerating inflation.
PG View: So gold, right?
15-Nov (CNBC) — President-elect Donald Trump’s plan to spend on big projects could send inflation up, which in turn would help gold, a fund manager said Tuesday.
In his victory speech, Trump proposed a “$1 trillion over a 10-year period” infrastructure plan, which has already boosted the prices of metals in the last week.
While the market was still speculating on what would lies ahead when he takes office, the general consensus is that fiscal spending is far easier to achieve than other reforms he has proposed, said Alex Merk, president and CIO of Merk Investments. That should underpin the appeal of gold as an inflation hedge.
…The uncertain environment will likely keep gold afloat, said Merk.
While gold has a historically low correlation to bond yields, that correlation is now “very high”, a positive for the precious metal, he said.
09-Nov (FT) — A key measure of market expectations for US inflation climbed on Wedensday to its highest level since last summer as investors bet Donald Trump will be able to boost government spending and cut taxes to make good on election promises.
The 10-year break-even rate, which gauges the difference in yield between inflation-adjusted and nominal Treasury yields of the same duration, jumped almost 9 basis points to 1.825 per cent, the highest level since July 21.
That suggests that investors are now bracing for a pick-up in inflation over the next decade, something that has stubbornly refused to materialise even as the Federal Reserve has held rates near historic lows since the financial crisis.
The rise is being propelled by expectations that Mr Trump, who has won the presidential election in a shock outcome, will dramatically increase fiscal stimulus measures, and also cut taxes, something that would likely boost inflation.
PG View: Even as stocks rebound and bonds tumble, gold remains resilient. If there is finally to be inflation, you’re going to want some gold.
03-Nov (CNBC) — NBC used to air a fast-paced television game show called “Deal or No Deal.”
The oil markets have been playing a version of that with OPEC and certain non-OPEC members who, in a desperate attempt to save their economies, are trying to forge a deal on limiting oil production.
As is usually the case, when Saudi Arabia speaks, the oil market listens, and, in a departure from their previous position of engaging in a bare-knuckle brawl for global market share, they have been leading the charge to reign in oil production.
Oil prices had rallied on their attempts, recently nearing the $52 level for West Texas Intermediate.On Thursday WTI was trading at about $45 per barrel.
… Because of all this, WTI oil prices are set to trade back down to the mid-$30, at least, putting the February low of $26.05 back in-play, into year-end.
2017 is looking like another challenging year for the energy industry.
PG View: That could translate into another challenging year for inflation expectations as well . . .
02-Nov (Reuters, via CNBC) — Oil prices tumbled 3 percent on Wednesday after a record weekly build in U.S. crude stocks added to worries of all-time highs in OPEC production that suggested little could be done to rein in a global glut.
The U.S. government’s Energy Information Administration (EIA) said crude inventories rose by 14.4 million barrels for the week ended Oct. 28, versus analysts’ expectations for a build of 1 million barrels. It was the biggest ever rise in U.S. crude stocks in a week, overwriting a 2012 record.
“This is very, very, very bearish. Nothing else in the report matters,” said James L. Williams, energy economist at WTRG Economics in London, Arkansas.
PG View: If energy prices resume their downtrend, it’s going to derail any hope of hotter inflation into year-end…and possibly the rate hike as well. More production freeze/cut rumors in 3, 2, 1 . . .