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 . . .
02-Nov (WSJ) — Fed Chairwoman Janet Yellen set markets abuzz last month when she said running a “high-pressure economy” might help undo some of the economic damage wrought by the Great Recession.
Some investors wondered whether she meant the Fed was now seeking to push inflation above its 2% target. Her remarks came the same day Bank of England Gov. Mark Carney said the central bank was willing to let inflation temporarily overshoot its 2% goal to prevent the jobless rate from rising sharply, and three weeks after the Bank of Japan said it would aim to exceed its 2% inflation target.
But Ms. Yellen wasn’t suggesting the Fed follow suit, nor do the central bank’s projections imply a similar strategy.
She effectively expressed sympathy for the idea of letting short-term interest rates and the jobless rate stay low for a while to explore the costs and benefits to the economy. That would cause inflation to accelerate, but not rise above 2%, according to the Fed’s forecast. Inflation has run below that level for more than four years.
Her remarks reflect the debate Fed officials are having at their two-day meeting, which concludes Wednesday. They are likely to leave their benchmark federal-funds rate unchanged in a range between 0.25% and 0.5% and signal they could raise it next month.
01-Nov (Bloomberg) — You could say Peter Pan is growing up.
Japan’s most determined central bank governor in the modern era, Haruhiko Kuroda, once described the task of fostering inflation as somewhat like Peter Pan’s efforts to fly — the moment you doubt yourself, you can no longer do it.
On Tuesday, the Bank of Japan’s inflation outlook came hurtling back toward Earth.
Kuroda and his fellow board members, who in 2013 forecast reaching their 2 percent target for consumer-price gains within a couple years, are now projecting this happening as late as spring of 2019.
This puts the goal beyond Kuroda’s term as governor, which ends in April 2018. It also means fulfilling the pledge to overshoot that target looks even more distant.
09-Sep (Bloomberg) — Weak growth, higher inflation, and stagnant productivity in developed countries will roil bond investors in the decades to come, as the benign global forces that have buoyed returns on financial assets for the past 35 years stage a sharp reversal. That’s the big-picture call from Deutsche Bank AG analysts who predict an oncoming lurch towards trade and financial protectionism — combined with aging populations and weak worker output — will intensify financial repression as a new multi-decade-long economic cycle kicks off this year.
“In our opinion we’re getting closer to a binary outcome for the global economy and financial markets,” the strategists, led by Jim Reid, wrote in a report on Thursday.
Now, there’s an inflection point in the global economy that is poised to create a perfect storm for bond investors: higher inflation, and strengthening political incentives to erode high debt burdens by hitting bond holders with effective haircuts, the bank argues.
…Deutsche Bank’s warnings follow Bank of America Corp. analysts last month, who reckon that financial assets are poised to underperform real-economy assets — such as commodities and collectible items — citing high financial-market valuations, and the prospect of looser fiscal policy, trade protectionism and wealth redistribution in developed countries. The bearish prognostications are premised on one big call, of course: there will be no positive productivity shock in advanced economies in the coming decades.
PG View: The return of inflation amid ongoing slow growth . . . that’s called stagflation and it’s an environment where gold really shines. During the 1970s, gold surged from $35 to $512, a gain of 1,360%.
08-Sep (FT) — Food prices in August rose to their highest level in 15 months as higher dairy and palm oil markets outweighed weakness in grains, which have been depressed by prospects of bumper harvests in key growing regions.
The UN Food and Agriculture Organization’s monthly food price index climbed 1.9 per cent from the month before and almost 7 per cent from August 2015 — the highest level since May last year, with prices for dairy, vegetable oils and sugar leading prices upwards.
Food prices, which have been falling for the past few years on plentiful supplies and favourable weather patterns, seem to have bottomed out, said Abdolreza Abbassian, senior grains economist at the FAO.
“With the exception of July, the index has risen every month this year,” he said.
PG View: Good thing central banks don’t include stuff people actually buy in their preferred inflation measures.
28-Jul (WSJ) — Lower oil prices don’t seem to be spooking markets for once. But they should cause a few wrinkled brows for inflation watchers.
The price of a barrel of Brent crude has fallen some 16% from its June peak, and was trading Thursday at $43.80. But stocks haven’t swooned. The S&P 500 is close to its highs, and even unloved European stocks have been bouncing back, with the Stoxx Europe 600 up 3.5% in July.
That may be in part because economic data has been holding up on both sides of the Atlantic, enabling the U.S. Federal Reserve to start hinting at another rate increase. In addition, the decline in oil prices appears to be connected more to supply than demand.
But if oil isn’t correlated with stocks, for once, inflation can’t escape so easily.
PG View: The Fed noted ongoing concerns about the absence of inflation in yesterday’s FOMC statement.
04-Apr (FT) — Companies do not believe the Bank of Japan will hit its 2 per cent inflation goal by 2021 in the latest blow to governor Haruhiko Kuroda and his programme of monetary stimulus.
According to the BoJ’s latest economic “tankan” survey, corporate expectations of price rises fell across the board, with companies now predicting inflation of 1.3 per cent in five years— down from 1.6 per cent three months ago.
The slide in inflation expectations is bad news for Mr Kuroda, who has built his effort to escape deflation on persuading Japan that prices will rise, and the country should spend and raise wages accordingly.
01-Apr (CNBC) — A tightening labor market and rising inflation against a backdrop of slowing overall growth are painting an increasingly stagflationary picture for the U.S. economy.
Stagflation, or conditions in which costs are rising but growth is not, last was seen in the 1970s, before then-Fed Chair Paul Volcker had to push the economy into recession to slay the inflation dragon.
Now, with a variety of factors coming together to show inflationary-deflationary cross currents, Wall Street is bracing for another battle.
“During the last year, as the economy has returned closer to full employment, the core cost structure of the U.S. economy has risen more aggressively and more broadly than ever before in this recovery,” Jim Paulsen, chief investment strategist and economist at Wells Capital Management, said in a report for clients. “While the U.S. is not facing runaway inflation, the concept of stagflation (i.e., rising inflation rates combined with slower real economic activity) has become much more noticeable.”
PG View: When stagflation dominated during the 1970, gold rose by nearly 16 times. See Black Swans, Yellow Gold
by Ambrose Evans-Pritchard
15-Mar (Telegraph) — The trigger for the next global recession is at last coming into view after a series of loud distractions and false alarms.
The Atlanta Federal Reserve’s gauge of “sticky-price” inflation in the US soared to a post-Lehman peak of 3pc in February. This index is a ‘pure’ measure of core inflation – the underlying story once the noise is stripped out.
The Cleveland’s Fed’s ‘median consumer price index’ jumped to 2.9pc, with big rises are in medical services, housing rents, car insurance, restaurants, hotels, women’s clothing, jewelry, and car hire. This is the long-feared inflexion point we all forgot about in those halcyon days of deflation, now just a fond memory.
Expansions rarely die of old age. They are killed.
The Fed’s veteran vice-chairman Stanley Fischer is itching to tighten. “We may well at present be seeing the first stirrings of an increase in the inflation rate,” he said in a portentous speech last week.
Every major downturn since the First World War has been caused by the Fed, determined to snuff out inflation as the credit cycle matures. Expansions rarely die of old age. They are killed.
29-Feb (Bloomberg) — The inflation picture in the euro area deteriorated in February, giving European Central Bank policy makers more bad news to digest just a week before their next meeting.
Consumer prices in the 19-nation bloc declined to minus 0.2 percent from a positive reading of 0.3 percent in January, according to data published Monday. Core inflation, which strips out volatile elements such as food and energy, was at 0.7 percent, down from 1 percent in the prior month. Those are the worst readings since February and April of last year, respectively.
The deteriorating inflation backdrop comes just over a week before ECB policy makers led by President Mario Draghi gather in Frankfurt for a meeting at which they’ve said they’ll review if their current stimulus is enough. Price growth has fallen short of the central bank’s goal of just below 2 percent for three years amid a drop in oil prices, pushing the central bank to take more and more aggressive action in response.
“Not only headline but also core inflation is much lower than the ECB has been projecting — it is not just energy, it is a wider problem reflecting second round effects and weak demand,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “This will provide the ECB with an extra push to deliver more aggressive easing than expected at its March meeting.”
PG View: The deteriorating inflation picture ups the odds for more ECB action in March, which has pushed the euro to a 3-year low against the dollar today.
28-Jan (Bloomberg) — German consumer prices fell at the fastest monthly pace in a year in January as plummeting oil prices and weakness in emerging-market economies postpone a long hoped-for pickup in inflation.
Prices declined 0.9 percent from December, the Federal Statistics Office in Wiesbaden said on Thursday. That’s the largest decline since January 2015. Even so, the annual inflation rate rose to 0.4 percent from 0.2 percent the prior month, in line with the median estimate in a Bloomberg survey.
While slightly faster inflation may seem like welcome news to the European Central Bank which is trying to fuel price pressures in the 19-nation euro area, the acceleration masks a deteriorating outlook. With a drop in oil prices of almost 25 percent since early December weighing on inflation expectations, ECB President Mario Draghi has signaled more stimulus may come as early as March.
22-Jan (Bloomberg) — Venezuela’s consumer inflation, already the world’s highest, will more than double this year to a level above all estimates from economists surveyed by Bloomberg, the International Monetary Fund said.
Inflation will surge to 720 percent in 2016 from 275 percent last year, according to a note published by the IMF’s Western Hemisphere Director, Alejandro Werner. That’s nearly quadruple the median 184 percent estimate from 12 economists surveyed by Bloomberg, and exceeding the highest forecast of 700 percent from Nomura Securities.
Spiking prices and widespread shortages for even staples have driven discontent in Venezuela. That helped spur the opposition to gain control of Congress for the first time in a decade as President Nicolas Maduro attempts to turn the tide of what he has deemed an “economic emergency.”
PG View: Smart Venezuelans that don’t want to see the purchasing power of their currency disappear are buying gold.
17-Dec (Bloomberg) — Argentina’s peso tumbled as much as 30 percent as newly inaugurated President Mauricio Macri fulfilled his campaign promise of letting the currency float freely.
Macri’s push for a devaluation was a key part of the economic overhaul he says is needed to lure investment that can jump-start an economy suffering from lackluster growth, inflation estimated at 25 percent and a shortage of dollars. The decline brought the official rate closer in line with where the peso had been trading in unregulated markets.
The move also carries risks, with the plunge potentially leading to skyrocketing consumer prices and a backlash from Argentines who see the value of their savings sink in dollar terms. Finance Minister Alfonso Prat-Gay, in announcing the move to end the central bank’s support for the peso and currency controls that limited the ability of Argentines to buy dollars, said Wednesday that the central bank is ready to intervene should declines in the peso spiral out of control. In addition, Argentina expects between $15 billion and $25 billion in inflows over the next month to bolster reserves.
…Morgan Stanley estimates that quick devaluation of the peso may lead inflation to accelerate to 35 percent in 2016.
PG View: Think about that for a moment. If you had 10,000 pesos in the bank yesterday, you woke up this morning and your savings had only ARD7000 in purchasing power. And that’s not even taking into consideration the 227% decline in the value of the peso over the last 7-years, prior to today’s tanking. It is a shame that the people of Argentina have to suffer such a crisis every 10-years or so. Smart Argentines own gold.
19-Nov (Bloomberg) — ECB President Mario Draghi said officials would “re-examine” their policy stance on Dec. 3, when new forecasts for inflation and economic growth will also be released. In recent weeks, governors have sent mixed signals over the need for further easing for a currency bloc that is showing domestic resilience but which is exposed to a global slowdown spurred by China’s cooling economy. The accounts showed officials saw uncertainty surrounding China as still “particularly high.”
The euro pared gains after the account was published. It traded at $1.0695, up 0.3 percent, at 1:45 p.m. Frankfurt time.
Praet’s presentation mentioned “downside risks to the September baseline scenario, notably as regards the inflation outlook,” according to the accounts. The ECB that month projected prices in the euro area will rise 1.1 percent in 2016 and 1.7 percent in 2017. The goal is medium-term inflation of just under 2 percent, a level not seen since early 2013.
“Such a downward revision to the inflation outlook was seen as potentially worrisome, especially when coupled with less robust evidence of a sustained turning point in underlying inflation,” the authors wrote. There is a risk that consumer prices, “after a pick-up around the turn of the year owing to oil price-related base effects, could fall back to relatively low levels in early 2016.”
16-Nov (Bloomberg) — The European Central Bank sees a risk that investors and consumers will lose faith in policy makers’ projections for reviving inflation, Executive Board member Peter Praet said.
“It’s key for a central bank to keep inflation expectations anchored, especially in a period of slack in the economy, and we have some signals that these inflation expectations are still fragile,” Praet, 66, said in a Bloomberg interview in Frankfurt on Monday. “There are risks and this is why we’re considering further action. A possible de-anchoring of inflation expectations together with a lot of slack is a dangerous cocktail.”
Eight months into an unprecedented 1.1 trillion-euro ($1.2 trillion) bond-buying program, the ECB is considering stepping up stimulus as the euro area’s sluggish recovery fails to lift consumer prices clear of the deflation danger zone. While some policy makers have said there’s little need for more action just yet, Praet argued that the Frankfurt-based institution is concerned about persistent miscalculation of how long it’ll take to return inflation toward its goal.
“Mechanically updated projections suggest that the risk is present that we may again have to extend this horizon,” he said. “And even if it’s slightly, it’s a repetition of a past pattern. And then you go into the question of credibility of monetary policy.”
12-Nov (CNBC) — The head of the European Central Bank has paved the way for further monetary easing in December, warning that signs of a sustained turnaround in core inflation had weakened.
Addressing the European parliament’s Economic and Monetary Affairs Committee Thursday, Mario Draghi said that “downside risks stemming from global growth and trade are clearly visible” in the euro zone.
Although a recovery in the 19-country single currency region was “progressing moderately” there were risks posed by the area’s “inflation dynamics.”
“Inflation dynamics have somewhat weakened, mainly due to lower oil prices and the delayed effects of the stronger euro exchange rate seen earlier in the year. In addition, price pressures – such as from producer prices – remain very subdued,” he said.
Draghi warned that from today’s perspective, “this suggests that a sustained normalization of inflation could take longer than we anticipated in March when we first appraised the overall impact of our measures.”
PG View: Interestingly Draghi specifically noted that core inflation has “somewhat weakened.” However, that indicator has been trending higher since April. That has led many to believe that Draghi is aware of weakness not yet reflected in the data, which is heightening expectations that QE will indeed be expanded in December.