Dashboard update: expectations and central bank signaling

Macro and Markets Dashboard: United States (March 12, 2016 — PDF)

Friday’s bull market led equity and commodity prices to their third consecutive weekly increase. Market volatility has continued to return to more comfortable levels. Investors views on the current macroeconomic environment and expectations about the future are important determinants of market behavior. While the global macroeconomic picture still includes low growth, I worry that unorthodox monetary policy may have its effectiveness counteracted by the signals it sends.

Oil prices, as measured by front-month contracts of West Texas Intermediate crude oil, increased nearly six percent during the week (see below). The S&P 500 and Dow Jones Industrial Average increased by more than a percentage point during the week, while the Nasdaq Composite Index was up two-thirds of a percent.

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The CBOE Volatility Index (VIX) fell to its lowest level of the year on Friday, closing at 16.5. Possibly supporting the relative calm in markets, the week offered very little new domestic macroeconomic data. Next week should provide more food for investor thought.

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A quiet week for domestic data provides opportunity for reviewing the global picture. The IMF forecasts global growth to remain weak but gradually improve. Emerging markets, including China, continue to experience relatively slower growth and lower demand. Commodity exporters continue to be hurt by the collapse in prices. Global trade has slowed, and some economists have asked whether we have reached the end of globalization.

The European Central Bank (ECB) expanded quantitative easing and cut all interest rates during their meeting this week. Other central banks in the region will likely follow the ECB further into negative interest rate territory. I worry that negative interest rates and other unorthodox monetary policy are not as effective as anticipated. What Keynes termed “animal spirits” plays a role in explaining why the continued lowering of borrowing rates may not lead to more lending.

Negative interest rates send a mixed message. A bank is simultaneously being enticed to lend by the low cost of money while being told that the economy is in unprecedentedly bad shape. Near to zero, the actual effect of small changes to the interest rate can be overpowered by the message that is sent by the direction of movement. When central banks tighten from zero, as the Fed did in December, it signals that monetary policy is moving away from uncharted waters and that the economy is improving. A tightening central bank adds basis points to its arsenal for handling future crises. When central banks such as the ECB and Bank of Japan (BOJ) loosen monetary policy further, they move farther into a territory which scares investors and lenders and constrains their future movement.

In the U.S., labor market tightening, wage growth, core inflation, and signs of modest economic growth push the Fed towards another quarter point rate hike. Most economists, however, do not expect a rate increase from the Fed during its meeting next week. Despite other concerns, such as the weak global picture and the continued strength of the dollar, the animal within me would like to see a Fed funds rate increase in one of the next two meetings.

 

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Dashboard update: data marches forward

Macro and Markets Dashboard: United States (March 5, 2016 — PDF)

This week brought more strong labor market data and more relief for commodity markets. Equity markets were also up on the week, while treasury and high-grade bond yields remain low. Decomposition of broad equity market growth shows that investors are still risk-off. Value stocks have climbed while riskier investments still seem reasonably priced, providing additional evidence that risk aversion persists.

February jobs data showed continued tightening of U.S. labor markets. The unemployment rate remains 4.9 percent while the labor force participation rate increased by two tenths of a percent to 62.9, a one-year high.

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The S&P 500 closed on Friday at 1999.99, as if priced by a nineties consumer psychologist. The index climbed 2.7 percent during the week. A crude decomposition shows value opportunities favored over growth opportunities so far in 2016. Year-to-date, the S&P 500 Growth ETF is down 3.03 percent, while the S&P 500 Value ETF is down only 0.37 percent.

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Meanwhile, treasury bond yields remain very low. The real yield curve rate on a five year U.S. treasury bond was negative on Thursday, at -0.03%, and closed Friday at 0.02%. People are willing to sacrifice returns for the relative safety of government debt. Japan issued new ten year bonds with a negative yield for the first time this week. Investors clearly do expect the markets to adjust so that these safe assets provide some future positive yield, but are willing to pay the government of Japan for short-term security.

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While equity and commodity markets have become gradually less volatile over the past two weeks, foreign exchange markets continue to move in all directions, reflecting both stories–commodities relief and risk aversion. I’ve pasted below the full table from my dashboard. Over the past week, the dollar returned some of the previous week’s gains against the pound, but continued to strengthen against the euro and yen. Notably, the Brazilian real strengthened four percent against the dollar during the past week.

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Dashboard update: adjusting the tools

Macro and Markets Dashboard: Japan (February 20, 2016 — PDF)

Macro and Markets Dashboard: United States (February 20, 2016 — PDF)

Given a relatively calm week for markets, I’m going to make a more procedural update this week and share two developments with my tools. First, I’m including a draft dashboard for Japan. Second, I’ll be sprinkling in some bar chart plots, which I hope dig a bit deeper into some interesting time series.

The draft dashboard for Japan still needs a lot of work, but provides a few interesting indicators of macro and market conditions in the land of the rising sun. For example, Japanese government bonds (JGBs) were in the news when the BOJ negative interest rate policy pushed yields on ten year bonds negative. While the shorter-duration bond yields are still negative, ten year yields are now virtually flat (see below). JGB_Feb202016

Additionally, I’ve developed some bar plots for looking deeper into changes to prices. Below, I include the decomposition of the Consumer Price Index and Producer Price Index into selected categories. I’ve used the 12-month percentage change to individual CPI and PPI series in this example. Hopefully, I can integrate these charts into the main dashboard, over the coming weeks. We can see from this example, that health care costs continue to rise more rapidly than other costs, and that the fall in energy prices slowed during January.

Prices_Feb202016

Dashboard update: investors shift assets to safe havens

Macro and Markets Dashboard: United States (February 13, 2016 — PDF)

As a result of the tumultuous start to the year, investors have been increasingly retreating to bastions like gold, Yen, and Swiss Francs. Gold prices have risen nearly 17 percent so far this year (see below). The Yen has appreciated more than six percent against the dollar during the past week, while the Swiss franc strengthened two and a third percent against the greenback.

gold_feb132016

Internationally, an increasing share (now 30%) of all government debt offers negative interest rates (the New York Times ran a fantastic piece on negative interest rates). This week, Japanese government bonds were in the news as the yield on the ten-year JGB fell into negative territory. This suggests expectations of prolonged low or negative interest rates. U.S. Federal Reserve Chair Yellen said that U.S. officials are looking into the option of negative interest rates. The yield on a ten-year U.S. treasury bond fell to 1.63 percent on Thursday. The spread between this ten year government bond and a high-yield corporate bond has climbed to its highest level since the financial crisis (see below).

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Market volatility, as measured by the CBOE VIX, closed above 25 all week, ending the week at 25.04. Oil prices fell further during the week, with the benchmark U.S. measure, front month contracts for West Texas Intermediate crude, closing Friday at USD29.44 per barrel. On Thursday, the price per barrel hit a twelve year low of $26.05 (see below).

oil_feb132016

Dashboard update: noisy week

Macro and Markets Dashboard: United States (February 6, 2016 — PDF)

Modest U.S. macroeconomic data continues to pour in, yet equity markets tumbled, possibly pricing in a steeper trajectory for the fed funds rate. JP Morgan Funds’ chief strategist, David Kelly noted in his weekly podcast that the noisy week was “unlikely to resolve issues troubling markets”.

Yesterday’s jobs report showed an increase in non-farm payrolls of 151,000 workers, bringing the unemployment rate down to 4.9%. The number of long-term unemployed was basically unchanged. The civilian labor force participation rate improved by a tenth of a percent to 62.7. Wages also improved slightly; average hourly earnings are 2.5 percent higher than a year ago.

unemp_Jan_2016

A new note from Francisco Blanch of Bank of America Merrill Lynch reminded that the oil price collapse generates an enormous wealth transfer from oil producers to consumers. Over time, this type of transfer may show up in personal savings rate or personal consumption expenditure data, however, the December personal savings rate was unchanged at 5.5 percent.

January manufacturing PMI data was practically unchanged at 48.2, however the index of non-manufacturing business activity fell more than 9 percent to 53.9.

nmi_Jan_2016

Major U.S. equity market indicators were down on the week, and tech stocks were hit particularly hard on Friday. The S&P 500 was down more than three percent during the week, and the Nasdaq composite index dropped more than five percent. Oil, as measured by front month contracts of WTI, closed Friday at $30.89 a barrel.

The dollar depreciated against most major currencies during the week, providing some relief for U.S. exporters (and policymakers). The dollar weakened more than four percent against the Brazilian Real, more than three percent against the New Zealand Dollar, and more than two percent against the Euro, Yen, Canadian Dollar, and Swiss Franc. The dollar was down roughly 1.7 percent against sterling.

Dashboard update: volatility persists but investor sentiment improved

Macro and Markets Dashboard: United States (January 30, 2016 — PDF)

A busy week for economists, as the Fed met, advance estimate 2015 annual and 2015 Q4 GDP figures were released, and earnings results were announced for hundreds of U.S. companies. Of course, the Fed did not change interest rates, and actually softened their statement language some. The first estimate of 2015 Q4 GDP growth showed a slowdown. Earnings, especially from Facebook, did not disappoint.

Advance estimate GDP data from the BEA showed real GDP growth in 2015 Q4 was lower at 0.7 percent (annualized basis), down from two percent in Q3. Analysts have been expecting a lower rate of growth, so this was not a huge surprise, though it is not great news. The strong dollar has hurt exports, while inventories and savings rates have both increased. The economist offered a nice piece of analysis on the GDP slowdown. As usual, the data will be revised a few times.

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The FOMC meeting during January 26-27 was not stopped by winter storm Jonas, though it seems the policymakers are being slowed by forces much much further away. As noted in the Fed’s statement (PDF):

The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.

The FOMC’s additional consideration of volatility abroad is a real wrinkle for monetary policy makers who have an already limited toolkit. Given the potential consequences of highly divergent monetary policy, this additional consideration has become a reality.

Equity market indices were higher on the week. The S&P 500 was up 33 points or 1.7 percent, and the Dow Jones Industrial Average climbed 372 points on the week, 2.3 percent. Much of these gains came from a surge on Friday.

Corporate high yield bond yields fell during the week, but remain in dangerous territory. The yield spread of Merrill Lynch’s index of high-yield corporate bonds over 10 year treasuries remains above 7 percent.

hybonds

The U.S. dollar softened against most major currencies during the week, including by half a percent each against sterling and the Euro. The dollar weakened by 1.39% against the Australian dollar, 1.75% against the Canadian dollar, 2.5% against the South African rand, more than 3.5% against the Malaysian Ringgit, and more than 6% against the Russian Ruble.

The dollar strengthened by more than 1.6% against the yen during the week, as the Bank of Japan announced that it would take its battle against deflation to the next level by adopting a negative key interest rate.

Dashboard update: another volatile week

Macro and Markets Dashboard: United States (January 23, 2016 — PDF)

While the S&P 500 closed higher on the week, it doesn’t look like market jitters have dissipated. Volatility, as measured by the CBOE’s VIX, reached its highest level since August, spiking at 31.95 on Wednesday, and closing Friday at 22.34.

Excess reserves of depository corporations that are parked with the Fed bounced back towards their peak, despite the Fed’s effort to drain liquidity. Similarly, yields on 10-year treasuries traded near 2 percent (see below).

Oil prices, as measured by front month contracts of WTI, reached a low of $26.19 a barrel, but closed Friday at $32.19. Newly released CPI data showed prices growing at 0.7 percent in December (see below), an increase of 0.3 percent over November, but still well below the 2 percent target.

On the exchange rate front, the dollar strengthened over sterling, the ruble, and the real. A fried who just returned from Brazil noted how relatively inexpensive a vacation from the U.S. to Brazil has become. With more than a foot of snow in Washington right now, opportunity costs are down, as well.

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cpi_Jan_21_2016

Dashboard update: markets continue their tumble

Macro and Markets Dashboard: United States (January 16, 2016 — PDF)

Major U.S. equity market indices have fallen again this week. The Nasdaq-100 closed at 4,141.08 on Friday, reaching its lowest level since August (see below). Crude oil futures closed below $30 a barrel on the week, the lowest level since July 2000.

The trade-weighted index of the U.S. dollar against major currencies, as obtained from FRED with a one-week lag, reached its highest level since 2003. The dollar strengthened by more than one percent against many major trading partners in the past week. Notably, the dollar increased by 1.5 percent over sterling, by 1.36 percent over the Mexican peso, by 2.17 percent against the Canadian dollar, and by 3.37 percent against the rand.

Monthly data on capacity utilization and industrial production was also bleak. December total industry capacity utilization was 76.5 percent, the lowest level since July 2013. The Fed’s industrial production index registered at 106.2 during December, its lowest level since June 2014.

I see that my dashboard is not capturing the rally in treasury markets (through I notice the decline the yield spread between 10 year treasuries and 3 month t-bills). I’ll aim to add some more charts showing fixed income markets for the next weekly update.

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Dashboard update: mixed, but mostly bad

Latest Dashboard: Macro and Markets Dashboard: United States (PDF)

Data over the past week has been both terrible and good, as US equity markets had their worst ever start to the year, but the jobs report was positive. Volatility in Chinese equity markets has been largely cited as the cause for the U.S. sell off. The S&P 500 fell nearly six percent during the week (see below). Oil (WTI) fell about three dollars a barrel over the week.

Meanwhile, jobs data showed a slight uptick in the extraordinarily low labor force participation rate, and a stable five percent unemployment rate. These, the jobs increase, and wage figures, are better than what was generally expected.

The trade weighted dollar strengthened, as the dollar strengthened by more than a percent over the British pound and Chinese yuan during the week, and by more than 3.75 percent against the Australian dollar. It now takes more than 1.41 Canadian dollars to buy a U.S. dollar.

The Fed’s H.4 report shows lots of activity as the reverse repo offerings reflect the Fed’s unconventional tools for draining liquidity from markets. Excess reserves of depository corporations have fallen to their lowest level since 2013 (see far below).

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