The initial jobless claims for March beat expectations and is at the lowest level since 1969. Coupled with wage growth hitting 3.5% YoY (the highest since 2010), it appears that the Phillips Curve has resurfaced.
The Phillips Curve is the relationship between the unemployment rate and wage growth.
The Phillips Curve has been MIA (missing in action) for a long time, but has resurfaced in the form of initial jobless claims and wage growth. While Core Inflation YoY is a tepid 1.79%, wage growth is climbing to almost 3.5% YoY.
If you believe the Taylor Rule (Mankiw specification), The Fed should continue to raise its target rate.
Wage growth at around 2x core inflation? Over, under, sideways, down.
The 30-year mortgage rate is dropping fast and the housing data is low riding on the rate decline.
And with the drop, both new home sales and existing home sales are enjoying a revival.
The Core PCE and Core PCE deflator YoY (aka, core inflation) are both declining. The deflator is actually down to 1.4% YoY.
It’s the same all over the world.
The US Treasury actives curve and dollar swaps curves are markedly sagged (or kinked).
But other countries are experiencing curve sags as well, but just not as pronounced. Germany, Japan, UK and France are all sagging, but less notably.
Numerous risks abound in the global economy such as Brexit, China trade disagreement, etc.
On the other hand, there is Venezuela which has entered a seemingly permanent sag.
And the SAG award goes to … the USA for short-term SAG.
The permanent SAG award goes to …. Nicolas Maduro and Venezuela.
Are today’s Price-to-earnings ratios reasonable? Or too high?
Yale’s Nobel laureate Robert Shiller developed the cyclically-adjusted price-to-earnings (CAPE) ratio to address this question. The answer? Today’s P/E ratio is almost twice the historic average.
If you like the Shiller CAPE ratio, you can invest in the Barclay’s or Doubleline Enhanced CAPE products.
DoubleLine Shiller Enhanced CAPE seeks total return total return in excess of the Shiller Barclays CAPE US Core Sector Net ER USD Index by using a combination of derivatives, and direct invests, to earn a returns that closely tracks the performance of the index. The Fund will also invest in a portfolio of debt securities to provide additional long-term total return.
What do the 10y-3m US Treasury yield curve and the Atlanta Fed’s GDP NOW Q1 GDP forecast have in common? Both are showing the same thing: economic slowdown.
The US Treasury yield curved inverted on Friday for the first time since 2007 and it became ever more inverted today as 10-year T-Note Volatility spiked.
Investors are taking large bets on the leveraged VIX note with inflows the highest in recorded history (that is, since 2011).
Former Fed Chair Janet Yellen said not to worry. Inversion may simply be a rate cut signal, not recession. So don’t think twice, it’s alright.
The US Treasury Yield Curve inverted on Friday for the first time since 2007. The talking heads were stumbling and mumbling about its meaning.
Here is my explanation. It is a combination of an overzealous Federal Reserve AND a slowing US (and European) economy.
In short, The Federal Reserve has been raising its target rate relatively quickly (driving the 3-month Treasury bill yield up) as the 10-year Treasury note yield has been falling (particularly since November 2018). They met on Friday and passed each other. This view of the inverted Treasury yield curve is more about The Fed raising its target rate despite a declining 10-year yield.
But another interpretation of the inverted curve is it is signal of an impending recession, the same way that household net worth (as a percentage of disposable personal income) peaks then falls prior to a recession (a tip of the hat to Jesse’s Cafe Americain!)
So, it is really a combination of the two: an overzealous Fed and a slowing global economy
As the US yield curve starts smelling like recession,
February existing home sales rose 11.8% MoM in February. As rates decline because of recession fears in the US and Europe, the outlook for US housing improves … in the short run.
The housing market is dazed and confused by Fed policies.
Talk about dazed and confused, President Trump is thinking of nominating Stephen Moore for the Federal Reserve Board of Governors. How about a serious economist like Stanford’s John Taylor of The Taylor Rule fame?
With a projected slowing economy and core inflation still under 2%, Fed Chair Jerome Powell officially threw in the towel on monetary normalization yesterday by announcing no more rate increases this year and balance sheet reduction will cease in September.
The US Treasury Actives curve remains kinked from 6 months to 10 years reflecting economic slowdown. The overnight indexed swap curve is hyper-kinked.
A closer look at the US Overnight Indexed Swap rate flattened after The Fed’s last rate hike, signaling that there be no more in the short run.
One can view Powell as Mean Mr. Mustard (and Yellen as Polythene Pam), the surrender on monetary normalization is welcome by equity markets and mortgage lenders.
“Big Bad Jay” Powell today announced today that there would be no more rate cuts in 2019 and balance sheet shrinking would halt in September.
Federal Reserve officials scaled back their projected interest-rate increases this year to zero and said they would end the drawdown of central bank bond holdings in September sending benchmark Treasury yields to the lowest level in more than a year and bolstering market bets on a rate cut in 2019.
The median rate projection of Fed officials compared with two hikes in the December forecasts, which spooked investors at the time. In its statement following a two-day meeting in Washington, the Federal Open Market Committee repeated January language that it will be “patient” amid “global economic and financial developments and muted inflation pressures.”
“Patient means that we see no need to rush to judgment,” Fed Chairman Jerome Powell said in a press conference after Wednesday’s decision. “It may be some time before the outlook for jobs and inflation calls clearly for a change in policy.”
The Fed’s signal that it will keep interest rates on hold for the full year reflects concerns that economic growth is slowing, lower energy prices are weighing on inflation and risks from abroad are dimming the outlook. The projections go further than the one-hike forecast analysis.
Here is today’s FOMC Dot Plot.
Here is yesterday’s FOMC Dots Plot.
On the announcement, 10-year US T-Notes yields dropped 7+ basis points.
And the 2-year and 5-year Treasury Note yields are BELOW The Fed Funds Target Rate!