Today’s economic report reminds me of the Hitchcock flick “Strangers on a Train.” Criss-cross, two seemingly unrelated factors — 3.2% GDP growth with falling Personal Consumption growth.
(Bloomberg) — U.S. economic growth accelerated by more than expected in the first quarter on a big boost from inventories and trade that offset a slowdown in consumer spending, bolstering hopes that growth is stabilizing after its recent soft patch.
Gross domestic product expanded at a 3.2 percent annualized rate in the January-March period, according to Commerce Department data Friday that topped all forecasts in a Bloomberg survey calling for 2.3 percent growth. That followed a 2.2 percent advance in the prior three months.
The increase in real GDP in the first quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, state and local government spending, and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased. These contributions were partly offset by a decrease in residential investment.
The acceleration in real GDP growth in the first quarter reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment. These movements were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending. Imports, which are a subtraction in the calculation of GDP, turned down.
On the positive US news, global sovereign bond prices rose and yields declined. Mostly due to disappointed economic news from China.
Yes, the tax cuts helped speed up the economic merry-go-round, but the tax cuts are not seemingly translating to personal consumption.
Can Hyper Inflation Targeting Create Higher Highs in Equity Markets?
I thought this.was a piece from The Onion.
Hyperinfation? The Federal Reserve has been trying to generate 2% inflation for years … and inflation is now only 1.9% YoY.
Inflation doesn’t include asset prices like the S&P500 index that is smoking. Just ask the New York Times (thanks Lisbeth!).
Hyperinflation? Seriously? Interest rates are more determined by economic growth around the globe (like declining Germany).
US home buyers are benefitting from European economic misery (particularly Germany and fiscal-stressed Italy). I call this the Blitzkrieg Bop.
On the other side of the interest rate barbell is China (and Japan). So while the USA is growing, Germany and Japan are not doing so well, causing their Central Banks to push rates to zero .,.. or lower. Even China’s Central Bank is buying everything in sight in fear of a recession.
Hence, US mortgage lenders and potential homebuyers benefit is terms of dropping interest rates.
You can see the downward plunge in the Treasury Volatility Curve (MOVE – TYVIX) as Central Banks become active in 2008 and 2009. The 30-year mortgage rate has been declining thanks to hyper-intrusion of global central banks, killing off bond volatility.
Allegedly, The Federal Reserve is ceasing its raising of their target rate and will stop shrinking their balance sheet in September.
Mortgage purchase applications (NSA) are in their third phase and doing quite nicely, helped along recently by the barbell slowdowns overseas.
So much for market discipline. In fact, central bank intervention kills-off market discipline, a vital component of free markets.
However central banks are not concerned with market discipline. They are concerned with perpetuating asset bubbles.
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?
The US is imposing additional economic sanctions on Venezuela, both on oil … and gold!
The United States imposed sanctions on Venezuela’s state-run gold mining company on Tuesday, accusing it of illicitly propping up the government of President Maduro.
The US Treasury claims Maduro has relied on an illegal mining boom in recent years with the profits generated by the gold mining company, Minerven, proving vital to maintaining the military’s support for the government.
“Treasury is targeting gold processor Minerven and its president for propping up the inner circle of the corrupt Maduro regime,” US Treasury Secretary Steven Mnuchin said in a statement.
The announcement comes days after Uganda opened an investigation into US$300 million of unexplained gold suspected of originating with Maduro’s government. Flights this month from Caracas to Entebbe raised concerns that the government is smuggling gold out of the country and selling it to traders in Africa and the Middle East.
It is the sixth round of sanctions imposed by the U.S. since January as they attempt to wrest power away from Maduro and towards opposition leader Juan Guaido. Most Western countries have recognised Guaido as Venezuela’s interim president.
Venezuela’s gold industry is allegedly one of the country’s most lucrative financial schemes in recent years. Minerven is accused of purchasing high volumes of gold from local miners using the countries depreciated currency. The gold is then melted into bars and transported to the Central Bank of Venezuela.
The sanctions have led to a spike in Venezuela’s 2-year sovereign yield (in USD) as their economy continues to liquify.
The Cafe con Leche index, meant to reflect inflation for the average coffee-drinking citizen. 2019 has been a bad year, in particular, for the average Venezuelans.
And the Gold/Venezuelan Bolivar Cross hasn’t looked so good in 2018 either.
The good news? At least Venezuela isn’t on the Pacific coast of South America so they can avoid the Fukushima reactor meltdown aftermath. Chile, on the other hand. …
European bond volatility (according to the Merrill Lynch 3-month EUR option volatility estimate) has plunged to the lowest level on record.
A similar chart for the US bond market is the Merrill Lynch Option Volatility Estimate for 3-months shows exactly the same thing. The US bond market is grinding to a halt.
Note that the US MOVE 3-month estimate hit a low in May 2007, just ahead of The Great Recession of 2007-2009.
The ECB’s Mario Draghi has decided to raise the dead (as in Modern Monetary Theory) by reviving the ECB’s Targeted Longer-Term Refinancing Operations.
Mario Draghi revealed the biggest cut in the European Central Bank’s economic outlook since the advent of its quantitative-easing program as policy makers delivered a new round of stimulus to shore up growth. The ECB president said the euro-zone economy will expand just 1.1 percent this year, 0.6 percentage point less than forecast in December.
The central bank will revive its Targeted Longer-Term Refinancing Operations to encourage banks to provide credit to businesses and consumers, and will hold interest rates at current record-low levels at least through the end of the year, several months later than previously indicated.
The Euro declined on Draghi’s announcement.
And most Euro area 10 year sovereign yields are down 5 basis points or more.
Draghi must not read from the Modern Monetary Theory (MMT) book!
Former Columbia University economic professor and curret Fed Vice President Richard Clarida made one obvious point at a Dallas Fed meeting, and one half-truth.
(Bloomberg) — Federal Reserve Vice Chairman Richard Clarida said that when rates on shorter-dated bonds move above rates on longer-dated bonds, it can be a signal that an economic slowdown is coming.
“Historically in the U.S., inverted yield curves are actually pretty rare — they aren’t black swans, but they don’t happen a lot, and when they do happen that is typically a signal that the economy is either slowing sharply or could even go into a recession,” Clarida said Monday at an event at the Dallas Fed.
Clarida drew a distinction between flat and actually inverted curves.
“Right now the yield curve in the U.S. is not inverted” but “it is getting flatter,” Clarida said. He noted that the Fed pays a lot of attention to whether the curve is flattening because of a fall in inflation expectations. And he said that monitoring the curve is complicated by the fact that U.S. markets are impacted by global demand for safe assets. “What happens in Europe and Asia can have an impact on our Treasury market, too.”
Well Professor Clarida, your statement is only partially correct. The US Treasury yield curve (green) is actually inverted from 1 year – 5 years. THEN upward sloping after 5 years. The US Dollar Swaps curve is inverted from 3 months to 4 years then upward sloping.
Now, if you want to talk about a downward sloping yield curve, take Venezuela. Please!
Another curve that is shaped like a rollercoast at King’s Dominion is the US Dollar Overnight Indexed Swaps curve.
So Professor Clarida is only semi-correct about curve shapes. There is inversion from 1 year to 5 years, possibly signalling a slowdown (or recession) in the 1-5 year period.