· Chicago PMI dropped to 56.2 in Apr vs 60 exp and 62.2 prev. While still strong, this represents the lowest print since Nov 2009. Time will tell how much of this was seasonal payback related.
· Dallas Fed declined to -3.4 in Apr vs 60 exp and 62.2 prev
· US Personal Income rose 0.4% in March vs 0.3% exp and 0.2% prev. Personal Spending declined to 0.3% vs 0.4% exp and 0.8% prev.
· Core PCE Deflator increased to 2.0% as exp vs 1.9% prev
· Canadian GDP declined to 1.6% YoY in Feb vs 2.1% exp and 1.7% prev
- EU M3 increased to 2.8% on a 3m avg rate.
- EU CPI Flash Est declined to 2.6% YoY vs 2.5% exp aned 2.7% prev
- German Retail Sales increased to 2.3% YoY in March vs 0.5% exp and 1.7% prev
- South Korea Mfg Business Survey improved to 90 in May vs 85 prev.
- Mon: South Korea CPI, AustraliaMfg PMI, China Mfg PMI
- Tues: RBA, UKMfg PMI, US ISM, China HSBC Mfg PMI, US Vehicle Sales
- Wed: Swiss Mfg PMI, Italy Mfg PMI. German Unemployment, US GDP, China Non-mfg PMI
- Thurs: UK PMI Services, EU PPI, ECB, US ULC, Initial Jobless Claims, ISM Non-mfg, China HSBC Services PMI
- Fri: Italy PMI Services, EU Retail Sales, US Payrolls, Unemployment
Hugh Hendry’s April investor letter is a good read. One of his views is that we will get bouts of deflation prior to an inflationary impetus. This actually dovetails well with a thought experiment I’ve been playing with. Namely, what happens if central banks take QE to massive levels?
For the most part, market participants have had a very poor record of predicting the effects of QE. Starting with Japan almost a decade ago, to events over the past few years, most forecasts of the macro economic effects have been incorrect. In the thought experiment below, I simply tried to show how system balance sheets change in a hypothetical economy following QE. (Cells in yellow are the fields that changed at each stage) Notes for each stage are at the bottom. Note that I do NOT think this will happen in the US – but it is possible in Japan. Ultimately, the ‘tipping point’ may be private sector confidence in the banking system. However, in the meantime, long government bonds may be the right bet. As always, comments & disagreements are welcome.