Before I get to Jackson Hole – note this study from Quantifiable Edges published on Friday: The equity bounce has been very strong, and while the historical precedents have been few, they have been unambiguously bullish:
With respect to Jackson Hole, Macro Man did a great post on it already. Readers should read the post in its entirety, but he took the Fed’s new labor market index and converted it to a cumulative series, then noting the incidences of previous first hikes. As his chart shows, relative to history, the Fed is ‘behind the curve.’ Of course, the Fed looks forward rather than back, and given recent inflation trends, this seems to be the right move.
Many commentators have noted that Yellen’s tone seems to have shifted to being more balanced from outright dovish. It’s hard not to agree, although the number of qualifiers she used makes any definitive judgment difficult. Note that Williams, Yellen’s protégé at the SF Fed, noted last week that an earlier hike may be warranted, throwing out a ‘summer 2015’ time frame. The 1st full hike is priced in for July of next year in the Fed Funds market, so all in all, there isn’t any major news here.
Draghi’s speech actually read hawkish to me. He spent a lot of time talking about how the Unemployment in the Euro area may be structural, and noted that:
- the euro area Beveridge curve – which summarises unemployment developments at a given level of labour demand (or vacancies) – suggests the emergence of a structural mismatch across euro area labour markets
- Another important explanation seems to be a lack of redeployment opportunities for displaced low-skilled workers, as evidenced by the growing disparity between the skills of the labour force and the skills required by employers. Analysis of the evolution of skill mismatch  suggests a notable increase in mismatch at regional, country and euro area level (Figure 5). As the previous figure shows, employment losses in the euro area are strongly concentrated among low skilled workers
- All in all, estimates provided by international organisations – in particular, the European Commission, the OECD and the IMF – suggest that the crisis has resulted in an increase in structural unemployment across the euro area, rising from an average (across the three institutions) of 8.8% in 2008 to 10.3% by 2013.
The other way of saying that is that the EU may be only 1.2% away from full employment, vs ~0.9% for the US and the UK! Finally he says that:
“I am confident that the package of measures we announced in June will indeed provide the intended boost to demand, and we stand ready to adjust our policy stance further. We have already seen exchange rate movements that should support both aggregate demand and inflation, which we expect to be sustained by the diverging expected paths of policy in the US and the euro area”
That doesn’t sound like he thinks the current plan needs to change much.
Some items not directly market related:
This is a sad story and concludes with a great idea:
Robots replacing farm workers:
I read about the Stockade Paradox today. An important philosophy of duality that is necessary for all the hard things that are worth doing:
When Collins asked who didn’t make it out of Vietnam, Stockdale replied:
Oh, that’s easy, the optimists. Oh, they were the ones who said, ‘We’re going to be out by Christmas.’ And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart."
Stockdale then added:
This is a very important lesson. You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be."
- German IFO declined to 106.3 vs 107 exp and 108 prev
- US New home Sales declined -2.4% vs +5.8% exp and -8.1% prev
- Mon: NZ Trade Balance
- Tue: US DGO, House Prices, Consumer Confidence
- Wed: Italy Consumer Confidence, Australia New Home Sales, 2Q Private Cap Ex
- Thu: German CPI, US Jobless Claims, NZ Building Permits, UK GfK Consumer Confidence, Japan Unemployment, CPI
- Fri: Month End, UK House Prices, EU Unemployment, CPI, CanadaGDP, US Core PCE, Chicago PMI