Recap 2014-08-25


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 [4] 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."[12]

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
  • Mon:

7 thoughts on “Recap 2014-08-25

  1. The bits about the labour market do on the face of it sound slightly hawkish, but in the context of the ECB lacking an employment mandate per se, probably not.

    Probably more relevant for policy is the following excerpt:

    “Over the month of August financial markets have indicated that inflation expectations exhibited significant declines at all horizons. The 5year/5year swap rate declined by 15 basis points to just below 2% – this is the metric that we usually use for defining medium term inflation.

    But if we go to shorter and medium-term horizons the revisions have been even more significant. The real rates on the short and medium term have gone up, on the long term they haven’t gone up because we are witnessing a decline in long term nominal rates, not only in the euro area but everywhere really. The Governing Council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term.”

    ,though of course, knowing the ECB, this just might indicate that they’re almost ready to unleash some abstruse ABS marginalia or similar…

  2. Thanks to you both for referring to those remarks. I guess I’m more sanguine about them. The ECB/Draghi HAS to acknowledge the sub 2% 5y5y inflation forward level soon after it happened. To avoid talking about it would be pretty terrible from an inflation expectation anchoring perspective. So personally I’m not surprised that he brought it up.

    The comments re: lower global long term rates were also somewhat hawkish to me. I mean, sure it’s factually accurate, but if you break down the decline into real and inflation components, most of the fall has been due to the real part rather than inflation. The US 5y5y inflation forwards, for example, is still in the range that has broadly prevailed since they started trading in 2004. So Draghi’s comments about that seem like a bit of a red herring to me… and may be an excuse to not do anything despite the sub 2% prints.

    Of course, the most important part of all this is what they are going to do about it. And I understand that there are different interpretations here, but I really didn’t read much in the language that suggests imminent action. People seem to be getting excited about more easing in a couple weeks, but I have a hard time betting on it. It seems more likely to me that he is trying to do some marginal easing via verbal jawboning until inflation bottoms.

  3. Agree it doesn’t seem like a tradable theme. After all, they unveiled their TLTRO with much fanfare, and that hasn’t even kicked in yet, so there’s every chance they play for time.

    It does feel like the sell-side is over-egging this a bit. But with nothing going on, who can blame them?

    I’d be interested to hear your thoughts on Yellen. For me, I think a lot of commentary focusing on her hedging and equivocation somewhat misses the point. The fact that she’s begun to distance herself from a particular (dovish) narrative in favour of a more agnostic stance is a bit of a shift. I guess that makes us more data-dependent than we’ve been for a while? If so, perhaps this sets us up for a bit more volatility heading into year-end?

  4. I agree. I think the tone shift is part of her plan to gradually set up the mkt for hikes without scaring the long end. She’s already on record about ‘extended period’ being around 6 months… which puts 1st hike around April next year. I think the Fed wants to prepare the mkt for a hike at any time starting in March. So I totally agree that there should be a bit more volatility.
    The only thing is – if they intend to keep the longer end stable, (a big if) and if they continue to be as communicative as they’ve been regarding the hiking process, it’s hard to see vol pick up as much as they did in past hiking cycles?

  5. I agree; it seems to me that the Fed has become increasingly focused on targeting the entire rate structure, so perhaps the days of ‘Fed proposes, market disposes’ are not about to return any time soon…until we get another ‘stability begets instability’ episode, at any rate.

    As to whether they really intend to try to keep the long end under control, I would argue: (i) they’ve developed a taste for it, and they’ve seen its effectiveness, (ii) Congress would be all over them if they start racking up losses in SOMA, so however much it really doesn’t matter, politically, it matters, (iii) they want to safeguard housing.

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