Recap 2014-12-12: We May Wait a Considerable Time to See a Removal of ‘Considerable Period’


The market consensus is that the FOMC removes the ‘considerable period’ language in its statement next week. But this no longer seems so likely, and the market has priced that in. In particular, the move in inflation breakevens has been very substantial, and at 1.6%, is the lowest level since 2010. Yes, oil prices are driving the move, and yes the metric can be volatile, and yes the Fed insists that because of these and other reasons, it focuses on survey measures of inflation. The problem is that the data shows that the Fed actually does react to inflation breakevens. The chart below graphs the Fed Funds rate in white, 10y breakevens in orange, the University of Michigan survey responses for inflation 5-10 years ahead in yellow, and the 5y5y forward inflation swap rate in purple. As the chart shows, historically the Fed has eased every time 10y breakevens fell to the 1.5% area, even though survey responses in those instances were broadly unchanged: (Obviously a cut was not possible in 2010 due to ZIRP, but that was of course when the Fed stepped up its QE program)

Potentially especially worrisome for the Fed is the drop in long dated inflation forwards. The chart below shows how the inflation swap forwards are at the lowest level since Lehman. The Fed has its own measure of the forward rate as detailed by a 2008 paper by Gurkaynak, Sack and Wright. Bloomberg has an index that implements the calculations, which also show recession – like readings:

A dovish FOMC would also make sense given Fed rhetoric. Fed officials have noted the benefits of letting the economy ‘run a little hot,’ for various reasons, including taking out a bit more insurance Fed Funds is at zero. As the multiple QE programs globally have now shown, one key transmission mechanism for central bank policy at the zero bound is inflation expectations. Well, with the fall in long dated breakevens, that mechanism has clearly gotten a bit clogged, and waiting a while to see how quickly it clears up would be both prudent and rational.


  • UMichigan Confidence jumped to 93.8 vs 89.5 exp and 88.8 prev. Inflation expectations actually ticked up to 2.9% vs 2.8% prev
  • New Zealand PMI declined to 55.2 vs 59.3 prev
  • China Retail Sales ticked up to 11.7% YoY vs 11.5% exp and prev
  • China IP dropped sharply to 7.2% YoY vs 7.5% exp and prev. Note that these are growth levels last seen during the late 90’s Asia crisis:

  • China M2 growth declined to 12.3% exp and 12.5% exp and 12.6% prev. M1 was stable at 3.2% vs 3.3% exp
  • US Core PPI was stable at 1.8% exp and prev
  • The House Thurs night narrowly (and contentiously) passed a $1.1T spending bill (the final vote was 219-206)… Perhaps the most incremental takeaway from the Thurs House voting was the disarray now befalling the Democratic party as Obama and Pelosi engaged in a rare and public battle over the bill (the WH backed the measure and helped Boehner “whip” votes while Pelosi took to the House floor and urged Dems to oppose it). The Dodd-Frank derivatives “push-out” provision stayed in the bill. NYT


  • Mon: Japan Tankan, US Empire Mfg, NAHB Survey, RBA Minutes, China HSBC Mfg PMI,
  • Tue: EU PMI, UK CPI, German ZEW, US Housing Starts, Markit Mfg PMI, Japan Trade Balance
  • Wed: BoE Minutes, UK Employment, US CPI, Oil Inventories, FOMC, SEP, NZ GDP
  • Thu: German IFO, US Jobless Claims, Markit Services PMI, Philly Fed, NZ Business Confidence, UK GfK Consumer Confidence
  • Fri: German GfK Consumer Confidence, Canada CPI, Retail Sales