“In monetary policy, “abrupt” and “disrupt” have more than merely resonance of sound in common. “
-John C. Williams, San Francisco Fed President, 8/15/16
Quick, without looking it up … what’s the difference between seltzer & club soda?
How about sparkling water – where does that fit in the convoluted mix of carbonated aqueous concoctions?
The technical answer is this (via huffpost):
- Seltzer: water + artificial carbonation, that’s it.
- Club Soda: Water + artificial carbonation + added mineral-like ingredients.
- Sparkling Mineral Water: comes from a natural spring and contains various minerals. There is no added carbonation so any bubbles are naturally occurring.
The real answer is that there is no difference.
Back to the Global Macro Grind…
If you’re not a fervent Fed follower, a notable development over the last few months has been the ostensible abandonment of orthodox policy assumptions and legacy forecasting models from various Fed governors.
In June, St. Louis Fed President James Bullard ditched his former “narrative” (his word) for a new regime-based model for forecasting growth, inflation, unemployment and the associated policy implications.
Here are a few quotes from the Paper that I think capture the conceptual crux of the change:
- An older narrative that the Bank has been using since the financial crisis ended has now likely outlived its usefulness, and so it is being replaced by a new narrative.
- The best that we can do today is to forecast that the current regime will persist.
- We therefore think of the current values for real output growth, the unemployment rate, and inflation as being close to the mean outcome of the “current regime.”
- If there is a switch to a new regime in the future, then that will likely affect all variables—including the policy rate—but such a switch is not forecastable.
Perhaps I’m wrong but, to me, the layman’s distillation of that techni-speak basically = Our old models don’t work, the new model is to straight-line what’s happened recently, and the new model will stop working at some point but we don’t know when and we’ll figure out a new, new model when that happens but on an extreme lag because we need sustained confirmation that the regime has, in fact, switched again.
Fast Forward 6 weeks ….
Last week, San Francisco Fed President John Williams stressed the necessity for policy innovation in a secularly depressed real natural interest rate environment where conventional policy has become increasingly ineffectual.
- Does this represent the final stage of broken-model grief (acceptance) and fledgling evolution?
- Is it an ivory tower equivalent of selling (their process) on the lows?
- Is it a crafted public capitulation designed to catalyze fiscal policy action?
Technically, there is a difference between a broken orthodox model, a new model that basically just carries forward what has happened recently, and no model at all.
Practically, there is not really a difference.
On to the Domestic Data Grind ….
Despite the elusiveness of an effective policy response, the primary fundamentals underpinning a depressed natural interest rate are identifiable: slack demand, negative demographics, soft productivity and an excess of savings over investment.
And we get the empirical on that reality with the monthly Durable and Capital Goods Orders data.
Headline Durable Goods rose +4.4% sequentially in July, marking the largest sequential gain in 9-months and reversing the prior month’s -4.2% retreat.
$$$ print, right? It’s certainly better than printing the largest sequential decline in 9-months, but the headline gain was belied by decidedly more squishy internals:
- Year-over-year growth was still negative for a second month at -3.3%.
- Year-over-year growth in pretty much every subaggregate also remained negative.
- Last month’s Headline retreat was largely driven by the -59% MoM/-60% YoY decline in private sector aircraft orders. That reversed this month to +90% MoM while “improving” to -21.1% YoY.
- Durables Ex-Defense & Aircraft (the closest proxy for household demand) rose +1.0% MoM, but held negative at -1.6% YoY, marking the 5th consecutive month of negative growth and 14th month of negative growth in the last 15 months.
Capex Orders, meanwhile, scored a similarly hollow victory as the +1.6% MoM increase equated to an acceleration to the downside on a year-over-year basis. Year-over-year growth fell to -4.9% (-3.5% prior), marking the 9th consecutive month of negative year-over-year growth and the 18th month of negative growth in the last 19 as the worst ever non-recessionary run of negative growth continues to extend (see chart above).
If we look across a broader selection of forward capex expectations, a congruous story of probable further underwhelming’ness emerges:
Forward Capex Plans | Fed Regional Composite: As can be seen in the Chart of the Day below, Forward Capex Plans as measured by a composite of the Fed Regional Surveys remains on its one-way street to lower-lows, suggesting the negative trend in investment spending is unlikely to ebb in the coming quarter(s).
Fed Senior Loan Officer Survey: Banks tightened lending standards for C&I loans for a 4th consecutive quarter in 3Q16 and standards for Commercial real estate loans showed the highest level of tightening in the series’ 12 quarter history. Concentrated tightening in the commercial sector suggests nonresidential fixed investment will remain underwhelming and a headwind to headline growth
Small Business Capex Plans: Both Small Business Capital Expenditure Plans (NFIB Index) and Small Business Lending (Thomson Reuters) are flat-to-down in recent months and have retreated meaningfully off their 2H15 highs. Neither series is signaling acute stress but they certainly aren’t signaling an imminent, positive inflection in business investment either.
So, have you become fully desensitized to the recession in durable & capital goods spending after a year and a half of negative growth, or does the Industrial data have you depressed?
If the former, no worries, it’s natural.
If the latter, no worries, surfing the services sector data is always good for a shot of sanguinity!
The Markit Services PMI for August released yesterday dropped -0.5pts to an anti-sanguine reading of 50.8 - the lowest reading in 3 years outside of the peak deflationary angst print of 49.7 in February.
The ISM Services reading is a bit better at 55.5 (July) but it really hasn’t done anything for the last 9 months.
The simple net of all this (July & August ISM data and the July Durable Goods and Retail Sales data) is that 3Q is off to an underwhelming (yes, 3rd intentional use of that adjective) start.
Janet’s speech at 10am this morning is titled: "The Federal Reserve's Monetary Policy Toolkit”.
The theme of the Jackson Hole Symposium is: “Designing Resilient Monetary Policy Frameworks for the Future”.
Implicit in “Designing” is the acknowledgment of the inadequacy of what is currently designed – something the domestic and global central banking collective is increasingly acceptant of.
The Fed’s practice of rhetorical gradualism leading actual implementations is designed to avoid abrupt policy shocks and minimize market disruptions. The recent verbal “carbonation” of stale conventional policy waters is not an accident.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.49-1.62%
SPX 2168-2193
VIX 11.15-14.31
USD 93.90-95.90
Oil (WTI) 43.95-49.51
Gold 1
Enjoy the show today, have a great weekend,
Christian B. Drake
U.S. Macro analyst
