CLARITY IS IN THE EARS OF THE BEHOLDER
ISI’s Ed Hyman:
Bernanke gave a surprisingly explicit but appropriate roadmap that should be applauded. However, he probably should have waited until after the summer to give a specific timeline.
Bloomberg’s Clive Cook:
(…) Bernanke triggered the recent rise in long-term bond yields when he said last month that “in the next few meetings, we could take a step down in our pace of purchases.” You could argue that he was merely stating the obvious, but the markets took it as important new information. In itself, that needn’t have been troubling. The problem for the Fed is that investors didn’t interpret it as good news about the economy but as bad news about the Fed’s reliability.
As the economy strengthens, you’d expect long-term interest rates to rise. But the recent rise in bond yields coincided with unexciting jobs data and very low inflation — inconsistent with the “strong economy” story. The implication is that investors thought the Fed was bringing forward its plans not just to taper QE but also, crucially, to start raising short-term interest rates.
Bernanke tried to address this confusion this week. He emphasized for the umpteenth time that the decision on tapering QE is separate from the decision on starting to raise short-term rates. All being well, tapering would probably start later this year, he said, with asset purchases continuing in 2014 until unemployment falls to 7 percent.
Interest rates won’t rise, the Fed has previously said, until unemployment has fallen to 6.5 percent. And, Bernanke added with fresh emphasis, perhaps not even then: These numbers are “thresholds” not “triggers.” So the Fed will merely start thinking about raising interest rates once unemployment falls to 6.5 percent, and might well choose not to act at that point. Oh, and it’s always possible, the chairman told another questioner, that the unemployment threshold for interest rates (and presumably therefore also for QE) will be revised — more likely down than up.
Is that now clear? (…)
Bernanke’s commitment to transparency and forward guidance has made his job harder. If he wants discretion under fire and the luxury of vigorous internal dissent, he can’t expect forward guidance to work as he envisaged. That’s why we’ll be debating what he really meant until he gives his next speech — and that, if you’re wondering, is a threshold not a trigger.
Bernanke said on Wednesday that the economy was a little better. However, as the St. Louis Fed noted yesterday, the FOMC was, in fact, a little less optimistic:
President Bullard also felt that the Committee’s decision to authorize the Chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed. The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store. President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.
In Bernanke’s defense, the FOMC did say that the downside risks to the economy had diminished. But, as Moody’s says
to the extent that expected changes in Fed policy deflate financial asset prices, the downside risks facing a still slack economy will increase.
As I recently wrote, everybody is currently Driving Blind.
Sales of previously owned homes surged in May to the highest level since late 2009, pushing prices up so quickly that a major real-estate trade group warned about unsustainable gains.
Home sales rose 4.2% in May from a month earlier to a seasonally adjusted annual rate of 5.2 million, the first time the pace crossed 5 million since November 2009, the National Association of Realtors said Thursday. Existing-home sales peaked in September 2005 at an annual pace of about 7.3 million. (Chart above from Haver Analytics)
The figures, showing rising home prices and contracts closing at a brisk pace, boosted optimism for the housing market and its ability to support the broader economic recovery. Median prices rose 15.4% from a year earlier to $208,000, the highest level since July 2008.
The number of homes listed for sale rose for the fourth straight month as the spring selling season got under way. And fewer sales are being forced by banks or homeowners under pressure: The percentage of sales that were distressed properties stood at 18%, the lowest level since the group began tracking the data in October 2008.
Note, however, the sharp drop in affordability from higher prices and mortgage rates. Affordability is still statistically high but disposable income is restrained and credit remains tight. Mortgage rates have risen another 50 bps since the last point on this chart.
The Philadelphia Fed’s index of general business activity within the factory sector jumped to 12.5, from -5.2 in May.
The new orders index bounced to 16.6 this month from -7.9 in May. The shipments index also returned to positive territory, up 13 points to 4.1.
Signs of weakness lingered in the labor-market readings, however, with the employment index rising just 3 points to -5.4, marking its third-straight month of negative results. The Philadelphia Fed said 20% of firms reported employment decreases, compared with 15% reporting increases. (Chart and table from Haver Analytics)
The Conference Board LEI for the U.S. rose slightly in May. Only the financial indicators contributed positively to the index, offsetting negative contributions from the ISM® new orders index, building permits and initial unemployment claims (inverted).
FED BASHING (Continued)
Did I start a campaign against the Fed when I wrote Driving Blind on June 5? Unlikely, but I nevertheless have been followed by many high profile pundits. John Mauldin’s recent Thoughts from the Frontline is a good read. It now looks like just about every observer feels the need to warn people against Fed forecasts.
- Dylan Matthews’ Washington Post piece was short but “unsweet”:
(…) I went back through every June forecast the Fed has released from 2009 to this year. Each of those forecasts included projected growth, unemployment and inflation rates for the year in question and the two years after. So the 2009 projection forecast 2009, 2010, and 2011, the 2010 projection forecast 2010, 2011, and 2012, and so forth. And those forecasts just kept getting less and less optimistic as the years wore on:
- Lance Roberts of Street Talk Advisors joins the fray:
(…) When it comes to the economy the Fed has consistently overstated economic strength. Take a look at the chart and table. In January of 2011 the Fed was predicting GDP growth for 2012 at 3.95%. Actual real GDP (inflation adjusted) was 2.2% or a negative 44% difference. The estimate at that time for 2013 was almost 4% versus current estimates of 2.3% currently.
Fed watchers ask whether shift in sentiment has come too suddenly
“Underneath the hood the economy still has a lot of weakness,” says Paul Edelstein, director of financial economics at IHS Global Insight. “I don’t think that we’re going to get the declines in unemployment that they’re expecting,” he adds.
Markit’s flash PMI for China was weak but few people seem to have noticed this troubling data:
A good deal of the weakness was apparently driven by external developments as the new export orders index plunged 4.9pt to 44.0, the lowest reading since the middle of the Great Recession. This collapse is quite difficult to fully believe, given developments in the region and the global economy, where there are no signs of such a collapse of demand.
Nobody believed the strong export numbers of a few months ago. Now, we should not believe the weak ones.
China’s cash crunch appeared to ease amid speculation the central bank stepped in, though the situation could deteriorate as banks’ quarter-end demand for funds picks up.
Traders said Friday the People’s Bank of China may have asked major state lenders to refrain from hoarding cash and release more funds to ease the liquidity squeeze. The central bank hasn’t responded to repeated requests for comment, while Bank of China, one of the country’s biggest lenders, denied reports it had defaulted on a loan Thursday. (…)
Some banks may also be confronting an inability to pay back in full and on time maturing wealth-management products, Fitch Ratings said today, estimating 1.5 trillion yuan ($245 billion) worth will come due before the end of the month. (…)
Analysts say China’s new leaders are appearing to show more interest in cutting long-term financial risks at the expense of short-term pain, as part of a broader effort to make future growth more balanced and sustainable. (…)
CME Group, which operates the New York Comex exchange on which gold futures are traded, announced yesterday it is increasing margin requirements on gold trading by 25% to $8800 per 100-ounce contract. The new initial margin requirement will come into effect after close of trading today.