Diary of a Financier

What is Janet Yellen’s Fed thinking?

In Economics on Thu 24 Sep 2015 at 15:29

In addition to global economic entanglement (read: China I & II), Janet Yellen and the Fed’s decision to defer its first rate hike in 9-years must have considered market-derived signals that are troubling for the US growth outlook.  What’s more is that these indicators have reached levels that prompted Fed intervention (i.e. QEs & OT) in prior years…

  1. 2s10s2s10s 2015.09.24

    The Treasury yield curve is near the flattest it’s been in the postcrisis period, stoking fears of the curve inverting (a harbinger of recession).
    Today’s 2s10s spread @ 146bps is second only to the 122bps in 6/2012, which was rescued by the Fed’s implementation of QE3 in 9/2012.

  2. 5y5y forward inflation

    5y5y inflation breakeven vs SPX (2008-15, incl correlation)

    breakeven

    Future inflation expectations have collapsed to postcrisis lows again, now @ 1.86% vs 1.92% in 10/2011, which was rescued by Operation Twist.

~~~~

It’s hard and futile to try and get inside the head of policymakers, but whether or not these indicators are part of the narrative being spun by the FOMC, they’re indicative of [perceived] stress upon the system.

Secularly, the US (and global) economy cannot stand on its own due to demographic headwinds.  Until the echo boom rises to power, the economy and markets are dependent on both monetary and fiscal policy to provide inorganic stimulus.

With the energy crash and strong US Dollar providing additional, formidable headwinds, consumption is the domestic economy’s chance to return to trend GDP growth.  Said cheap energy, strong currency, deleveraged households, and a tight labor market have been aligned for over a year now, yet they’ve failed to propel the famed US consumer onward & upward.  That’s a real problem too, because energy/currency/deleveraging/labor supply are major drags on growth right now, so they require the counterbalancing offset consumption would normally provide in a dynamic economy.

(Wage growth has remained tepid — despite a few false-starts and the Fed’s constantly bullish outlook.  Personal income (monthly, %yoy)With top-line revenue growth so weak, SPX components still need margin expansion to eek out bottom-line growth, which means consumption growth will have to surge to offset the margin hit corporate earnings from rising wages.)

It’s entirely possible that post-traumatic stress from the Personal savings rate 2015.07financial crisis is still lingering, engendering a new generation of gunshy “Depression Babies,” who prioritize savings over all else.  The economy is unavoidably changing — whether you look at technology-driven disinflation or the capex depression.  The stubbornly high personal savings rate¹ could be another item on that laundry list.

Retail sales is now the most important macro datapoint I can think of.  Amidst that aforementioned alignment of the stars, retail sales reports have been underwhelming all year.  Maybe Average Joe doesn’t take his gas savings and spend it on everyday goods at the grocery store or toy store… but the holidays are the last bastion.  The US consumer (and by extension the US economy) has his last chance to save himself from the brink of recession in the coming Q4 holiday shopping season.

–Romeo

¹ The personal savings rate (PSR) is high relative to only the era of “US Consumerism” (2000s), but it’s important to note that PSR accounts for disposable income after taxes; in other words, PSR does not account for actual savings or disposable income available for discretionary spending/investment/etc.

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