2016/10/11 Commentary: OECD and FOMC
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COMMENTARY: Tuesday, October 11, 2016
OECD and FOMC
American writer, lecturer and humorist Mark Twain (aka Samuel Clemens) famously cited the apocryphal cliché (loosely attributed to British PM Benjamin Disraeli), “There are three kinds of lies: lies, damned lies, and statistics” in his 1906 partial autobiography. It seems that this is even more so the case in the computerized digital age. While we will have more to say on the US election process (such as it is) soon, just look at the disparity between any number of election polls. After the Trump video recording release imbroglio various polls show Secretary Clinton ahead by as much as 14 points to as little as still within the 4 point statistical margin of error. This obviously relates to which audience was polled and what specific question(s) they were asked.
Why is this important to the market psychology right now? It is due to the degree to which statistics are being used to justify certain perspectives that will drive the psychology of the various asset classes. This is especially true right now for the govvies where yields have sustained more extensive increases than at any point since the UK Brexit LEAVE vote triggered a near term implosion. Yet the overall state of the economies does not yet seem to justify the higher inflation potential necessary for the secular reversal of the long term govvies up trend and accompanying yield weakness. Of course, potential economic strength and inflation pressure are also incrementally strengthening the US dollar.
And there has already been one key influence this week that may have been interpreted as economically stronger than justified, with another pending into midweek. Among the limited economic releases Monday morning was the latest Organization for Economic Cooperation and Development’s Composite Leading Indicators (our mildly marked-up version.) We have to admit that these are indeed showing some improvement outside of France and Italy. However, a closer look at the chart (or even better the lower section statistics) shows the ‘stable growth’ noted for the US is in fact continued erosion. How that actually ends up playing out through and after the US general election will likely be quite an influence on the balance of the world economy. So the “…stable growth momentum…” cited for the OECD area by the analysts is actually less reliable than their typical ‘rose tinted glasses’ headline view might suggest.
And the other, pending, key influence will be Wednesday afternoon’s FOMC minutes.
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NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out in December in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize into 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? In that instance the economic factors built up, but the actual crash was deferred into 2008. It is starting to feel this one may be deferred as
▪ The FOMC meeting minutes as well will likely show some of that ‘rose tinted glasses’ view of the US economy’s potential to expand more rapidly than the sustained slow growth since the early part of 2015. We have repeatedly characterized this as the FOMC ‘normalcy bias.’ That was highlighted in the December 16th Fed’s ‘Normalcy Bias’ Continues post and (as the title implies) previous analysis.
It was cited again most recently in our September 21st FOMC Won’t Hike post. In that same post we noted, it is neither oversight nor mistake that the top link in the sidebar to the right remains Fed has NO Cred!! That links back to our March 23rd Fed’s Normalcy Bias Crumbles. One might think that if it is so clear to even humble analysts it is misguided to think the US economy was getting back to normal (NOT ‘new normal’) into and after last December, then the allegedly smartest finance minds in the world could figure it out.
How does that relate to “lies, damned lies, and statistics”? Simple. The Fed is misguided in its extensive US labor market focus while so much else is not in order to deliver the additional economic boost and much desired higher inflation. [As an aside, how perverse is it that central bankers are all hoping for, and working aggressively to reinstate, higher inflation?] As noted in many previous assessments, it is also something over which it has now been proven they have very little control. The resumption of real economic strength that can drive classical ‘demand pull’ inflation instead of just monetary bloat is the responsibility of a political class that has failed to deliver necessary structural reforms.
Yet the statistical portion of this will be the parts of those FOMC minutes which cite the US employment improvements. What the sheer numbers of jobs and reduction in the US Unemployment Rate fail to capture is the degree to which while gaining more jobs than were lost in the Great Recession they are NOT the same caliber of jobs as those lost.
As we and quite a few other analysts have repeatedly noted, high-paying construction and factory jobs were replaced with entertainment and services jobs in the post-Crisis gains. As such they do not recreate the pre-Crisis income and spending. This shows up in the (until just recently) depressed Hourly Earnings component of the US Employment reports, the overall weakening of US Median Income, and surprising weakness in other figures.
FOMC Minutes Still a Key Short-Term Influence
So we certainly can expect more pressure on the govvies, and very possibly the equities as well, after the FOMC minutes release on Wednesday afternoon due to the more hawkish tone of the discussion, whether that will turn into more aggressive govvies weakness will be the more interesting development. And it is the perfect week to test that consideration, as Thursday is also a $12.0 billion US 30-year T-bond (2.25% notional yield) auction.
It is certainly going to be interesting with the both the lead contract 10-year T-note future and 30-year T-bond future each down to more critical supports (129-24 and the 164-00 area respectively) than at any time since the post-UK Brexit vote rallies. The equities remain more critical as well, as the December S&P 500 future has dropped back from the early week surge to the top of the 2,155-60 to 2,141.50 area range back to the bottom of it today.
The US Dollar Index has also pushed up closer to its significant early February .9860 weekly channel DOWN Break than at any time since late July. Yet here as well that only puts the other developed economy currencies (outside of weak sister British pound) closer to key support. On the other hand, the emerging currencies are suffering once again on anticipation of the likely hawkish FOMC minutes potential to encourage thoughts of the long-delayed next FOMC rate hike actually occurring in December.
Extended Trend Assessment is available below.
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