2017/07/12 Commentary: ‘Normalization Bias’ NOT Back!!
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Commentary: Wednesday, July 12, 2017
‘Normalization Bias’ NOT Back!!
There’s an odd couple if there ever was one. Who would have imagined that the esteemed head of the Federal Reserve would be lumped as a key market influence (as always) with the likes of Donald Trump Jr.? Yet they are the odd couple on the influence that is now driving the various asset classes. And in the first instance this morning the equities, govvies and emerging currencies all got a pleasant surprise in the reversal of a ‘risk-off’ psychology that had been plaguing them over the past several weeks. That weaker price activity in all three was due in various ways to weaker US data in the face of previous indications from the Fed that was going to be less accommodative due to ‘improvement’ in the US economy; especially still focused on the Fed’s view of US employment.
Yet there it was this morning in both her pre-released opening statement and subsequent testimony that Fed Chair Yellen felt the federal funds rate increase cycle might be close to the end…???! This should not have been a total shock, as it was previewed in a speech by Fed Governor Lael Brainerd on Tuesday. Yet many times the indications from other Fed members are just so much personal opinion and not policy.
However, in this case the ‘boss’ has come out and confirmed a far less aggressive rate increase tendency. As regular readers know, we have been concerned that in the face of weakening indications on the US economy (more below) the last FOMC meeting’s projections and press conference seemed way over the top on US growth expectations, employment and inflation. Indicating another 2017 rate hike and three more into 2018 seemed the same sort of misguided view as the Fed’s ‘normalization bias’ through 2015 into much of 2016. Chair Yellen seemed to diminish quite a bit of that today.
And the irony is that the Fed claims its more aggressive growth and inflation projections for next year are not in any way based on tax reform or other fiscal stimulus. Yet there are many outside of the Fed who believe that there cannot be enough US growth (i.e. ramping back up to 3.0% GDP growth) to justify the Fed’s more aggressive rate increase plans without it. So the irony we have noted previous still remains: what if the Fed’s current interest rate increase plans are only rescued by the very reforms that Chair Yellen asserts are not incorporated into the FOMC projections as yet? And that gets us back to the latest revelations surrounding the Trump administration and family…
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NOTE: Given the likelihood the US economy will now get the structural reform that we (along with Mario Draghi and others) have been loudly complaining was not forthcoming since our dual It’s Lack of Reform, Stupid posts in January 2015, we need to adjust our view that a potential economic and equity market failure is coming. We previously referred you back to our December 8, 2015 post for our major Extended Perspective Commentary. That reviewed a broad array of factors to consider Will 2016 be 2007 Redux? While a continued regime of higher taxes and more regulation (i.e. under Clinton) might have fomented a continued weak or even weaker US economy, the tax and regulation changes proposed by the Trump administration will hopefully still be approved by the Republican Congress and diminish the similar fears we had to what transpired in 2007-2008.
…which we will return to shortly after an overview of the market responses to today’s Chair Yellen testimony exploring the various asset classes’ activity. Yet as noted above, it was an almost miraculous ‘risk-on’ reversal of the previous ‘risk-off’ jitters that ran from about two weeks ago into prior to Yellen prepared opening remarks this morning.
EQUITIES
The equities had been very interesting on the short-term US downside leadership. It was obvious US equities had indeed stalled against the higher 2,450 area weekly Oscillator resistance, which moves up to 2,465-70 this week. And two weeks ago Tuesday weakness meant the September S&P 500 future violated the 2,430-25 interim support that it then churned broadly above and below along with the last two Thursday’s selloff to lower more major support. That was not a huge surprise after recent attempts to push back above 2,430-25 failed, which was a relatively weak sign.
Yet as noted for some time now, that more important lower support is the old March and May 2,405-00 all-time highs. That area held very well prior to a strong bounce in both of the last two weeks, barely being neared on last Thursday’s selloff (trading low 2,405.50) prior to Friday morning’s gap higher on the positive US NFP number. That all reinforces it as key support, with the front month S&P 500 weekly MA-13 also up to 2,408 this week.
Yet it is back above 2,425-30, which is now reinstated as ‘friendly Fed’ support this side of the 2,465-70 area weekly Oscillator resistance this week. The more extended ultimate Oscillator resistance is up to 2,495-2,500 this week.
GOVVIES
The govvies are also very interesting once again, as the September T-note future and Gilt have both held their respective 125-00 and 125.00 weekly channel supports. It will now be interesting to see whether they can also push back above their relative low-mid 126-00/126.00 congestion or need to sink to lower supports noted in last Wednesday morning’s “Commentary: Bond Bubble Burst?” post Market Observations.
The exception is the September Bund future that broke the equivalent 161.50 channel support, and yet held down into the more major lower 160.50-.00 congestion. That is only reasonable given the stronger German and Euro-zone economic data at present. Even though it is on the mend as well on the friendlier Yellen views today, it also has key contract and continuation resistance up into the 162.00-.50 area that includes all of the weekly moving averages (i.e. MA-9, MA-13 & MA-41.)
FOREIGN EXCHANGE
It is also still interesting in foreign exchange that the secular strength in the euro has maintained with not that much strength in other currencies against the US dollar. Until the return of more ‘risk-on’ equities psychology this morning that was especially true of the emerging currencies that seem to be reversing their first half of 2017 up trends.
That was also reasonable on both the prospect of higher base rates outside of the US, and on the recent shift to a bit more of a ‘risk-off’ equities psychology. However, there was also weakness in the Australian dollar and Japanese yen against the greenback even as EUR/USD maintained its bid in the 1.1400 area and GBP/USD managed to not slip too far from the top end of the 1.28-1.30 range. However, AUD/USD is now back up nearer its .7750-.7800 resistance, and even the recently beleaguered yen has seen USD/JPY back off from its most recent push above 1.1400 area. All-in-all a weakening of the greenback on the more accommodative Fed communication of the past two days.
EMERGING CURRENCIES
The emerging currencies bounce from their recent selloff which for the most part only started with the ‘friendly Fed’ influence this morning had actually violated some key supports. Those are now the same levels they will need to trade back through to reestablish more upside momentum against the US dollar. Those levels include USD/MXN that held up much better than some others over last week already back below 18.15 continuing to weaken below the 17.90 August 2016 13-month trading low. If it continues, then the next significant support is not until the 17.00 area.
And the Turkish lira that saw USD/TRY basing into the key 3.55-.45 range since early June is back to the top of the range after squeezing above it to 3.64 interim resistance last week. Whether it can break below that lower support (including all the weekly moving averages) is very important, due to the next minor interim support not until 3.40 yet with major 2015-2016 congestion support not until the 3.10-.00 range.
USD/ZAR that once again ranged above both the 13.15-.20 and 13.30 areas into 13.50 area resistance (including weekly MA-41) must continue back below those lower levels to continue its slide, with both of the two recent selloffs getting to the more major 12.50 major congestion. Even the recently politically beleaguered Brazilian real that saw USD/BRL spike up to 3.40 in mid-May is now back down into the key 3.20 area. Much below that a swing back down to (or near) February’s 3.04 2-year low is likely.
And last but not least, some sort of recent political or economic pressure must be plaguing the Russian ruble that has not benefitted from Crude Oil’s recent recovery. While USD/RUB has not pushed up through the 61.00 Tolerance of the 60.00 resistance, it has not fallen very far from it either even as other emerging currencies exhibit more strength against the US dollar. That is important not only because 60.00 is hefty recent and historic congestion, weekly MA-41 is also at 59.60. That must be violated once again to establish more momentum down toward the lower 56.00 recent hefty congestion.
That is it for now on the near-term trend indications, and we encourage anyone who is interested to reference the Market Observations (lower section, available to all Gold and Platinum subscribers) in last Wednesday morning’s www.rohr-blog.com “Commentary: Bond Bubble Burst?” post that were fully updated Thursday morning.
Trump Factor
Back to the latest Trump tribulation, where the involvement of Donald Trump Jr. in even signaling an intent to accept information that might affect an American election from a foreign source is damning on multiple levels. As we are moderately conservative, this is not a serial damnation of the Trump family or the President. We have always noted the President is the guy with the right message who happens to be the absolutely, positively worst possible messenger. That is based on personal factors, such as a very thin skin that has him tweeting and commenting more on the press and other perceived opponents much more than his otherwise enlightened legislative agenda.
Yet one of the tenets of the overall Trump organization denials of any collusion with the Russians (specifically the Russian government or closely tied operatives) is that the whole thing is not to be believed. They have asserted again and again that there were no substantive meetings with any Russians, and the whole thing is a Left-wing press conspiracy theory fantasy. Well, as of Donald Jr.’s email dump on Tuesday, it is apparent that there was at least one substantial meeting.
That’s bad enough, even if it ended with no damning information on Hillary Clinton being provided to the Trump campaign. The initial emails between Russian affiliated, London-based publicist Rob Goldstone demonstrate a willingness to ‘collude’ with foreign agents on things that could affect the US election, even if no laws were broken based on no action actually being taken. This reinforces all of the claims of the Democrats and mainstream press that the Trump campaign was willing to cooperate with foreign agents to influence the US election.
And the other aspect of this nasty ‘little’ affair (because it was ultimately not a major violation and nobody is going to jail), is that Trump Jr.’s involvement of then Trump campaign Chairman Paul Manafort and close advisor Jared Kushner means that nobody can claim this was a mental lapse… not by three individuals, one of whom (Manafort) is a seasoned international campaign manager. The ‘collective amnesia’ defense only goes so far, and was only cured when Jared Kushner decided it was in his interest to amend his security clearance forms to include the meeting with Ms. Veselnitskaya.
We will have more to say below on what is likely really going on here. What we know for now is that this is yet another example of something that will divert the mainstream press from any extended discussion of Trump policy proposals. The prurient interest in the various Team Trump peccadillos are such better ratings drivers that the press cannot afford to move onto more meaningful matters. More important is the distraction for a Republican Congress that is struggling to pass any of the Trump legislative agenda into law. Yet that is just what the not-so-loyal US opposition is happy with, as it may come back to bite the Republicans in the 2018 bi-election if they fail to pass reforms.
We’ll have more on what is really going on here below, including how both of the very partisan sides in the US are missing the broader background and point.
Economics Still Problematic
There is ample reason for the Fed to become a bit less hawkish at present, and that is in the context of its international cohorts. While their circumstances are different, both the European Central Bank (ECB) and Bank of England (BoE) becoming more hawkish in their way were major drivers for the combined equities and govvies selloff two weeks ago. Admittedly the BoE is in a bit of a bind right now as the weak British pound drives inflation pressures above their target level at the same time the UK economy is at risk.
That is why the BoE might need to raise its base rate sometime soon in at least a passing influence over a potential surge in inflation. And two weeks ago Governor Carney who had previously seemed inclined to favor employment over inflation fighting seemed to shift to potential rate hikes to address inflationary pressures. Yet to keep this in perspective the current UK base rate is only 0.25%. Therefore, it is reasonable to assume that any nominal increase will not actually impact overall economic growth prospects.
The ECB is another matter. Any premature curtailment of its Asset Purchase Program that was inferred as a possibility in the wake of Mario Draghi’s contemporary comments to Mr. Carney’s more hawkish view might indeed have a broader impact. Yet it is reasonable to ask just how serious any indication from Mr. Draghi on less downside risk in the Euro-zone also amounts to enough strength to curtail ECB accommodation?
The bottom line is that it isn’t. As noted in last Wednesday’s Commentary: Bond Bubble Burst? post (in the “The ‘Real’ ECB Mindset” section), “…with recent German inflation figures pushing above the ECB’s broader Euro-zone target, the inherently inflation paranoiac Germans continue to pressure Draghi to curtail the Asset Purchase Program and raise interest rates.” And so every once in a while Draghi needs to pay lip service to German concerns while reminding them “…when they agreed to be part of the euro currency area they agreed to allow monetary policy to strike a mid-range path that would also assist weaker economies.”
As such, it is not reasonable to expect Draghi’s somewhat more hawkish communication will actually translate into less ECB accommodation. That is based on solid background that indicates the Euro-zone employment boom is not the pre-Crisis full employment. This mirrors the US gains where total employment has exceeded pre-Crisis levels for some time now, yet the economy remains more subdued than during previous phases.
The bottom line is that inflation is not rising very quickly (outside of the currency driven effects in the UK), and that precludes more extensive rate hikes for now. And those economic tendencies are indeed global, as labor is a global commodity which can be sourced from many countries. That is as explained by Yra Harris in the CNBC Santelli Exchange June 9th video clip in last Wednesday’s post. As that also reviews the overall sustained Quantitative Easing psychology and the breakdown of the old employment and inflation nexus, it is worth reviewing for anyone who has not done so already and has 3 minutes to spare.
Signs of Weakness Abound
This is not just so much citing so much economic data, as it also explores the opinions of various folks we respect on how it all amounts to weaker indications than some of the headline data (like employment gains) would seem to indicate. Yet first let’s allow this is not a recession in any major economy. After Chair Yellen’s testimony this morning the Beige Book economic assessment from each of the regions was released this afternoon.
It showed still only moderate growth with also only moderate inflation pressures. While there was some wage growth, it was not enough to foster any stronger inflation. As CNBC’s Steve Liesman put it, “It sounds like a 2.0% Beige Book” referring to US GDP growth still being stuck at relatively subdued levels. And while there have been some better data points on things like sentiment indications, the actual US economic data has reverted back to serial weakness from recent improvement. As noted in Monday’s emailed note, OECD’s Composite Leading Indicators indicate in addition to the UK the US economy may be losing momentum.
To indulge in a bit of hindsight for a moment on the context for any future evolution of the economic performance, even prior to this Monday’s OECD’s Composite Leading Indicators there was last Thursday’s OECD Q1 2017 Quarterly National Accounts Contributions to OECD Growth. That was similarly daunting for the future path of global growth, and especially the US where there was supposed to be the same strong recovery after Q1 as in previous years that does not seem to be forthcoming. The bottom line is that the key Private Consumption indication was lower than in even 2015 and 2016. This is very interesting as we head into Friday’s big US finish on releases of CPI, Industrial Production, Retail Sales and University of Michigan Confidence.
Labor Force Participation
We would not be surprised to see weakness in those numbers in spite of the better US jobs picture due to the nature of the US employment recovery since the Crisis. And there was a very good bit of overarching analysis after last Friday’s US Employment report from our old friend Larry McDonald. He covers all of the key aspects along with some very long term graphs to articulate the basic point for The Demographics Myth Inside Labor Force “Participation" that rounds out many of the points we have been making of late.
He is very focused on the degree to which the lower Labor Force Participation Rate that many attribute to the Baby Boomers aging out and retiring is more so a lack of labor market participation by folks in their prime: the 25-54 age group. So a good part of the stubborn weakness of the US economy (and others) is the degree to which these folks are not participating.
And to the degree they are, it is the younger, lower paid workers are the ones showing up in the jobs growth figures. There was a very good discussion of this in a discussion by CNBC’s Steve Liesman on low productivity numbers. This goes into quite a bit of how lower educated works have seen the highest employment gains, and how employers seeking skilled labor are forced to hire less skilled workers. This is a major reason average wage levels are atypically not rising with lower unemployment.
Same is True for Europe
In last Thursday’s update of the Market Observations we also noted the Financial Times analysis that worked right into our current focus. That was an editorial section ‘Big Read’ on The eurozone’s strange low-wage employment boom. It is a telling appraisal of how the ECB is falling into the same ‘normalization bias’ trap that the Fed was in during 2015 into much of 2016. Once again the problem is the reliance on the now less credible relationship between employment and inflation, which we have extensively reviewed previous and Yra Harris noted in the Santelli Exchange interview covered above.
Due to the lower caliber (less pay and lower or no benefits) of jobs counted as gains back toward the employment levels seen prior to the 2008-2009 Crisis, the actual strength of the various economies is lower than at previous similar levels of unemployment. This gets back to Harris’ observation on the fungibility of labor in addition to capital.
[Also note that while we are providing that excellent FT analysis for free this time because it is so compelling, we often only provide links that require and FT subscription. We encourage anyone who does not already have one to sign up at www.ft.com. They have a very inexpensive ($1.00) trial subscription available at present.]
And any full review of the ECB account of the monetary policy meeting on June 7-8 that was released last Thursday will confirm that it is not actually very concerned about inflation at present. And that is in spite of the jobs gains which (as noted above) are less representative of a return to real economic strength than during pre-Crisis cycles. Especially interesting is the observation in the middle of page 6:
“A number of comments were made about the combination of a downward revision to the outlook for underlying inflation and an upward revision to the outlook for economic activity in the staff projections. This was seen as puzzling, all the more so as the output gap was expected to close over the projection horizon, which should translate into higher upward wage and price pressures over time. In that context, caution was also expressed regarding measures of economic slack, which were surrounded by large uncertainties. Some measures of slack, such as official unemployment data, were likely to underestimate the real degree of unutilised resources and broader measures of unemployment could be more relevant. ”
That is consistent with the dynamic the Fed is now dealing with, and we presume that this is apparent to other central banks as well. It all reinforces our long-stated views that the Trump Tax reform (preceded by healthcare) and stimulus programs are indeed still critical to a US economy that is lagging previous cyclical recoveries. In that regard it is at risk of falling into structural weakness unless something changes. And while things have changed quite a bit since earlier post-WWII decades, the US economy will still be a key component of the overall global growth picture regardless of whether it is a singular leader in the more complex global order.
The ‘Real’ Story Behind Trump Jr.’s Peccadillo
All of the highly partisan defense or damnation of Donald Trump Jr. for taking that meeting with a Russian attorney misses the real point: This was just another well-thought way in which the Russians have been able to create uncertainty about the American (and other) political system’s legitimacy. Going back many decades there was a broadly held view that the Russian leaders who did not have to deal with regular elections of any consequence were playing chess (after all it is their national game) while the West for the most part was playing checkers.
In spite of Russia’s poor economic system, the Soviet Union was able to maintain a major global presence outside of some key eras. One was the Nixon era, where Henry Kissinger was up to the task of matching chess moves with the Russians. He was followed by the also very astute Zbigniew Brzezinski under President Carter. Too bad Carter was not clever enough to take Brzezinski’s advice as he messed up American foreign policy.
What does all of this have to do with Trump Jr.’s misstep in taking that meeting with the Russian attorney? Well, if anyone is playing chess out there while the Americans are playing checkers, it is Vladimir Putin, the ex-KGB officer.
As noted above the political novice Trump Jr. could not resist being involved in something that could assist his father’s Presidential bid without considering the subtle aspects that might have helped him avoid the appearance of willingness to collude with the Russians. The first tripwire he should have noticed was the email from Rob Goldstone stating so explicitly that the contact was part of “…Russia and its government’s support for Mr Trump…”
That this did not trigger a pre-response review by the Trump campaign’s lawyers is astounding, as it appears Donald Jr. never put it in front of them. They surely would have known what he (as a novice) might not have realized: accepting assistance from a foreign power (especially an adversary) to influence a US election is highly illegal.
Yet beyond that there is a key question he should have asked himself: “If these folks indeed have “…some official documents and information that would incriminate Hillary [Clinton] and her dealings with Russia and would be very useful to your father…”, what the heck did they need him for? They could have easily released it at any time, and it would have still ostensibly been a major negative for the Clinton campaign. It appears the Trump the Younger was so keen to be involved in something he could take credit for that he didn’t bother to think through the real dynamics (and legal implications) of the offer.
Kremlin ‘Business as Usual’
Yet for any sophisticated observers, this is a standard FSB (Federal Counterintelligence Service of Russia successor to the KGB) operation. It is the ‘dangle’ of some key information that is used to measure the interest of some individual or entity on the opposing side. While the ultimate object of these exercises is to find some individual who can provide useful information or become an undisclosed agent, sometimes the initial response of the target is enough to provide some advantage to Russia.
And that seems to be the case here. Regardless of the fact there was no damning information on Hillary Clinton provided to the Trump campaign, the emails between London-based publicist Goldstone and Trump Jr. demonstrate a willingness to ‘collude’ with foreign agents on things that could affect the US election. Even if no laws were broken based on no action actually being taken, this reinforces all of the claims of the Democrats and mainstream press that the Trump campaign was willing to cooperate with foreign agents to influence the US election.
And while the partisan Left politicians and media slug it out with the Trump organization and their tacitly supportive Republicans once again, who is the real winner? Russia along with the other less than democratic states throughout the world. They have succeeded once again (much as with the Democratic National Committee and Hillary Clinton emails releases during the election campaign) to weaken the confidence that American (and along with it some European) election processes are the fair and free exercises that Western leaders rightfully extol. Look for more of the same unless and until Western politicians and their supporters get back to the chess board.
The Extended Trend Assessment with full Market Observations will be updated later this week. It will include more extensive discussion of the Evolutionary Trend View prior to and after last week’s significant central bank influences and economic data.
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