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• The oil price cliff dive will end the prospect of double-barrelled tightening

  
  
  
  
  
  

  A pause is being considered at the Fed, even by hawkish FOMC members. The oil price crash now gathering steam makes this pause more likely. Maybe Bullard’s infamous low dot on the Fed’s Summary of Economic Projections is the right way to look at Fed policy.

  

• How Brexit makes Britain poorer, forcing Carney to stay his hand

  
  
  
  
  
  

  The risk in the UK is an inflationary recession. For now, Mark Carney is resisting a rate hike. But how long will the Bank of England hold out? And how long can British consumers keep spending if real wages are falling? Two things would ease this pressure. One is some sort of fiscal support for real wages. The second is the fall in oil prices. As in the US, I see oil prices as key.

  
  
  
  
  
  
  

• Could the UK be headed for an inflationary recession?

  
  
  
  
  
  

  The Bank of England kept its key policy rate unchanged at a record low 0.25% . Three dissents show how a weak currency and rising inflation are making it harder to keep rates low. The worst case scenario is an inflationary recession, which would topple Theresa May.

  
  
  
  
  
  
  

• What are credit markets signalling about the US economy?

  
  
  
  
  
  

  The US economy has been very resilient during this post-crisis business cycle, as we are now into our ninth year of economic expansion. Soon we could hit a record for the length of an expansion. Yet, with that backdrop, 10-year Treasury yields were at 2.13% this morning – even as the Fed signals more hikes to come in 2017 as well as reverse QE. I think the bond market is signalling continued low growth and low inflation. Some thoughts below

  
  
  
  
  
  
  

• On the Fed’s pause due to dual-barrelled monetary tightening

  
  
  
  
  
  

  Fed Governor Jerome Powell recommended a June hike and 2017 balance sheet reductions, in one of the last public speeches by a Fed official before the June FOMC meeting. When the Fed follows Powell’s game plan, we will be in the unchartered waters of dual-barrelled tightening, with the attendant risks that entails. Some comments below

  
  
  
  
  
  
  

• All politics are local: understanding Trump’s threats and misunderstanding Merkel’s disappointment

  
  
  
  
  
  

  What Angela Merkel was doing this past weekend when she spoke of the need for Europe to “take our fate into our own hands” was using an international issue for domestic purposes.

  
  
  
  
  
  
  

• The threat of an overheated German economy

  
  
  
  
  
  

  The Eurozone economy is doing really well. Some data points to 3% growth. The German economy is doing even better – with some data pointing to 5% annualized growth. But there’s a downside – overheating. And with the ECB at negative rates and engaged in 60 billion Euros of QE to boot, overheating in Germany is a reasonable fear. Some thoughts below

  
  
  
  
  
  
  

• More Europe

  
  
  
  
  
  

  At the height of the European Sovereign Debt Crisis, German leader Angela Merkel was openly calling for ‘more Europe, not less’. With Emmanuel Macron elected to the Presidency of France on that platform, Merkel has perhaps her only chance to make good on that vision. First she needs to get re-elected though. But if she gets that far — and her party’s election win last night in Schleswig-Holstein suggests she will — she has to meet Macron with a reformer’s fervour or lose Europe to nationalism.

  
  
  
  
  
  
  

• France: What Macron means when he says the EU must reform or face Frexit

  
  
  
  
  
  

  At the weekend, French Presidential election frontrunner Emmanuel Macron told the BBC that EU leaders “have to face the situation, to listen to our people, and to listen to the fact that they are extremely angry today, impatient and the dysfunction of the EU is no more sustainable”. He then warned that if EU leaders do not correct this dysfunction, either France would exit the eurozone or the National Front would take over or both. I think what he says is true and let me explain why.

  
  
  
  
  
  
  

• Trump is just a conventional politician who uses over-the-top bluster, NAFTA edition

  
  
  
  
  
  

  This morning, the Trump Administration called the leaders of Canada and Mexico to tell them that he “agreed not to terminate NAFTA at this time,” showing, yet again, that Donald Trump is much less audacious a President than some expected. The question is why. About two months ago, I surmised that despite all his hot rhetoric, Trump’s bark was worse […]

  

All Content

Baumol’s cost disease, aging societies and inflation expectations

Quick hit here. I have been banging on about lowflation, repeatedly suggesting it is here to stay. The Fed, on the other hand begs to differ and is pre-emptively normalizing rates, as a result. No matter how you look at this, there’s a rub though: We all consume different products, so we each experience a different individual inflation rate. Even […]

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by Edward Harrison / on 23 June 2017 at 09:44 /

The wisdom of crowds and government bond markets

When you look at how markets are positioned, it’s clear that a lot of people see continued low growth for years to come – a veritable Japanification of the US economy. I hope this is one of those times that markets are wrong. But I am not willing to bet on the hope, just the opposite.

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by Edward Harrison / on 22 June 2017 at 09:17 /

The oil price cliff dive will end the prospect of double-barrelled tightening

A pause is being considered at the Fed, even by hawkish FOMC members. The oil price crash now gathering steam makes this pause more likely. Maybe Bullard’s infamous low dot on the Fed’s Summary of Economic Projections is the right way to look at Fed policy.

Read more ›

by Edward Harrison / on 21 June 2017 at 16:35 /

Abenomics and Japanese growth

Only during the Great Recession did nominal GDP break out of a tight range – and then, it did so to the downside. We are nowhere near the top of the range now, nor should we expect to be anytime soon.

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by Edward Harrison / on 20 June 2017 at 09:35 /

How Brexit makes Britain poorer, forcing Carney to stay his hand

The risk in the UK is an inflationary recession. For now, Mark Carney is resisting a rate hike. But how long will the Bank of England hold out? And how long can British consumers keep spending if real wages are falling? Two things would ease this pressure. One is some sort of fiscal support for real wages. The second is the fall in oil prices. As in the US, I see oil prices as key.

Read more ›

by Edward Harrison / on 20 June 2017 at 08:38 /

Is the new rout in oil getting worrying?

Earlier this morning, the New York Mercantile Exchange was quoting delivery for light sweet crude in July at $43.30. That’s a far cry from the $55 average that analysts had expected for 2017 as recently as last month. And all indications are that this price deflation is not transitory, but lasting. The selloff in oil brings year-to-date losses to some […]

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by Edward Harrison / on 20 June 2017 at 07:50 /

The Fed will continue to tighten despite inflation below target

New York Fed President William Dudley has reiterating Fed Chair Janet Yellen’s determination to push forward with interest rate hikes despite inflation below 2%. The Fed will continue to have this stance unless and until economic data weakens significantly.

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by Edward Harrison / on 19 June 2017 at 09:12 /

Could the UK be headed for an inflationary recession?

The Bank of England kept its key policy rate unchanged at a record low 0.25% . Three dissents show how a weak currency and rising inflation are making it harder to keep rates low. The worst case scenario is an inflationary recession, which would topple Theresa May.

Read more ›

by Edward Harrison / on 15 June 2017 at 08:42 /

The Fed’s financial stability concerns, auto subprime edition

Below are some data points from recent credit statistics and analyses, showing trends in the auto credit sector.

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by Edward Harrison / on 14 June 2017 at 08:43 /

The Fed’s financial stability concerns before its June hike

Hiking rates now after a monster commercial real estate cycle has already developed is akin to closing the stable doors after the horse has already bolted. But this may be a concern of the Fed. Let’s see what the Spring 2017 OCC Risk Assessment says when it comes out.

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by Edward Harrison / on 13 June 2017 at 18:05 /

Why commercial real estate will be central to the next credit bust

On Sunday, macro strategist Lawrence McDonald made three tweets about corporate real estate I think merit highlighting. They show a corporate real estate market that has been white hot during this particular business cycle. And that means it is one of the credit sectors to watch for signs of distress

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by Edward Harrison / on 13 June 2017 at 09:14 /