tweeted by Martin Beck,
and it comes from Oxford Economics, using Haver Analytics database. It shows the relative
economic growth since 2008 for the US, UK, Japan,
and EMU.
It will not surprise many to learn that US
contraction was not as deep as in the areas. It also would not be
surprising to learn that the US economy has grown the most since
2008. This is part of
the material basis for the divergence of monetary policy and the third
significant dollar rally since the end of Bretton Woods.
On the other hand, many might suspect Japan
has been the worst of the bunch, but in truth, it is the eurozone that has been
the laggard. However, that is about to change. Real GDP growth
in the eurozone is about to overtake Japan.
Controversy has emerged over the outlook for
the US and UK monetary policy. There is nothing in the red line
depicting the US, which suggests the
eight-year recovery is about to end. There are no significant
imbalances. While the Fed has hiked, the real Fed funds and two-year note
yields are still negative. The Fed has not tightened so much as removed
some accommodation. The US economy slowed from 3.5% in Q316 to 2.1% in
Q4 and then 1.2% in Q1 17. However, the slowdown is likely behind the US
as GDP appears to have accelerated in Q2.
After being widely criticized for being too
dovish, the Federal Reserve has become subject to widespread criticism that is
was too hawkish last week in announcing a rate hike and details of its unwinding of QE. Some argue the
economy is slowing, but this assessment is made
by looking at the rear-view mirror. The Fed does not target GDP.
Its mandate is full employment, and that
has been approached. It has a
mandate for price stability. Inflation has softened in recent month, but Yellen and the Fed’s leadership wants
to look through it as it has been primarily
driven by the fall in energy prices and wireless communication.
There are some other quirky things, dragging down core inflation, like owner
equivalent rent (falling while rents are
rising). The prices received from the Philly,
and NY Fed surveys reached new five-year
highs.
Underneath Yellen and Dudley’s recent comments
is a faith in the Phillip’s curve, which
essentially asserts that businesses will raises prices to offset rising labor
costs. This is a debatable
point. Is labor really simply
another input, like raw materials? Some argue that wages did not fall as
much as the economic conditions would have suggested during the crisis given
the slack and deflationary conditions. Others argue that wages should be
rising faster now, even though they are growing faster than productivity.
In any event, as long as the labor market is absorbing its slack, at least some
Fed officials will be confident that price pressures will rise even if there
are unpredictable lag times.
At the same time, some Fed officials,
like Chicago’s Evans, have expressed concern about “technological deflation.” It appears, for
example, that Amazon can deliver food items at around 20% lower than one can
buy them in the store from Whole Foods. Uber, now Lyft, can undercut
traditional taxi cabs and black cars. The idea is that new technology is
disruptive, enhances competition and drives prices lower.
On the other hand, the kinds of goods that are covered do
not seem to be large weights in CPI or core PCE basket. And the
enhanced competition might be a short transition phase. Consider that
Google accounts for nearly 90% of search advertising. Facebook accounts
for almost 80% of mobile social media traffic. Roughly
three-quarters of e-books are sold by Amazon.
For its part, the Bank of England has
whipsawed the markets. Last week’s 5-3 vote was closer than
expected. We had correctly anticipated Carney would set the market straight. Indeed Carney played down the
need to raise rates soon. However, Haldane, the BOE chief economist, came
out today, seemingly allying himself with the Hawks
over Carney.
One could reconcile Carney and Haldane.
Carney did suggest that the economic data in the coming months would be
particularly important. Haldane said that if data “are still on
track” that unwinding the accommodation provided last August (after a referendum) “would be
prudent moving into the second half of the year.” Haldane’s comments
are all the more important because he is seen
as part of the dovish contingent at the BOE, unlike say McCafferty who had
dissented last year in favor of an immediate hike on a few
occasions.
However, Carney seems considerably more
concerned about the economy going forward. He noted the squeeze on
earnings that could weaken consumption and output. He also put an emphasis on the uncertainty
(Brexit, politics) that increase the range of possible outcomes. Despite
the slowing of the UK economy, the slowing earnings growth and the loss of
momentum of the PMIs, Haldane insists that the overall economic picture is a
“reasonably reassuring one.”
Looking at the OIS, a week ago, before the BOE
meeting, there was about a 6.5% chance of a hike before the end of the
year. At the end of last week, there was almost a 24% chance
discounted. It now stands near 36%. Sterling has encountered offers
about a cent lower than it did last week
on the MPC vote. Haldane’s comments did not completely unwind Carney’s
effect. Yesterday’s high was almost $1.2760. Today’s high has been
$1.2710. Sterling has already unwound about half of its Haldane-inspired
gains. A break of $1.2630 warns of a retest of the lows.