Yellow Lights are Flashing

<br /> Yellow Lights are Flashing – Marc to Market<br />


(Two week business trip is winding down, leaving London tomorrow
and will be in Canada for the first couple days of next week, then back to NY.
 Sporadic posts to continue. Thanks for your patience)
Yellow lights
are flashing. 
 Bonds remain heavy despite a weak spate of data that would seem to remove nearly
any chance that Fed will hike rates next week.  The implications of the
disappointing retail sales data indicates that estimates for Q3 GDP will be revised lower.  
This quarter
does not seem to be the breakout that had
appeared to be the case previously.
  The output from industrial sector,
which accounts for a little less than a fifth of GDP fell in August, and the July gains were shaved in revision.   
There were reports that might have blunted the negativity, but they seem overshadowed by the
other reports. 
 Both the September Philadelphia and
Empire State Fed surveys, which are part of the first readings the market
receives for a new month, showed serially gains that exceeded expectations. The
US economy is still snapping the nine-month below trend growth period, but it
is not doing it with a punctuation point.  
My calculations
suggest that at an implied yield of
three-quarters of a basis point, the September Fed funds futures has about an
11% chance of a hike discount. 
 The CME, where the contract is traded, estimates it at 12%.
 Bloomberg’s WIRP has it 18% and has been consistently running higher than
the CME and my calculations over the past few weeks.  
There is a
greater chance that Trump is elected than
the Fed hikes rates next week.
  Nate Silver’s blog puts the odds at 37.4%
currently based solely on the polls.  If one adds to its economic and
historical data, the odds edge up to 38.5%.    Trump has narrowed the
gap, which now stands at the smallest since late-July.  
St. Louis Fed
President Bullard has sketched out the idea that the economy moves in certain
paradigms,  which are characterized
by a stable (predictable) relationships between variables, such as unemployment
and inflation.
  As practitioners,
we have to assume the paradigm holds in
the short-term.  I think this is a broadly useful way of thinking about
the economy.  In my work (that will so be
published as a book!) I have suggested a model of based on such
macro-paradigms (what I call cash registers) covering the Bretton Woods era,
the breakdown, the Reagan-Thatcher era,
the breakdown, and the period that lies
Perhaps it is
what some think of as the fractal nature of the market;
these paradigms are evident in other shorter periods as well. 
  It is important to distinguish between noise and the
normal fluctuations from the signal of a change in relationships.   The
rise in yields, with long-term yields rising more than short-term yields, what bonds traders call a bearish
steepening, is a yellow light flashing.  It is signaling of a potential
turn in the market’s reaction function.  
The European
Summit in Bratislava strikes me more as the beginning of the discussion rather
than a platform for decisive action.
  Maybe the Berlin election is more
important.  Merkel’s CDU was trounced a couple of weeks ago in her home
state of Mecklenburg-Vorpommern. It came in third behind the AfD.
 Nevertheless, the state will continue to be run by a SPU-CDU coalition.
Berlin is a
different story.
  The CDU are polling around 18%, down on average one
percentage point a year since the last election.  It is holding on to a
small lead over the AfD, which is drawing around 14% support in the polls.
  This would count as a victory for
the AfD, which would then be represented
in ten of Germany’s 16 state parliaments.  
The SPD are
polling around 25%.
 This would be
the lowest in years, as Germany too is
experiencing some political fragmentation.  Nevertheless, this the SPD
will lead the next government.  If the CDU do a bit worse, and the Greens and Left parties do a bit
better, a case may be made for the
center-left coalition government without the CDU.  This could be important for
next year’s national election.  A
particularly poor showing by the CDU, the second in a row, will
antagonize the CSU, which is critical of Merkel’s immigration policy.  
Although the CDU and CSU have been strong allies, Berlin could widen the
growing fissure and lead to it running, or at least threatening to run, its own
candidate for Chancellor.  

Merkel will
tack to the right, which seems to be already taking place.
  Domestically, it has begun as
law-and-order.  In European politics, a hardline is likely.  The idea
that the UK government can collect its thoughts before invoking Article 50 and
begin before French and German elections take place
seems a trifle naive.  That train left the station. German (and
French) domestic politics are already impacting. 


Yellow Lights are Flashing
Yellow Lights are Flashing

Reviewed by Marc Chandler

September 15, 2016

Rating: 5

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