The release of Fed Minutes showed greater unaminity than was previously hinted at. That was the excuse for the intraday reversal yesterday.
A sharp-eyed observer noted:
"Volume had been barely pacing Monday. Until 2:00 p.m. when it started to crank. As a matter of fact, there was a boatload shoved thru as the clock struck 2 and for the next ~30 minutes. Local lore is attributing this jump in volume and in price to the good news of the FOMC minutes. The only question that remains is what kind of a speed reader could actually scan and digest the above-referenced 7 pages, 276 lines, 34 paragraphs and 3,336 words and start to act on it before the red headline ink was even dry. (emphasis added)
I’ll say. The ramp started the instant the Fed minutes hit — certainly not enough time for any mortal to have read and comprehended that much data. This looked like it was simply a large macro-player pushing indices around in a very thin tape.
This is not me "talking my book." As I said in early August, I am contructive on the market for the next few weeks, but not much more beyond that.
The more interesting Fed related story the past few days was out of merry ole England, by way of Jackson Hole. Its seems that Charles Bean, the Bank
of England‘s chief economist, is aghast at the absurd focus on the Core Rate of inflation by the U.S. Central Bank.
Dan Gross has the details:
"The US Federal Reserve is wrong to focus on core measures of inflation
that exclude energy prices, Charles Bean, chief economist at the Bank
of England, has suggested.
It should focus instead on headline inflation, which is much
higher, he argued. Including energy and food costs, US consumer price
inflation is running at an annual rate of 4.1 per cent, against 2.7 per
cent for core inflation.
Mr Bean told the Fed’s annual Jackson Hole symposium at the weekend
that energy prices were rising for the same reason the price of many
manufactured goods were falling: the rise of China and other emerging
market economies. Since both price trends had a common cause, he said
it makes little sense to focus "on measures of core inflation that
strip out energy prices while not stripping out falling goods prices as
Mr. Bean did not mention the Fed by name but his implication was
clear. Fed officials, including chairman Ben Bernanke, typically talk
about measures of core inflation excluding volatile food and energy
prices, which they say better predict future headline inflation.
Central bankers in Europe take a sharply different approach. Both
the Bank of England and the European Central Bank put greater emphasis
on talk of headline inflation, which includes the immediate "first
round" effect of rising energy prices.
I find it rather discouraging that so obvious a statement needed to be publicly pointed out by an overseas observer, albeit a well placed one.
Inflation (ex-inflation) has now risen to the level of a national embarrassment.
BoE chief economist hits at US inflation measure
By Krishna Guhain Jackson Hole
Published: August 28 2006 03:00 | Last updated: August 28 2006 03:00
Hey Barry- Ignoring inflation (or, at best, failing to adapt outdated measures to the modern world) seems to be an operational philosophy that the Fed and U. S. government will keep for a while. So the natural question is: How do you think this situation can be exploited for financial gain? I’ll take f–ked up perspective all the way to the bank if I can…
I have a prediction. The inflation rate will soon go steadily down. My reasoning is that I believe we are headed for a serious recession, on par of the early nineties….
About that rally yesterday. I read the minutes and I did not see what the market saw, so it does look pre-meditated.
I still think this bogus rally gets whacked after Labor Day.
Jim is right……ride it hard until the first stringers return.
OK, let’s all agree inflation due to gas/energy prices is running higher than we would all like (Fed included). Now, let’s look at WHY the oil prices are high – Geopolitical risks, Hurricane concerns, increased worldwide demand, lack of new refining, etc. (although, to be fair, prices have come down fairly signifcantly lately).
Now, if you are the FED and you have raised rates 17 straight times, and you are starting to see commodities/energy retreat and Core inflation is holding fairly steady, and most importantly to this site, housing is in a semi free-fall, why would you raise rates? Answer is you wouldn’t/won’t. You won’t raise them in Sept. either. The economy will naturally slow (as it is doing), and guess what energy/commodities are coming down.
If we get GDP under 2 for Q3, they will then start to cut rates and market will take off. Soft landing will be achieved. Maybe it’s because I am in the Midwest, but I really think this housing situation is over-rated as far as brining on a recession. People still have money, real wages are going up (slightly yes, but still up) and the consumer is one resilient MF’er. Don’t bet against them guys.
The only excuse the Fed gives for core inflation reporting is that headline inflation is “volatile.” Gosh and golly, it’s not like they don’t have any centuries old statistical techniques for smoothing out volatility. Perhaps there’s an opportunity to start a respectable series of inflation indicators; iBR1, iBR2, iBR ex energy, etc.
Once Britain starts talking about it does that mean we are fighting the last war? Barry, JDamon makes some very good points. Do you honestly believe the Fed should be raising rates higher here? Cooked inflation numbers aside, of course. Far aside.
First of all, cue up “God Bless the USA” and let me say I don’t think monetary policy should depend on import prices at all. To target an index including import prices means that policymakers expect American firms to cut prices (relative to the target trend) when importers raise prices and vice versa. Why should they? Why should a scarcity of imports (like oil) result in a contrived scarcity of money? And why should an abundance of imports (like manufactured goods) result in a contrived abundance of money? The reason to have a target in the first place is to give the Fed credibility so that domestic firms will forbear raising prices in response to temporary shocks. If the objective is to influence the behavior of domestic firms, why should policy be influenced by variables outside the control of domestic firms? The target index should focus on prices that are likely to be sticky, which is not the case for imports under flexible exchange rates.
(For the record, looking at domestic prices only, the GDP deflator is running at about 3.3% for the past 4 quarters – somewhat worse than the core CPI but considerably better than the full CPI.)
But – second point – part of the reason the Fed focuses on core prices is that food and energy prices are volatile. If you’re looking at the last month or 3 months or 6 months or even 12 months, the full CPI gives you only a little bit of information about whether inflation is accelerating, whereas the core gives you more information. If the Fed were to target a full index like the CPI, they would have to take into account its volatility. In that case, the 4.1% number cited by Bean (or was it by the reporter?) is misleading. Rather you should use a smoothed inflation rate that takes into account several years of data. For example, I have a weighted moving average (72 months linear weights declining to zero at the far end) of CPI inflation that is running at about 3%, which is a lot closer to 2.7% than 4.1%.
(Cross-posted from Greg Mankiw’s Blog. I don’t usually cross-post, but I couldn’t help myself this time.)
Tony Crescenzi on Realmoney.com has been saying today and for some time that commercial construction and loans is booming.
I don’t understand why commercial construction would be so strong in light of a weakening economy. Anyone have a clue?
Commercial construction is usually 12-18 months behind the consumer. It’s tough to stop building a mall right in the middle of your pour for Dillard’s foundation.
Another criticism foreign central bankers have made is that it’s a mistake for the Fed to ignore equity price inflation, but to then lower rates when equity prices fall. The Economist had a lot on this earlier this year.
Given the current indebtedness of average working people, wouldn’t inflation actually be good for them? Wages would probably at least keep up with inflation. Even Social Security is indexed now.
Don’t get me wrong, I’m not advocating it. But just hypothetically, wouldn’t 70-80% of American households be better off with inflation of 5-7%?
mark, Commercial construction is not lagging. They are reacting to the demand for business growth. Corporate profits continue to grow and they need to expand their operations. Do not try to compare big business to the consumer. That is like comparing apples and oranges. Businesses deveolp strategiest to maintian their competative edge. They speculate on the future and capitalize on times of poor and pently. When was the last time you heard of the average consumers hedging his energy needs 5 to 10 years out into the future? Or layoff the kids when they can’t afford to kepp them becasue of rising costs? That is why they are called a consumer. They consume. They are a bacl hole for products and services and very few products and services are ever converted up to a higher value product or service that the resell other than the consumers labor hours.
Corporate profits are high not becasue the eocnomy is good but becasue consumers have not figured out the real value of the products they are purchasing. Remember the CRT monitor to LCD monitor convertion. Those CRT monitors dropped from $700 for a 21 inch screen to $250 overnight. So you have to wonder, was the value of those old monitors $700 or $200? People were willing to pay $700 up to the day that they dropped prices. They didn’t understand the true value of the product.
Even the core rate doesn’t offer much solace, rising from 2.1% in Q1 to 2.8% in Q2.
But, like fund managers, central bankers aren’t averse to talking their own book too. Our European trading partners can’t be too happy that a weak dollar discourages their exports to us and would probably like to see the Fed tighten again.
foreign central bankers will not be voting in our upcoming elections so the odds of the Fed tightening??? thought so…
For those conspiracy theorists out there, the SP500 futures dropped a point on the release and the mkt didn’t start advancing until two minutes after the release, plenty of time for some to find exactly what they were looking for in the report. the speculators see the push and pile in on every pullback. Simultaneously the mkt had a larger time frame divergence which everyone pounced on. just one perspective….
Hey, did anyone notice Robert Shiller’s op-ed in the WSJ today?
Discussed here by Roubini:
Uh, yes Ander, it is lagging. Lagging demand as such.
“real wages are going up”
Yeah, if you’re in the top 1% of the wage earners.
It’s gone down for the low and middle class wage earners.
#1: PCE core inflation is rising and hitting new highs based on 4-5 year compounded growth rates.
#2: The last time there was an energy cost bump core inflation steadied. But guess what, when energy costs came down core inflation rose! (Simple economics: Money was syphoned to energy so there was less for core purchases which meant lower demand which meant lower cost pressures. When less money was needed for energy, more was available for core purchases, more demand, more upward price pressure.)
OK, so here’s a comment by the Richmond Fed President. How can he talk about moderating energy prices helping control inflation when all along they have been EXCLUDING energy in their calcuation of inflation?!
Lacker said he did not think that weaker growth “by itself” would bring inflation down. On one side, there is a view at the Fed that hopes flattening energy prices over the near term would reduce upward pressure on core inflation, he said. “I was in the camp of thinking we needed to raise rates to make sure inflation comes down,” Lacker said in a television interview.
They have been excluding direct energy prices from their calculation. Lacker is talking about the indirect effect of energy prices. For example, if fuel gets cheaper, then air fares might go down, because it costs less to run a jet. They have been including air fares all along. (I actually happen to be an extremist who thinks that even the indirect effect of energy should be excluded from target price index, but that is not how it is done today.)
I think we are talking about different things. At least I hope so since I am in the business ( international commercial real estate and economic development consulting). It would be very hard on my ego to think I advanced this far in my profession and I had no idea what I was talking about. (Perhaps it was the throwaway nature of my post.) I see what you are talking about for current demand. I look several years out in my projections for my clients before committing them to projects.
The bond market is now pricing in an 8% chance of a rate cut at the Jan 31, 2007 meeting.
How bout that.
Amazing how the bond market and stock market are now completely on different pages. In order for the Fed to cut rates in 4 months, the incoming data would have to show rapid deterioration in the economy.
But hey…are we still buying?
On the Shiller index and Roubini’s analysis, while I agree fundamentally with the fact that housing is turning from boom to bust, that graph is usually explained away by housing bulls as due to 1997 era tax changes. The capital gains on housing became deductible up to $250k for a single or $500k for married homesellers that year. That started the ball rolling, then historically low interest rates entered the picture, and of course irrational exuberance.
>Rather you should use a smoothed inflation rate that takes into account several years of data
Not really disagreeing with you, just pointing out the Control 101 truth that the longer you average your data the slower your response time to a step change is.
So how responsive should the Fed be? I sure don’t know. But when you think you have a really good predictor think about when it actually sets the flag, and if that would be soon enough for any use to anybody.
I’m in general pretty comfortable with the normal view that you should watch energy prices thru their second-order effects.
But knzn is going to have to work quite a bit to get me to see his self-labeled “extremist” view. We, especially in America (but you Euros don’t get too smug, look around a bit) have built ourselves into such an energy-dependent corner that you can make a lot of good predictions about the economy based on what a btu will cost it.
Just a point of clarity on the action immediately following the Fed statement – as someone who monitors the futures markets very closely, they whipsawed lower initially before spiking higher. They actually water-falled for the first couple of minutes……
after the close
Federal Reserve Bank of Richmond President Jeffrey Lacker said nothing has changed his economic views since he cast the lone vote against the central bank’s decision this month to leave interest rates unchanged.
“There’s a danger of inflation being entrenched at the level it is now,” Lacker, 50, said in an interview in Washington. “I don’t think we’re out of the woods yet” on the inflation risk, he said.
“Housing obviously is going to be a drag on the economy going forward to some extent,” Lacker said. Still, he said that he hasn’t yet seen much of a “spillover effect” to reduce consumer-spending growth or overall construction employment.
Intesting comments by Lacker about not seeing much of a “spillover effect”….
What is the Fed President seeing that Barry and the other perma-bears here aren’t? I thought the housing crash was supposed to be the “Katrina” of all economic destruction?
BR: Funny, when I got bullish in October 2002 I was called a perma-Bull.
Inflation should be measured in other dimensions such as velocity and quality. The internet business facilities contributes much to “velocity”. The internet can locate in a few minutes a play-model Camaro car instead of physically shopping for it in 3 malls and still not be able to find it. When you get the Camaro in two days, you would want to buy the Thunderbird model next day; and so on. An example of “measure of quality” would be that of – a house manufactured in 1970 could last 60 years, while a house purchased today might only last 50 years because of differences in basic materials being used such as particle boards vs. solid plywood, plastic vs. copper plumbing materials, etc…
Another “quality dimension” would be that -percentages of increases this years of being at war in Iraq and other places and spending in Tsunami and Katrina disasters contributed to a distorted measure of inflation.
Stocks are being pushed up by Options/Insider trading. These guys know whats really going on the rest of the herd doesn’t: The economy is closing in on recession.
They are pushing it up, for when the herd panic, they will sell it off with a major correction.
Pretty much textbook.
“Inflation should be measured in other dimensions such as velocity and quality.”
How about reality? My Rip Van Winkle experience, 5 years ago I go to work, save, work, save, work, save ad nauseum, then I wake up and find that the $250K house I could’ve paid cash for then is now $750K.
Inflation in gas and food is deflationary, because it stripes out cash from people.
Do you know the today’s news #1 that noone paid attention at?
WalMart and Samson Club (or whatever its name) just started dropping prices because sales are falling. Check today Minianville.
Decreasing gas consumption takes time, it can’t be done overnight. A lot of people now are losing their homes, defaulting on loans, selling their cars and moving into small apartments closer to work. They drop out from gas consumption. But this process is not fast enough to affect prices. Should take another 6 months.
Did you hear it? WalMart is dropping prices. What inflation?
Wal-mart is also cutting jobs besides cutting prices, hear that: Recession.
thank goodness they’re cutting jobs
the best way to cut inflation is to fire people
If the Fed focused on real time inflation indicators such as asset and commodity prices, they would have headed off the housing bubble before it got going, the metals bubble (corner), the natural gas swindle of DEC2005, and the NASDAQ bubble.
Focusing on the core rate which is an insensitive lagging indicator of inflation creates excessive speculation, excess liquidity, off cycle monetary adjustments, and tends to stabilize prices at a higher level than previous to the inflation.
Inflation is the rate of increase in prices. Zero inflation means that prices remain at a permanently higher level with deflation. The core rate automatically builds price increases into the equation. It would be better if the fed reacted when excess monetary stimulation was ocurring, not two years after the fact. Of course raising rates now is risky. They should have been at 5.25 % last year. We would now be at 4.5 %.
But this is stunningly naive. A majority of trades are done by programs, and it is extremely likely that several of those have clever high powered, handcrafted FOMC minute parsing and interpretation code. It can net millions by beating merely human traders to the punch.
“extremely likely that several of those [programs] have clever high powered, handcrafted FOMC minute parsing and interpretation code.”
Ett wood bee inturesting efff tha FED ishued a phonetic ur mangled sta-t-ement jus ta c if dis wur true.
Of course this won’t happen. The Fed knows the announcement is gamed and that’s the way they like it.
Maybe, just maybe, the Fed has engineered a soft landing, inflation will continue to be mild, we’ve experienced the slowdown, and the stock market is pricing in more rapid economic growth 6-12 months down the road.
No amount of inflation is good. That it is generally accepted that a modest level of inflation is good is really just an acknowledgement that, since inflation can not be completely contained, then a little is better than a lot. Inflationary expectations are compounded (built in to exprectations) exponentially. The result is phantom profits which produce an illusion of greater wealth.
Ander: In “Wealth of Nations” by Adam Smith, he makes it pretty clear that capital spending is a response to high profits, thus ultimately reducing the return on invested capital via the subsequent effects of competition. Commercial construction is likely a lagging indicator.
“But this is stunningly naive. A majority of trades are done by programs, and it is extremely likely that several of those have clever high powered, handcrafted FOMC minute parsing and interpretation code. It can net millions by beating merely human traders to the punch.”
Let me guess, you are not a programmer? duh.
Computers are utterly worthless for interpreting anything that requires context, like, oh say, the minutes of a meeting of a bunch of gasbags. There was indeed program trading, but the program consisted of the hot shot traders walking out the door last Friday for the week and throwing the keys to the pimple boys and telling them to flip the switch at exactly 2:00 pm on Wednesday to run things up a bit for EOM window dressing purposes.
It didn’t really matter what the Fed minutes said, there was going to be a “rally” and that’s all there is to the story.
oops, should have been “telling them to flip the switch at exactly 2:00 pm on Tuesday.” Programming error. :)
>>>It didn’t really matter what the Fed minutes said, there was going to be a “rally” and that’s all there is to the story.<<< Exactly. This entire low volume rally has been "news? data? anyways...are we still buying?"
>>>Stocks are being pushed up by Options/Insider trading. These guys know whats really going on the rest of the herd doesn’t: The economy is closing in on recession.
They are pushing it up, for when the herd panic, they will sell it off with a major correction.
Pretty much textbook.<<< >>>But this is stunningly naive. A majority of trades are done by programs, and it is extremely likely that several of those have clever high powered, handcrafted FOMC minute parsing and interpretation code. It can net millions by beating merely human traders to the punch.<<< Those last two posts read like they came right out of Yahoo message boards.
Note that 3.1% longer term smoothed CPI is still above the core CPI and way above the Fed’s comfort level of 2%. This points to continued rising core and nominal CPI .
I’m not an economist, but my understanding is that the excess money created the last few years has been rotating out of financial or paper assets because real interest rates are too low (or negative for several years) and into hard assets. I believe this rotation will continue and continue pushing up the CPI. The core will now probably be the main avenue with the acceleration because the non-core inflation will now be pushing through to core goods.
At the same time, the higher nominal rates has slowed NEW money creation. It was this new money creation that was fueling the lending bubble and its absence is what we see in the stalled (and soon to be falling) house price rises and commodity price rises.
Therefore, we may see rising CPI for the next year or two at the same time we see falling house and commodity prices plus falling financial asset prices. If the Fed does not get ahead of the curve then nominal rate rises will only be keeping pace with CPI rate rises which means low real yields but higher nominal yields persist. This is the essence of what caused stagflation. Paul Volcker acknowledges in his biography that he only saw this relationship clearly after he had been raising rates for a while and yet still CPI was accelerating. Until he got aggressive enough to get real interest rates to rise then the cycle could not be broken and stagflation persisted.
you got that right
those sentiments are made by conspiracy theorists who see the FBI in their cereal every morning , they know zip about this biz and prove it on every post they make
And there has been a large transfer of GDP from low to high income earners; the high income earners tend to invest a much higher percentage of their income, and this adds to the price pressure on assets. There has been indeed huge asset price inflation, supported and sustained by the Federal Reserve.
But the CPI is only rather indirectly linked to asset price inflation. The very redistribution from low to high income earners has reduce the buying power (wages) of the low income earners and has therefore moderated the CPI. Globalization has achieved this by adding a lot of foreign spare capacity in labor but not in capital to the USA trading system.
The reasons why the CPI is edging up now, despite heroic efforts to redefine it, are that a lot of that foreign spare capacity is used up, leading to high wage increases rates in offshore countries, and at the same time spare capacity in commodities is fully used up, as the increasing incomes of offshore workers allow them to buy a lot more stuff.
Not so sure about that. The main effect of inflation is that it benefits debtors vs. creditors, and people with high bargaining power vs. people with low bargaining power.
However I suspect that it would benefit real estate owners, and more than 80% of voters own real estate…
As to the merit of the level, 5-7% is a bit on the high side, but if stable it does not have lots of distortion because of monetary illusion.
The problems are:
* Getting there without creating expectations that inflation would overshoot that band.
* Once there, keep it stable. I suspect it is rather harder than at a lower level (inflation is an average…).
Anyhow the point is moot for several reasons:
*Inflation is not a clear concept; there are as many ”inflation” definitions as there are indices.
* Arguably ”inflation” as in cost-of-living for the bottom 80% of incomes is already way above 5%; a good, cynical analyst says that if the CPI were computed as it was 30 years ago it would be abound 8%. Even without that, some of the currently defined indices are close to 5% already.
* Asset price inflation has been running at way above 5-7% for years, and low-end wage inflation has been much lower than 2% for years.
* Even if it benefited 70-80% of the population, only 50% of the population votes, and less than 5% donates to politicians. Inflation, and inflation of what to the benefit of whom, is a political choice.
Indeed the opposite, because while comprehension of arbitrary text is very hard, comprehension of text in a limited domain is a lot easier. You are rather underestimating modern technology here, especially as this particular case is about comprehension of a very limited domain, and the enormous amount of money that ”black box” traders can throw at the problem.
Ah but FOMC releases are carefully worded to the last comma, using well established patterns and formulas. Look at this side-by-side, word-by-word comparison of two recent releases and it shall be clear how much of a special case this is:
Ahhhhhh, very plausible, bonuses can trump program trading anytime.
I think the consumer is almost dead broke. Most of the pople owe more money today than ever and this will reflect in the economy.
Bankruptcies have decreased because most of the people hurried to declare before the changes, but it will continue growing in the future. As long as we create low paying jobs here and move jobs overseas we will have a disaster waiting to happen. Greed is good, but it could return to haunt us.
My oint is we have the fist signs of an exhausted consumer even when interest rates are still historically low. What may happen if the FED has to conttinue raising rates?
Housing is gone from now on will only get worse, again, the consumer is the one factor that decides if housing moves up or down.