Thursday

June 2, 2016

www.bloombergbriefs.com

 

Fed's Powell, Kaplan; ECB Rate Decision; OPEC MeetsBEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS

WHAT TO WATCH: At 8:35 a.m., Fed Governor gives the keynote Jerome Powelladdress on the role of regulation in today’s banking system at the Prudential Regulation Conference. The decides on rates at 7:45 a.m., followed by ECB President ECB Mario

’s press conference at 8:30 a.m. Dallas Fed President will speak Draghi Robert Kaplanon the economy at a moderated keynote discussion in Boston at 1 p.m.

ECONOMICS: OPEC, which contributes about 40 percent of the world’s oil supply, meets in Vienna. as measured by ADP are forecast to rise by 173,000 Private payrollsin May following a 156,000 gain the month before, 8:15 a.m. are Initial jobless claimsexpected to rise slightly to 270,000 in the week ended May 28, 8:30 a.m.

GOVERNMENT: U.K. Prime Minister discusses Britain and the David CameronEuropean Union, answering questions from journalists and the public in an hour-long Sky News television program on the June 23 referendum, 3 p.m.

MARKETS: Japan’s yen strengthened and gold advanced, crude oil hovered around $49 a barrel and the euro rose to a one-week high.

(All times local for New York.)    

Click to view a live version of this chart on the Bloomberg terminal.here

QUOTE OF THE DAY

"You can think of it as insecure stability. We believe there are diminishing returns to monetary-policy activism.They may still be positive, but they’re diminishing."

— Richard Clarida, Pimco’s global strategic

adviser, on a new global phase of rising risks

COMMENTARY IN THIS ISSUE

 

In its latest , the Fed Beige Bookcharacterized overall economic conditionsas modest, with growth advancing at a moderate pace: Richard Yamarone.

 

Inflation remains below the Fed's longer-run target of 2 percent, casting on doubtthe central bank's willingness to deliver: Narayana Kocherlakota.

Citigroup's William Lee discusses the lackof inflation in the U.S. and its wageimpact on the Federal Reserve'smonetary policy path: and Tom Keene Michael McKee

WHAT TO READ

“The benefits of policy coordination may now be more pronounced” in the current global economic environment, according to a by economists. post New York FedRead more on the terminal .here

EQUITIES DATA MONITOR

BEIGE BOOK  RICHARD YAMARONE, BLOOMBERG INTELLIGENCE ECONOMIST

Non-Farm Payroll Revisions Appear to Break Trend

Until the end of 2014, the Labor Department's revisions of its monthly non-farm payroll reports were pretty predictable. From April 2008 through the end of 2009, when the job market contracted, the revised figures were worse than the initial reading 90 percent of the time. After the job market started to recover, the numbers were rosier after revisions 75 percent of the time. This trend broke down last year, when revisions were split 50-50. This year, the economy has continued to add jobs, but the initial figure was revised down in January and up in March and February. Payroll data through December 2015 reflect both monthly survey-based revisions and more detailed annual benchmark revisions. Data this year only reflect the monthly revisions. All figures may be revised further.

— Mark Maestranzi, Bloomberg Application SpecialistThis story was written by Bloomberg LP employees involved with sales-support and was edited by the News Department. To suggest ideas or provide feedback, contact the editor for this story: Ben Baris at bbaris1@bloomberg.net or 212-617-2459. Source: Bloomberg

June 2, 2016 Bloomberg Brief Economics 2

BEIGE BOOK  RICHARD YAMARONE, BLOOMBERG INTELLIGENCE ECONOMIST

Fed Issues Mundane Assessment of U.S. EconomyThe latest Federal Reserve

assessment painted a bland picture of economic conditions. In-line with Bloomberg Intelligence Economics expectations, the Fed characterized overall economic conditions as modest, with growth advancing at a moderate pace.

On balance, consumer spending and related activity were advancing, as were housing and construction. Wage inflation was limited to specialized and entry-level workers, and retail prices were kept in check due to price discounting and competition from online retailers. Manufacturing, agriculture, retail sales, tourism and consumer spending were all reportedly mixed.

Several regions reported mixed or flat consumer spending. Foreign tourism — and associated spending — was soft in the New York region.

There wasn’t much to fret over regarding the general price level — only some commodity and raw material prices were reported outside of some construction-related increases, which were the result of higher worker costs getting passed along.

Labor markets were generally tighter since the last Beige Book, with reported difficulties hiring highly-skilled and entry-level workers. Minimum wage legislation increased wages for those at the lower end of the income spectrum. Only a few Districts reported increases, and most were concentrated in the highly-skilled and technical areas.

Conditions were reportedly mixed, but some of the more recently released data from the regional Fed manufacturing surveys suggests otherwise. All five of the

Consumer Spending/Retail

Inflation

Labor/Wages

Manufacturing

regional Fed headline manufacturing indexes are contracting: New York (minus

9.0), Philadelphia (minus 1.8), Kansas City (minus 5.0), Richmond (minus 1.0)

and Dallas (minus 20.8). Several regions reported reduced demand from the

energy sector, while many key areas found metal prices, particularly steel, to

be a sign of improving demand and conditions.

Essentially all commentary regarding construction and housing was favorable.

Residential activity increased in most districts, while multifamily construction was growing in several Districts; in San

Francisco multi-unit construction outpaced single family activity. Home sales were reportedly strong throughout the nation, including sales for entry-level

and lower-priced homes. Home priceswere reportedly higher across all regions. Nonresidential and commercial construction increased in several areas.

The assessment of the nation’s farm economy is also mixed as low commodity

Real Estate/Housing/ Construction

Agriculture

prices quelled ag income growth. Drought conditions in the Atlanta District and floods in part of the Richmond District dampened plantings. Prices received by farmers were lower than year-ago levels.

Activity in the energy sector reportedly contracted further since the April Beige Book, with the Kansas City Fed noting declining employment and several bankruptcy filings.

Loan demand continued to increase in most districts, but definitely not for those in the energy industry. C&I lending was favorable in some districts, and credit quality was reportedly improved. Overall lending was higher, as were mortgage loans.

The unsurprising elements in the most recent Fed Beige Book will do little to alter the current expectations of a June/July rate hike. Conditions are gradually improving, with scant signs of any profound weakness, which is exactly what the Fed will need to justify a slight increase in its overnight borrowing rate.

Energy

Banking/Financial

Rate Hike Odds Have Vacillated Since April Minutes Boost

June 2, 2016 Bloomberg Brief Economics 3

 

COMMENTARY   NARAYANA KOCHERLAKOTA, BLOOMBERG VIEW COLUMNIST

June 2, 2016 Bloomberg Brief Economics 4

COMMENTARY   NARAYANA KOCHERLAKOTA, BLOOMBERG VIEW COLUMNIST

The Fed's Credibility Is Slipping AwayBack in January 2012, the Federal

Reserve promised to keep its preferred measure of inflation close to 2 percent over the longer run. More than three years later, that promise remains unfulfilled, casting doubt on the central bank's willingness to deliver.

The latest reading for the measure, known as the price index for personal consumption expenditures, showed annual inflation running at only 1.1 percent in April. Excluding volatile food and energy prices, the inflation rate was 1.6 percent. The first chart opposite shows how both have fallen well short of 2 percent for more than three years.

Some would say that central banks are out of ammunition, that the Fed has thrown everything it has at the problem of sub-target inflation and failed to make progress. Actually, though, the Fed has been deliberately tightening monetary policy over the past three years. Just last week, Chair Janet Yellen made a point of saying that the Fed intends to keep raising interest rates in the coming months.

To understand the Fed's motivations, consider this: Would it have started pulling back on stimulus in May 2013 if its short-term interest-rate target had been at 5 percent instead of near zero, and if it hadn’t been holding trillions of dollars in bonds? I strongly suspect that the Fed would instead have added stimulus by lowering interest rates. If so, then the Fed's current course is driven not by state of the economy, but by a desire to get interest rates and its balance sheet back to what is considered "normal."

Savers, bankers and many politicians agree with this objective. They want "normal" — meaning higher — interest rates. The Fed, however, promised to focus on actual economic outcomes such as inflation, not on those voices. It can’t break that promise without undermining people’s faith in its willingness to keep promises in the future. This erosion of faith is visible in Treasury bond prices, which suggest that traders have been

lowering their expectations of long-term inflation (specifically, annualized inflation for the five-year period starting five years from now):

Some say that investors are just requiring less compensation for bearing inflation risk, rather than expressing expectations of low inflation. Even that, though, should be a troubling signal for the Fed: It suggests that investors doubt the central bank will be responsive in bad times (when growth is low and unemployment is high), allowing inflation to fall so low that regular Treasury bonds

will perform a lot better than their inflation-protected counterparts.

Investors' doubts aren't surprising, given the Fed’s focus on “normalizing” interest rates rather than on hitting its inflation target. Such concerns will create an extra drag on the economy if and when bad times do come. In other words, the Fed’s willingness to renege on its promises seems likely to make the next recession worse than it otherwise would be.

This column does not necessarily reflect the

opinion of the editorial board or Bloomberg LP

and its owners.

DATA & EVENTS

Not Enough Inflation

Waning Expectations

June 2, 2016 Bloomberg Brief Economics 5

DATA & EVENTS

TIME COUNTRY EVENT SURVEY PRIOR

7:30 U.S. Challenger Job Cuts YoY — 5.80%

7:45 Euro Area ECB Main Refinancing Rate 0.00% 0.00%

7:45 Euro Area ECB Deposit Facility Rate -0.40% -0.40%

7:45 Euro Area ECB Marginal Lending Facility 0.25% 0.25%

7:45 Euro Area ECB Asset Purchase Target EU80b EU80b

8:00 Brazil Industrial Production MoM -0.90% 1.40%

8:00 Brazil Industrial Production YoY -8.60% -11.40%

8:15 U.S. ADP Employment Change 173k 156k

8:30 U.S. Initial Jobless Claims 270k 268k

8:30 U.S. Continuing Claims 2150k 2163k

9:45 U.S. Bloomberg Consumer Comfort — 42

9:45 U.S. ISM New York — 57Source: Bloomberg. Surveys updated at 5:30 a.m. New York time.

 

Read the full story with a live version of this chart on the Bloomberg terminal .here

CALENDAR

Click on the to see the full range of economists' forecasts on the terminal.   highlighted releases

OVERNIGHT

A Bank of Japan board member expressed pessimism about the economy and the central bank’s strategy, saying in a speech that the BOJ won’t be able to reach its 2 percent inflation target as forecast and negative rates won’t work to boost investment. “I believe that it is desirable to aim to achieve the price stability target of 2 percent as a medium-to long-term goal and I expect that the road toward this goal will be long,”

, one of nine BOJ board Takehiro Satomembers, said in a speech in Kushiro, Hokkaido today. Sato dissented on the January decision to adopt a negative-rate policy and also in October 2014, when the BOJ expanded stimulus.

India’s government stayed mum on the fate of central bank Governor Raghuram

as speculation over his future Rajan mounts. The rupee reversed gains, bonds declined, and foreign investors sold the most Indian debt in two weeks yesterday after a local-language newspaper reported that Rajan doesn’t want an extension of his term even though Prime Minister Narendra Modi wants him to stay on. The Reserve Bank of India, the Prime Minister’s Office and the Finance Ministry all had no comment on the report, which was written by a long-time Delhi journalist for one of the country’s largest newspapers.

China’s wage growth accelerated last year, defying the slowest economic expansion in a quarter century, as the government pushed ahead with its strategy of boosting incomes and consumption to cut reliance on fading heavy industries. The average annual urban wage increased 10.1 percent last year to 62,029 yuan ($9,410), according to the to National Bureau of Statistics,post the first acceleration since 2011 and exceed the 9.5 percent pace of growth in 2014. The number doesn’t cover the country’s 190 million who are self-employed or workers at some private enterprises.

Asia

Brazil’s Economy Shrinks Less Than Forecast in 1Q

Latin America’s largest economy shrank less than all but two economists expected in the first quarter, indicating Brazil may be close to hitting bottom after a confidence crisis scuttled demand and plunged the nation into its worst recession in decades. Brazil’s gross domestic product contracted 0.3 percent in the three months ended in March, after a revised 1.3 percent drop the previous quarter, the national statistics institute said in Rio de Janeiro. The figure was better than the median estimate for a 0.8 percent decline from 45 economists surveyed by Bloomberg. Business and consumer confidence that plunged in recent years stabilized at historic lows in the first quarter of this year. Sentiment has since recorded increases after President Dilma Rousseff was suspended pending her impeachment trial. 

— David Biller, Bloomberg News

June 2, 2016 Bloomberg Brief Economics 6

   

 

MARKET INDICATORS

June 2, 2016 Bloomberg Brief Economics 7

MARKET INDICATORS

SURVEILLANCE WITH KEENE & MCKEE

Source: Bloomberg. Updated 5:35 a.m. New York time.

June 2, 2016 Bloomberg Brief Economics 8

Bloomberg Brief: Economics

SURVEILLANCE WITH KEENE & MCKEE

William Lee, head of North American Economics

for Citigroup, speaks with Bloomberg's Tom

Keene and Michael McKee about the lack of

wage inflation in the U.S. and its impact on the

Federal Reserve's monetary policy path. Listen to

audio of the full interview on the terminal .here

Q: Do we have wage growth?A: The only place I've found wage acceleration, or growth in the pace of increasing wages, was in the near minimum wage $15 an hour type jobs. Outside of that category maybe you could find something in the specialized construction skills like plumbers, framers, and roofers. But the rest of the economy is really having very, very little wage inflation, and certainly no acceleration of wages, which is what the Fed is really looking for because we don't want relative wage changes to move monetary policy because relative wage changes means we'd have to shuffle people from one place to another because there are shortages there. What the Fed is looking for is a sustained cost increase that leads to companies pushing up prices. And that we haven't seen.

Q: Does that start to change? The Fed is of the view that we are moving in that direction, we're going to see more wage gains for a broader selection of people.A: And that's key. The Fed is not of the view at the Fed is split. The hawks are

saying we are seeing signs that the tightness in the labor market will lead to that at some point really soon. The doves are saying show me, show me that we actually have the wage increases or price increases before we start to move because so far we've been bushwacked all along the way.

Q: What you just said is neither of them can see it, right?A: Exactly. And the key is the doves have lost faith in the Phillips curve. The Phillips curve has been declared dead since I was in graduate school. But now, the nature of the deadness of the Phillips curve is the slope is so shallow. In other words, it takes a lot of change in slack to generate a little bit of wage inflation or a little bit of price inflation. And there is the mystery. Where is the slack? How much slack is there? And Janet Yellen says there's a lot of slack because we don't see the wage increase. We don't even see signs of it across the board. We only see pockets of it, which is where shortages are. And that's the debate within the FOMC right now.

Q: What's your view of what they're going to do in the next couple of months? Nothing has happened, but the market is now pricing out the Fed.A: No kidding. And because the markets know they could push the Fed around, the big event, of course, is going to be this Friday. What will the employment numbers be? A number like 140,000,

 

which is what we're calling for, is going to cause a lot of people to stir. Now, remember, there are 35,000 workers on strike, so we have to add that back in. So our call for 140,000 is really a 175,000 call. And that to me is pretty okay. It's where we're business as usual, but that's not enough to give the hawks the smokinggun. And it's certainly not enough to say we don't have enough and so we're goingto have more debate at the next meeting.

Q: If we don't know where we're going,if we really don't observe wage growth,what can be the proactive policy of a Fed, or do they just wait and wait?A: That is a critical mistake the Fed is making because what we need is leadership. We need a Volcker that says "I know that keeping rates at zero is the wrong thing for an economy that is coasting above potential, so I guess I'm normalizing rates." Now, to take that kind of leadership requires a lot of dissent within the Committee and putting up with a lot of dissent until you start to see stuff go your way or clear evidence that it's not going your way. What we don't have at the Fed right now is that kind of strong leadership. Instead we have consensus leadership. And consensus leadership means you run a risk. And in fact, you not only run a risk, it's being dictated by China, the markets, and everything else that shouldn't be pushing monetary policy.

This interview has been edited and condensed.

 

 

 

 

 

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