Yellen Says Rate Hikes Soon As Need More Ammo "In Case Of Shock" - Live Feed Dove, hawk, or nothing at all? That's the question as Fed chief Janet Yellen speaks after she receives the Radcliffe Medal from Harvard University's Radcliffe Institute for Advanced Study. There are no prepared remarks, but a scheduled 30-minute Q&A session with Greg Mankiw could give insight into Yellen's thoughts on two key issues: whether she now has more faith that recent evidence of rising inflation is convincing, and the degree to which she feels overseas risks have receded. Most (including the market) expect Yellen to stick to the hawkish meme ascribed by the latest FOMC statement and numerous Fed speakers. Some, including DoubleLine's Jeff Gundlach expect a dovish Yellen to re-appear. Still others believe she will say nothing at all - instead waiting for a more formal speech on June 6 to drop her tape bombs. As SocGen notes, Fed Chair Yellen will be honoured at Harvard, with a conversation on her achievements at the ceremony. However, little emphasis on the monetary policy outlook is expected at this event. The appearance to look forward to will be the Chair's speech in Philadelphia on June 6, the Monday following the May employment report and a day before entering the blackout period for the upcoming FOMC meeting. Live Feed (The event started at 1030ET with Yellen is due to speak at 1315ET.. though it appears they are running late)... *BERNANKE SAYS WE'RE LUCKY TO HAVE YELLEN LEADING THE FED Headlines: *YELLEN: AMERICA OWES BERNANKE ENORMOUS DEBT OF GRATITUDE *YELLEN: CAPITALISM IS BEST ECONOMIC SYSTEM BUT CAN BREAK DOWN *YELLEN: WE WANT TO DO EVERYTHING TO HEAD OFF A FINANCIAL CRISIS And this happened... *YELLEN: FED'S HANDLING OF FINANCIAL CRISIS WAS MAGNIFICENT *YELLEN: QE, FORWARD GUIDANCE HAVE HELPED ECONOMY RECOVER *YELLEN: WE DIDN'T SEE HOW HOUSING BUBBLE CREATED SYSTEMIC RISK *YELLEN: WE ARE TRYING NOW TO DO BETTER JOB OF SEEING RISKS *YELLEN: WE ARE FOCUSED ON SYSTEMIC RISK, FINANCIAL STABILITY *YELLEN: WE'RE BRINGING NEW MINDSET TO HOW WE OVERSEE BIG FIRMS *YELLEN: QUANTITY, QUALITY OF BANK CAPITAL HAS IMPROVED And then she said... *YELLEN: ECONOMY IS CONTINUING TO IMPROVE *YELLEN: WITH GAINS, HIKE IN COMING MONTHS MAY BE APPROPRIATE *YELLEN: DON'T HAVE TYPICAL SCOPE TO CUT RATES IN CASE OF SHOCK And this happened... And so admitting that The Fed needs to raise rates to be able to cut rates has sent stocks lower... click image for link to Harvard live feed - no embed available As we noted previously, With verious Fed presidents having whipping up the market into a hawkish frenzy in the past two weeks, leading to a dramatic repricing in summer rate hike odds with expectations for a July rate hike now over 50%, many can be "disappointed" by Yellen's speech today, at least according to Jeff Gundlach who said Yellen appears to be more cautious on raising interest ratesand he expects her comments to be dovish again on Friday, when she is scheduled to speak at an event in Harvard-Radcliffe. Specifically, during a DoubleLine event in Bevely Hills, he said said the Fed is "a bit stuck" given that it will not have ammunition available for the next recession unless it raises rates, despite continued lackluster economic growth. He noted that some developed countries, including Australia and Sweden, tried to raise interest rates in 2010, but ended up having to reverse course. "The Fed seems hell bent on raising interest rates until something breaks, which is what happened in these countries," he said.
Capital Goods Shipments Collapse Most Since 2009 As Durable Goods Orders Bounce In July (Thanks To Revisions) Following June's disappointing relapse in Durable Goods Orders (which was revised lower), July's preliminary headline rose 4.4% (ahead of 3.4% exp) - the biggest MoM gain since Oct 2015. However, due to the revisions durable goods orders fell 6.4% year-over-year - the second big annual drop in a row. Under the hood most of the headline data beat expectations MoM as follows: New durable goods new orders rose 4.4%, vs Exp. 3.3% New orders ex-trans. rose 1.5% vs Exp. 0.5%, Non-defense capital goods orders ex-aircraft rose 1.6%, Exp. 0.3% ... but we note that Capital Goods Shipments non-defense Ex-Aircraft fell 0.4% MoM... which led to a 9.5% collapse in year-over-year core capex unadjusted orders. However, when applying the now controversial seasonal adjustments, which on a Y/Y basis should not impact the number substantially, we get the following modestly better picture.
Fed Whisperer Hilsenrath Kills November Rate Hike Hopes, Plays Down December Too Despite the imploring of Fed officials that November is a live meeting... just days ahead of the election - it's not (and never really was). As WSJ's fed whisperer Jon Hilsenrath confirms, today's jobs data ensures no fed rate hike in November (with December still the most likely scenario for Janet and her friends). However, Hilsenrath warns, even December is not a sure thing. The Dollar is diving... And this is why... The subdued September jobs report ensures the Federal Reserve won’t be raising short-term interest rates at its November policy meeting, a week before the U.S. presidential election, and creates a new thread of uncertainty about its action in mid-December. The report—marked by a slight uptick in the unemployment rate to 5%—largely fit the narrative Fed ChairwomanJanet Yellen laid out for the labor market after the central bank’s September policy meeting. People are rejoining the labor force in search of work. Many of them are finding jobs, but not all. The number of employed people, as measured by the Labor Department’s survey of households, rose a robust 354,000 in September from the month before, while the number of unemployed rose 90,000. (A separate survey of business establishments showed employers added a modest 156,000 jobs last month.) The rise in the number of unemployed created by the return of individuals searching for jobs is putting some upward pressure on the unemployment rate. It ticked up from 4.9% in August and has effectively stopped falling this year. Ms. Yellen sees the return of workers to the job search process as a healthy sign. The labor-force participation rate had been falling for much of the expansion as discouraged individuals and aging Americans stopped searching for jobs. That has reversed. The labor-force participation rate was up a half percentage point in September from a year earlier to 62.9%, an apparent sign of optimism among prospective workers that jobs worth seeking are out there. The growing pool of labor is also a sign the job market isn’t yet near overheating. This underscores Ms. Yellen’s plan to move slowly toward raising short-term interest rates. “The economy has a little more room to run than might have been previously thought,” she said at her September press conference. “That’s good news.” The Fed next meets Nov. 1-2, before the Nov. 8 presidential election. Given this “room to run,” confirmed by the latest jobs data, a rate increase at that November meeting is almost certainly off the table. A December rate increase is still the most likely scenario for the Fed, but it isn’t a sure thing. If the jobless rate keeps rising, Fed officials might decide to forestall rate increases until next year. The central bank will have two more jobs reports to observe before it has to make a decision at its mid-December meeting. So there will be plenty of time for deciding. And while Nov odds are tumbling... December odds remain stable for now...
Does Likely 2nd Fed Rate Hike Mean Return To Normal? The CME Group FedWatch Tool, based on the 30-Day Fed Fund futures prices, is now projecting a 95% chance of the second rate increase of this tightening cycle as of today. It will be the first interest rate move by the Fed in just about a year. The first rate hike of this cycle last December was the first increase in over 9 years. But the current FOMC’s laborious and deliberate style begs the question: Is his the new normal of highly micro-managed central banking or has the global economy become so large that slow growth is an unavoidable byproduct? I suspect it is a combination of fallout of the Great Recession, productivity gains from the information revolution dampening growth and inflation and a Fed that is petrified to make a wrong move that has brought us to this economic crossroads. We opined on this topic last year that the end of ZIRP (zero interest rate policy) and its rather long life will likely solidify this data-dependent, passive-aggressive Fed policy philosophy. Perhaps it’s not really the Fed’s or other central banks faults? It could be the lack of progressive fiscal policy and dysfunctional federal governing around the world that has kept the lid on private sector growth. Or perhaps the global economy just grew too much too fast and this is a massive consolidation phase and the Fed is just keeping the pilot light on until we can kick it up a notch. Whatever the case, political shake ups are happening around the world and Chair Yellen’s days are numbered with the new Trump administration unlikely to re-appoint her for another term in 2018. Despite what the Fed says about low inflation, we think real inflation that hits us all in the pocketbook and bank account is much higher, economic growth is gaining traction, and the stock market remains rather buoyant. Official overall CPI inflation numbers show tepid inflation. However, official government data of the things that we all spend most of our money on: medical expenses, housing, food and energy is up 50-100% in the past 15 years. Not seasonally adjusted, Housing is up 48.3%, Medical Care is up 83.6%, Medical Services up 92%, Food up 48.6% and Energy is still up 67.2% (it was over 100% in 2014) since 2000. If overall CPI inflation and GDP begin to perk up next year, Yellen and friends may feel compelled to move more rapidly to preserve their legacy and not be the ones that were behind the curve, missed the cues and let inflation run rampant again damaging the economy and the job market even worse. In the updated table below, past interest rate tightening by the Fed has put pressure on the market. Declines 1-month and 3-months after the first increase were relatively mild. As we said last year, this cycle has the potential to deviate from history and surprise to the upside. It has so far. Prior tightening cycles had additional hikes in short order and rates increased rapidly to substantially higher levels. If the pace and level of rate hikes is forced to accelerate, lower market prices would likely follow unless Mr. Trump and the new Republican Congress can work together to put the private sector back in the lead driving the economy like it has during boom times throughout history. I am rooting for them.
Trump Effect: ADP Employment Surges To Highest Since 2014 As Manufacturing Hiring Spree Continues After last month's private payrolls scorcher, when ADP reported that a whopping 298K jobs were added, the biggest increase in 6 years on a record surge in good producing jobs, this morning ago the momentum continued when ADP reported that in March the US generated 263,000 jobs, smashing expectations of a 185,000 gain, and after a downward revision to the February number from 298K to 245K, this was the highest print since December 2014. Goods producers added 82,000 while construction jobs swelled by 49,000 and manufacturing added 30,000. Broken down by firm size: Small firms (1-49) added 118k jobs in March Medium firms (50-499) added 100k jobs in March Firms with over 500 employees added 45k jobs The details: “The U.S. labor market finished the first quarter on a strong note,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “Consumer dependent industries including healthcare, leisure and hospitality, and trade had strong growth during the month.” Mark Zandi, chief economist of Moody’s Analytics said, “Job growth is off to a strong start in 2017. The gains are broad based but most notable in the goods producing side of the economy including construction, manufacturing and mining. Judging by the market's reaction the reflation trade may be making a comeback, with the dollar rising ahead of Friday's payrolls release which according to ADP may be another blockbuster report. Some more visual details: Change in Nonfarm Private Employment Change in Total Nonfarm Private Employment Change in Total Nonfarm Private Employment by Company Size
