Forecasting things like (not limited to) GDP growth, unemployment and inflation is tricky business. Very few get it consistently right (especially policy makers). And whilst macro forecasting is generally a fool’s errand – there are things we can observe to improve our probabilities of success (or at least reduce our risk). Consider inflation… whilst not perfect – there are a set of reasonably strong correlations which exist over extended periods. And it’s these types of correlations we can use to our advantage.As I will demonstrate – over the past 5 decades (after the US dollar removed its peg to gold in 1971) – inflation levels have largely correlated to what we see with commodity prices.
Are Bond Yields and Oil Cracking?
Today was an important day in the bond market. The US Treasury auctioned $40B of 10-Year notes. Coming into the auction – I was worried there would not be a decent bid. For example, if we faced further buyer’s strike – these yields were likely to resume their path higher. However, we saw the opposite. The 10-year yield drifted lower. So what does this tell us about future economic growth? Are investors worried? In addition, the price of WTI Crude is also sharply lower… back below US$80/bbl on concerns of weakening demand. Are equities slow to connect the dots – as they are headed in the opposite direction.
Fed Trying to Thread a Narrow Needle
Tomorrow we will hear from the Fed. It’s very unlikely the world’s most influential central bank will raise rates this month. However, it’s my view Jay Powell is not about to drop any dovish hints. Remember: just because they may be closer to the end of rate hikes – that doesn’t mean they are about to cut. Rate cuts are dovish. However, rates staying higher for longer is hawkish. And as inflation comes down, this means real rates are rising (with the Fed on hold). From mine, we hear a hawkish Fed tomorrow. And the market has not priced that in.
Have Jobs Slowed Enough for the Fed to Pause?
Last week offered plenty of macro data for traders (and the Fed) to consider. Core PCE remains stubbornly higher at 4.2% YoY – moving higher month on month. However, there is signs of a slowing labor force – with job additions missing expectations. The question is whether the jobs market is now slowing enough for the Fed to end rate hikes? For example, total unemployment is very strong at 3.8% and there are almost 9M open jobs. That’s not a weak labor market…
For a full list of posts from 2017…