Monthly Archives: July 2013

The US official statisticians have today issued revised statistics for GDP dating all the way back to 1929. It may be alarming for investors and policy makers to hear that our understanding of economic “truth” needs to be amended for the last 84 years, but the changes have not in fact made much fundamental difference to the debates which matter for the economy today.

In particular, there has been very little change in the Fed’s likely view of the amount of slack which remains in the economy, though the latest version of growth in the last few quarters, including the publication of data for 2013 Q2 for the first time, may persuade them that economic momentum is a little firmer than previously believed.

The most dramatic-sounding news in today’s release is that the level of nominal GDP has been revised up by 3.4 per cent in 2013 Q4. This follows a number of methodological changes, the most important of which is to treat R&D spending as a positive contributor to investment and GDP, rather than as an input to the production process. But since this change impacts GDP levels for decades in the past, it does not make much difference to our understanding of the economy’s capacity to grow in the immediate future. It simply involves viewing the same objective truth through a different coloured lens. For most practical purposes, this change can be ignored.

There are, however, three areas where the revisions could be significant: Read more

As the financial markets begin to wind down for their summer lull, activity surrounding the Federal Reserve is hotting up. Next week, the FOMC will decide whether to give a clear signal that it will begin to taper its asset purchases at its subsequent meeting in September. Furthermore, President Obama has said that the appointment of a new Chairman (yes, he said “Chairman”, though he might have meant “Chair”) will come in the autumn, and controversially dropped broad hints that Lawrence Summers is being seriously considered for the job. Previously, it has been assumed that Janet Yellen was a shoo-in. Not any more.

What are the markets to make of this? Let us start with the easier one, which is the likely action of the FOMC on Wednesday. There is no compelling reason for a major change of language in this week’s statement. The economy has slowed in the second quarter, with many economists now predicting growth in real GDP of only around 0.5 per cent, but there have been signs of firmer activity in July, and the employment numbers due on Friday are expected to be firm. Read more

Macro investors remain very intrigued by Mark Carney‘s arrival at the Bank of England, which could have major implications for sterling and UK equities. The minutes of the new governor’s first MPC meeting showed that the committee voted 9-0 against any immediate easing in monetary policy, but the crunch will come with the publication of the Inflation Report on 7 August. Only then will we discover whether the incomer has persuaded his colleagues to try to shock UK economic expectations towards a new equilibrium.

There was little sign of this in the minutes, which hinted that the longstanding two thirds majority against further QE has remained intact. Whether that will remain the case once the new mandate has been agreed with the Treasury is the great unknown. Read more

In the past decade, the world’s central banks – first in the emerging and then in the developed world – have embarked on a Great Expansion in their balance sheets which is unprecedented in modern times. This blog sketches the anatomy of the Great Expansion and attempts to project what will happen as the US Federal Reserve tapers its asset purchases in the next 18 months.

The latest episode in the saga has, of course, involved the Fed’s attempt to distinguish between “tapering” and “tightening”, a distinction which the markets have been reluctant to recognise [1]. The US forward interest rate curve shows the first rate increase occurring very close to the time when the Fed is planning to stop buying assets in mid-2014. Whether it intended to do so or not, the Fed has de facto tightened US monetary policy conditions and will have to work hard to reverse this. Read more

The financial shock which has recently hit the emerging markets stemmed in part from a period of severe stress in the Chinese money markets, which has now been brought under control. But the challenges facing China are chronic, not acute. And since the country is much more than “first among equals” in the Brics, a prolonged slowdown in its economy would keep all emerging market assets under pressure for a long while.

Although China is probably not facing anything as dramatic as a “Lehman” moment, it will need to spend several years tackling the combination of excess credit and over-investment that has followed the Rmb4tn ($652bn) stimulus package of 2008. Hailed at the time as a masterstroke, the package has caused a hangover that has now been implicitly acknowledged by the new administration under reformist Premier Li KeqiangRead more

For many years, one of the most enduring mantras of central banking was along the lines of “we never pre-commit to future actions, because all of the information we have about the state of the economy is already contained in the actions we have just announced”. Now that has been completely abandoned. With the ECB and the BoE changes announced today, the central banks are shouting from the rooftops that “we are all forward guiders now”.

In the old days, if the central banks wanted to ease or tighten policy, they just adjusted the size of the change in interest rates at any given meeting, and allowed their actions to speak for themselves. The forward path for short rates was generally very sensitive to any given change in the policy rate, so they did not have to worry too much about the impact of their policy on the yield curve. Read more