Daily Archives: December 15, 2010

Robin Harding

Tim Duy says that the the Fed is behind the turning tide of economic data and “remains locked into a forecast that anticipates output growth hovering near potential”.

“In short: In general, the data flow of the last eight weeks is clearly encouraging. To be sure, not every release, like the employment report, is perfect. But enough are perfect that forecasters are quickly reversing the downgrades made just a few months ago during the mid-year slowdown. Will the data suddenly turn on us again? Always possible, always something to watch for, but I don’t think that should be the expected path. Right now, the data suggest the US economy might start firing on more than just a few of its eight cylinders. A little optimism is justified. Don’t expect the Fed to reverse course soon – they have yet to embrace the possibility that the economy is set to grow at something above trend. But a data flow like this cannot be ignored forever. Look for more glimmers of hope creeping into Fedspeak in the weeks ahead.”

I agree with most of Tim’s analysis but I don’t agree that the Fed has an overly negative forecast. The Fed’s forecasts have, if anything, been overly optimistic – but the data have moved in their direction and private forecasters are moving up to meet them. Put it another way: the tide of the data may have turned but the FOMC is quite a long way up the beach. 

Robin Harding

The Cleveland Fed has updated its inflation expectations model after the release of the November CPI. It shows a tidy rise across all time horizons.

At the ten year horizon, inflation expectations rose to 1.64 per cent from 1.51 per cent, an improvement but still well below the 2 per cent that prevailed earlier this year when nominal yields were last at this level. The same holds true for 10yr TIPS spreads: 

Say what you will of the dizzying rise of South Africa’s rand, it has certainly helped to restrain inflation by keeping a lid on import prices. Consumer price inflation – which was over 10 per cent in late 2008 – has been running towards the bottom of the Reserve Bank’s target range, 3 to 6 per cent.

But data released this week suggest that inflationary pressures may be starting to build again – and that they could return with a vengeance when the currency weakens. At 6.2 per cent, November’s producer price inflation figure, released on Wednesday, surprised on the upside. So did the previous day’s consumer price inflation number of 3.6 per cent. 

Ralph Atkins

The European Central Bank has a new target! Not only does it want to control inflation, it wants to save the environment, too. It has just published its first “environmental statement”, signed off by Vítor Constâncio, vice-president, which reveals a goal of reducing its total carbon footprint by 15 per cent in 2011 compared with 2009.

The ECB is hardly a smoke-belching industrial company (please, no jokes about hot air production). But it does operate three high-rise buildings in Frankfurt and has more than 1,500 staff, quite a few of whom travel around the world regularly. The euro’s monetary guardian also produces a lot of weighty, paper-consuming publications.

So how is the ECB doing when it comes to greening its operations? 

Ralph Atkins

What has been the root cause of the eurozone’s difficulties? Athanasios Orphanides, Cyprus’s central bank governor, says European solidarity and the level of trust between the continent’s governments have been called into question. The correct response, he has just argued in a lecture at Frankfurt’s House of Finance, was to design systems of mutual support – or insurance policies – that would allow Europe’s monetary union to weather future economic and financial storms.

To some, especially in Germany, that might sound like offering rewards for poor fiscal behaviour and turning the eurozone into a “transfer” union in which taxpayers’ money flows from fiscally prudent countries to the profligate. But Mr Orphanides took the example of motor insurance. “Would banning all insurance be a sensible way to ensure individual responsibility?” he asked. 

Chris Giles

In today’s forecasts for the  2011 UK housing market, the Council of Mortgage Lenders worries that banks and building societies will not be able to lend much next year, partly because they will have to refinance large amounts of wholesale lending and pay back £130bn to the Bank of England in respect of the 2008 Special Liquidity Scheme which will expire in January 2012.

It says prospects have improved, but still implies that borrowers will be the main losers of the Bank’s demands to be repaid:

“The big issue for lenders next year will be to re-finance existing wholesale borrowing and begin to pay back the very large amounts of funding advanced through official support schemes. However, the prospects of them being able to do this without adversely affecting the market have improved. The amount due to be repaid under the special liquidity scheme by January 2012 has declined from about £180 billion to around £130 billion currently.

 

Chris Giles

Unemployment has risen for the first time in six months, the Office for National Statistics said this morning, calculating that the rate rose by 0.1 percentage points to 7.9 per cent between August and October compared with the May to July quarter. This rise translates to a 33,000 increase in unemployment and an almost identical decrease in employment.

The trouble with the numbers, however, is that they are seriously distorted by an apparently rogue survey month in July which showed very strong employment levels and low unemployment. A month ago, July was part of the latest three months and now it is in the base for the comparison. 

“The Swedish economy is growing at a record rate.” This is the opening sentence of the Riksbank’s announcement that it is continuing its rate raising schedule by hiking rates 25bp. The move was widely expected. Two MPC members entered reservations about the rise and rate path, as with the last rate rise a month ago.

“Underlying inflationary pressures are still low in Sweden,” says the Bank, “but are expected to increase as economic activity strengthens.” Inflation will be pushed temporarily higher by the cost of electricity and commodities but underlying pressures will be low as a result of low labour costs.