When will real wages finally rise?

One of the main features of the credit crunch era has been weak and at times negative real wage growth. This was hardly a surprise when the employment situation deteriorated but many countries have seen strong employment gains over the past few years and in some employment is now at a record high. Yet wage growth has been much lower than would have been expected in the past. As so often the leader of the pack in a race nobody wants to win has been Japan although there has been claim after claim that this is about to turn around as this from Bloomberg in May indicates.

It’s not making headlines yet, but wages in Japan are rising the fastest in decades, in a shift that’s poised to divide the nation’s companies — and their stocks — into winners and losers, according to Morgan Stanley.

No doubt this was based on the very strong quantity numbers for the Japanese economy which if we move forwards in time to now show an unemployment rate of 2.8% and a jobs per applicant ratio summarised below by Japan Macro Advisers.

Japan’s job offers to applicant ratio rose to 1.51 in June from 1.49 in May. The ratio is the highest in the last 43 years since 1974. While the number of job offers continue to rise along with the expansion in the economy, the number of job applicants are falling. With the shrinking population, Japan simply does not have a resource to meet the demand for labor.

I can almost feel the wind of the Ivory Towers rushing past to predict a rise in wages in such a situation. They will be encouraged by this from the Nikkei Asian Review on Friday.

The labor shortage created by stronger economic growth has prompted many companies to raise wages. Tokyo Electron, a semiconductor production equipment manufacturer, is a good example.

Tokyo Electron introduced a new personnel system on July 1 in which salaries reflect the roles and responsibilities of employees. Under the new system salaries will rise, primarily for junior and midlevel employees. The change will raise the total wages paid to the company’s 7,000 employees in Japan by about 2 billion yen ($18.1 million) annually.

This is something we see regularly where the media presents a company that is toeing the official line and raising wages. But I note that it is doing particularly well and expecting record profits so is unlikely to be typical. By contrast I note that there is another way of dealing with a labour shortage.

In April, Lumine, a shopping center operator, responded to an employee shortage among its tenants by closing 30 minutes earlier at 12 locations, or 80% of its stores. The risk was that shorter operating hours would cut revenue, but Lumine sales held steady in the April-June quarter.

Awkward that in many ways as for example productivity has just been raised with total wages cut.

What about the official data?

I will let The Japan Times take up the story.

Japan’s June real wages decreased 0.8 percent from a year before in the first fall in three months, labor ministry data showed Friday.
Nominal wages including bonuses fell 0.4 percent to ¥429,686 ($3,880), the first drop in 13 months, the Health, Labor and Welfare Ministry said in a preliminary report.

Up is the new down one more time. Also the official story that bonuses are leading growth due to a strong economy met this.

due mainly to a 1.5 percent decrease in bonuses and other special payments.

There is one quirk however which is that part-time wages are doing much better and rising at an annual rate of 3.1%. The catch is that you would not leave a regular job in Japan because those wages are lower and to some extent are catching up. How very credit crunch that to get wage growth you have to take a pay cut! Indeed to get work people had to take pay cuts. From the Nikkei Asian Review.

Japanese companies hired more relatively low paid nonregular employees during the prolonged period of deflation.

Now we find ourselves reviewing two apparently contradictory pieces of data.

 The number of workers in Japan increased by 1.85 million between 2012 and 2016……….Japan’s wage bill was 7% lower in May than at the end of 1997 — before deflation took hold.


You might not think that there would be issues here as of course the commodity price boom driven by Chinese demand has led to a boon for what we sometimes call the South China Territories. Indeed this from @YuanTalks will have looked good from Perth this morning.

The rally in industrial continues in . rebar limit up, surging over 6%

Yet according to the Sydney Morning Herald this is the state of play for wages.

But since 2012 and 2013, Australian workers have felt stuck in a holding pattern of slow wages growth. Wages for the whole economy increased by 1.9 per cent in the year to March just in line with inflation.

There are familiar issues on the over side of the balance sheet.

Families are also wrestling with rising electricity prices, skyrocketing property prices and high demand for accommodation has also forced up rents.

Even the professional sector has been hit.

When Sahar Khalili started work as a casual pharmacist eight years ago, she was paid $35 an hour. Over the years that has fallen to as low as $30 while her rent has more than doubled.

Actually there is something rather disturbing if we drill into the detail as productivity has done quite well in Australia ( presumably aided by the commodity boom) but wages have not followed it leading to this.

The typical Australian family takes home less today than it did in 2009, according to the latest Household Income and Labour Dynamics survey released this week.

These surveys are invariably a couple of years behind where we are but there are questions to say the least. Oh and the shrinkflation saga has not escaped what might be called a stereotypically Australian perspective.

“My beers are getting smaller,” he says.


Friday brought us the labour market or non farm payroll numbers. In it we saw that wage growth ( average hourly earnings) was at an annual rate of 2.5% which is getting to be a familiar number. There is a little real wage growth but not much which is provoking ever more food for thought as employment rises and unemployment falls. Indeed more and more are concentrating on developments like this reported by Forbes.

Starting pay at the Amazon warehouse, carved out of a large lot with a new road called Innovation Way designed for Amazon-bound trucks, is at $12.75, no degree required. For inventory managers with warehousing experience, the pay is $14.70 an hour and requires a bachelor’s degree.

The new warehouse offers 30 hour a week jobs because they slip under the state legislation on provision of benefits. In some parts of America they would qualify under the food stamp programme. No wonder that as of May some 41.5 million still qualified.

Yet the Wall Street Journal describes it thus.

a vastly improved labor market


This is a situation we have looked at many times and there is much that is familiar. Firstly the Ivory Towers have invented their own paradise where wages rise due to a falling output gap and when reality fails to match that they simply project it forwards in time. The media tends to repeat that. But if we consider the dangers of us turning Japanese we see that wages there are lower than 20 years ago in spite of very low unemployment levels. Over the past 4 years or so this has been always just about to turn around as Abenomics impacts.

My fear is that unless something changes fundamentally ( cold fusion, far superior battery technology etc..) real wages may flat line for some time yet. All the monetary easing in the world has had no impact here.




Fears of deflation turn to fears of inflation

The world inflation picture has changed in 2016. It is hard to note that without a wry smile as there was no shortage of so-called expert opinion that when inflation headed towards zero and in some cases to below it that sang along with REM.

It’s the end of the world as we know it.
It’s the end of the world as we know it.

If we think back all sorts of downwards spirals were predicted from the lower inflation but in fact as I pointed out there were benefits such as improvements in real wages leading me to sing along with the next line of the song.

It’s the end of the world as we know it, and I feel fine.

Many workers and consumers will have been singing along with that too. Also the truth was that we were mostly seeing a relative price shift as commodity prices and in particular the oil price fell and reduced overall inflation. This was something which the Ivory Towers had told us could not happen as we apparently needed some inflation for relative price shifts to happen! Another fail for them. So let us take a look at where we are now.

The inflation base provided by services

There always was some inflation beneath the surface which was swamped by the effects of the oil and commodity price fall. Mostly it was to be found in the service sector. For example if we go back to September 2015 in the UK we see that whilst headline official CPI inflation dipped to -0.1% this was also true.

The CPI all services index annual rate is 2.5%, up from 2.3% last month.

Twelves months on in our latest reading it is in fact pretty more ignoring what has gone on elsewhere.

The CPI all services index annual rate is 2.6%, down from 2.8% last month.

A not dissimilar pattern has been found in the Euro area where is we go back to the preliminary forecast for March inflation an overall rise from -0.2% to -0.1% was accompanied by this.

services is expected to have the highest annual rate in March (1.3%, compared with 0.9% in February),

In essence services inflation has been running at an annual rate of around 1% in the euro area for a while.

If we move to the United States then last September this was reported.

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today

However services inflation was running at an annual rate of 2.3%. A year later when headline inflation has risen services inflation is 3% and there is now focus on it although mostly because of this issue.

The index for prescription drugs increased 0.8 percent (on the month).

So as you can see in the UK and US in particular services inflation never went away and if we move from consumer measures to the wider economy that sector is of course the largest. The Euro area had the same experience but of a milder level.

Asset Prices

The whole deflation mythology rather ignored the fact that in more than a few places asset prices were rising. In the UK that was particularly noticeable in the rise of house prices which have become increasingly unaffordable whilst the official CPI measure ignores owner-occupied inflation. But there have also been concerns about house price rises in some of Europe, China,Canada, Australia and the US.

What about the oil price?

This was the main game changer for inflation and recently we have seen it rise. Indeed from the lows of below US $30 in January we have seen the price of Brent Crude Oil rise to US $51.73 as I type this. This puts it just under 8% up on a year ago which means that as this feeds into producer prices and then consumer prices the downwards influence from it will fade and then end. We are already seeing some of this effect as for example the energy price component of consumer inflation has seen its annual rate rise from just under -9% to -3% in the Euro area.

Some care is needed here as the oil price has established something of a habit of falling in the latter part of the year. OPEC seems to be doing its best to stop that at the moment but we do not know how that will play out. Should the oil price merely remain around here then we will see the annual rate of price inflation from it rise.

Commodity Prices

These are less clear-cut because a rally in the first half of 2016 has been followed by a decline since. If we look at the CRB ( Commodity Research Bureau) Index it opened 2016 at 373 rose to a peak just below 421 and is now just below 400.  There have been two quite contrary trends at play here where firstly the price of metals surged ( from 540 to 720) whilst foodstuffs at first followed this but then fell over the summer and are now lower than when they started 2016.

The US Dollar

This matters to everyone who does not have the US Dollar as their currency because the vast majority of commodity prices are in US Dollars. So this from investing.com does echo on the inflation front.

The dollar index was up 0.10% at 98.74 at 02:45 E, off a high of 98.81, its highest level since early February.

The interest-rate rise that is supposed to be driving this has been supposedly around the corner for all of 2016 but after a dip in April towards 93 the US Dollar Index has been rising since. It has even pushed the strong Japanese Yen back above 104 more recently.

Some of this is individual moves such as the post EU leave fall for the UK Pound but more generally we have seen the Euro decline a little recently and the Chinese continue to fix the Renminbi lower (6.77 today).


The winds of change are blowing through the inflation landscape as we wait to see what the main mover the crude oil price does. Whilst technically it is a relative price shift it is picked up as inflation (or disinflation), and to be fair it does trigger price changes elsewhere. How much inflation will now rise depends on what it does but as I have explained there are factors in the background where the band never stopped playing as we were supposed to be hitting an iceberg. Oh and it means I would far rather be the Austrian government and taxpayer than an investor in this. From Bloomberg.

Austria’s 30-year bund yields were little changed at 1.01 percent as of 10:32 a.m. London time…….The initial price talk for the 70-year bond sale was 60 basis points more than the yield on the February 2047 security, the person said.

So 1.6% for 70 years? No thanks after all we are living in an era of this.

Meanwhile I note that according to FT Alphaville this has been the state of play on the inflation front.

inflation predictions are back in a big way and after more than eight years of being proved wrong time and time again, the inflationistas may finally get to have their day in the sun.

Actually if we look back I was right to suggest that UK inflation would rise back in 2010 as it then on both measures ( CPI & RPI) rose to above 5%. That is an extraordinary thing to have amnesia about as via its disastrous impact on real wages it is one of the most significant phases in post credit crunch UK.

Oh and you may note that for all the hot air (Open Mouth Operations) of central bankers and indeed their QE their efforts have had very little impact here. Of course that is partly to do with the fact that they impact on asset prices which are kept out of most official measures of consumer inflation. It is also partly to do with the fact that devaluing your currency is overall a zero sum game which may give to some but also takes away from others. However this paragraph needs to come with a so far…….


What will happen if the US Federal Reserve raises interest-rates next week?

Next week sees the last 2015 meeting of the US Federal Reserve and it follows a year where it has hinted at an interest-rate rise several times but not done it. Over recent days and weeks it has been ramping up the rhetoric and what we now call Open Mouth Operations to a new peak. If it was a game of chess then one would be wondering if they have totally endgamed themselves. However central bankers can be slippery people as Talking Heads put it. After all last week saw Mario Draghi disappoint expectations he had deliberately raise in his speeches and then raise them again only a day later!

the decision to re-invest the principal payments on maturing securities for as long as necessary will add EUR 680 billion – some 6.5% of the euro area GDP – in liquidity to the system by 2019,

Oh and we got kind of a default view of what the beginning of a monetary policy tightening by the US Federal Reserve might do to the US economy.

our measures will add almost 1% to GDP between 2015 and 2017.

If monetary stimulus raises GDP then maintaining QE as the US Federal Reserve did last year and then nudging interest-rates higher is likely to apply something of a brake, according to Mario anyway.

The fallacy of a 0.1% move in interest-rates

We saw one of these last week which reflected more the ECB’s intention to be seen to do something rather than being something which will have much if any influence on the real economy.

First, as regards the key ECB interest rates, we decided to lower the interest rate on the deposit facility by 10 basis points to -0.30%.

Yes there will be an impact on banks who at the time of writing have 698 billion Euros exposed to that rate but as to the real economy which has already seen between 4% and 5% of interest-rate cuts? Not much and maybe nothing. Ironically if there is something it may be contractionary if the banks trying to recoup their losses by raising margins.

In the arcane world in which central bankers live we cannot rule out a 0.1% rise in interest-rates next week even though it would give few if any benefits to the real economy and raise risks in the financial one.

The world has already changed

What I mean by this is that financial markets have already made much of the adjustment to a post interest-rate rise era. The clearest example has been the rise of the US Dollar over the past year or so in response firstly to the slowing of the monetary expansion and finally promises of a tightening of policy. The US Federal Reserve follows what is called the broad trade weighted which has risen in round numbers from 102 in July 2014 to more like 122 as of the last update. It is a bit behind recent moves such a last week’s Euro rally but there has been quite a tightening of US monetary policy here via the exchange-rate and has probably contributed to the numbers suggesting a weakening in manufacturing.

Next we have the issue of longer-term interest-rates or bond yields. If we look at the ten-year or Treasury Note yield we see something intriguing. Whilst the impression is of yield rises in fact it was 3% as 2014 began and is 2.25% now. So over time we have seen a winding back of expectations of future interest-rate increases. Central bankers will claim this as a victory for the Open Mouth Operations of Forward Guidance whilst we note that in fact there has been quite a change in real yield expectations via the effect of falling oil and commodity prices. You see in January 2014 the bond manager Pimco was forecasting this for inflation.

this puts our headline CPI forecast around 2.0% YoY this year.

So a real yield on that rough and ready measure of 1% whereas with zero inflation it has been more like 2.25% this year so there has been a tightening already. Now all measures of real yields have problems as unless commodity prices fall again in 2016 inflation will pick-up but we have already seen a tightening.

This is much clearer at the short end which is why media reports have suddenly taken an interest in the 2 year yield which has recently got near to 1% compared to the recent nadir of 1% in mid-January. The catch here is what economic impact it has as for example fixed-rate mortgages in the US tend to follow either the 15 year or the 30 year yield. Here we have seen a tightening as the 2.22% for the 30 year has been replaced by a nice round 3% as I type this.

So if we add up both factors we see that there has already been quite a reaction to the interest-rate rise or indeed rises hinted at. Thus it is possible that an interest-rate rise might see a US Dollar fall if subsequent events suggest that the increase might be rather lonely.

The impact abroad

Regular readers will be aware of the concept of a “carry trade” and the dangers that it brings. The bursting of the carry trade in the Swiss Franc and Japanese Yen post credit crunch highlighted this. Well take a look at this from the Bank for International Settlements and the emphasis is mine.

Since 2008, dollar credit has grown more rapidly outside the United States than inside…….. Dollar credit also expanded owing to its substitution for local currency credit given favourable dollar interest rates and exchange rate expectations.

A bit awkward on two counts here as the exchange-rate expectations bit has seen a US Dollar rally and maybe now interest-rates will rise. So on what scale might this be an issue?

Dollar credit to non-banks outside the United States reached $9.8 trillion at end-Q2 2015. Borrowers resident in EMEs accounted for $3.3 trillion of this amount, or over a third. EME nationals resident outside their home countries (for instance, financing subsidiaries incorporated in offshore centres) owed a further $558 billion.

So quite a lot and even the BIS notes the dangers if you think through the implications of this part of its conclusion.

Until recently, currency trends and interest rate differentials vis-à-vis the US dollar rewarded EME firms for substituting dollar borrowing for domestic currency borrowing. (EME means Emerging Market Economy)

Ah yes until recently and the danger is of course if financial markets decided to keep playing this by Aloe Blacc.

I need a dollar dollar, a dollar is what I need
hey hey
Well I need a dollar dollar, a dollar is what I need
hey hey
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me.

That would end the “uneasy calm” in financial markets mentioned by the BIS!


We see that the proposed/hinted US interest-rate rise has already had an impact as 2015 has seen a rise in the US Dollar affecting exporters and import substitutors and a rise in long bond yields affecting fixed-rate mortgages. I have argued in the past that the Federal reserve has tried to get away with just doing this and cannot rule out the possibility that it will do the same next week. But the risk for it doing that is that the markets then treat it like the girl who cried wolf.

If we look at a single interest-rate rise of 0.25% then there will be an impact on the financial economy but what impact on the real economy. In itself I would argue somewhere between very little and not much as after all we saw large interest-rate cuts which had disappointing effects or the US would not have entered the QE era and had a central bank with a balance sheet of around US $4 trillion.

The catch is that via changes to foreign exchange and interest-rate expectations that the opposite of something wonderful happens and we see a blow-out. So a “Black Swan” event or the like. Some of that is already in play and the danger is real now but we do not know if it will pass and unless it happens are unlikely to know how close we came. After all the Nostromo could have passed by the planet where the Alien was….

The US Federal Reserve mostly ignores foreign influences but I suspect that even it is bothered this time around which it keeps telling us that the interest-rate rises will be small as we wonder if in these times even small will prove to be too much. It would of course be quite an indictment of the last seven years should it prove to be so.





What is the economic impact of a strong US Dollar?

The end of last week saw prospects for interest-rates come to the fore. In the background we had the hints and promises of Mario Draghi about the Euro area going further into the negative interest-rate zone. Then Thursday saw the “unreliable boyfriend” Mark Carney give us somewhere around Forward Guidance 8.0 as a Bank Rate rise in the UK receded around yet another corner. Following this on Friday came the strong non-farm payroll report in the United States which shifted upwards the market view of US interest-rates. However none of the above have actually happened yet and there was one area which has already shifted that is the world of currencies and exchange-rates.

You may choose to consider this in the light of the famous “currency wars” statement from September 2010 or not but the truth is that a long list of countries are trying to manipulate the value of their currencies right now. For all the talk of interest-rate changes and extraordinary monetary measures if we look at economies the main player these days is the exchange-rate which the media often overlooks.

The strong dollar

This is a fact of life and let me illustrate it with some detail from DailyFX on Friday and the emphasis is mine.

Eight months of congestion have been brought to a dramatic end this past week as the US Dollar mounted an impressive rally in the aftermath of the October labor report……Now that we have seen rate speculation soar and the Dollar break to 12-year highs, many will simply presume the currency to continue rising under its own.

speculative momentum.

Unfortunately the St.Louis Federal Reserve is rather tardy in updating the official measure so let as take a look at that hardy perennial the US Dollar Index. It has been in a bull market since late April 2011 when it dipped below 73 although the main move to the current level of 99 has been since the summer of 2014. Just for clarity it is not at its equivalent highs to the official measure for the simple reason that it covers the major currencies and misses out the moves against the South American currencies for example. The extreme move there has been against the Brazilian Real which has fallen by 41% in 2015 so far.

Some care is needed with the hype as I note that Goldman Sachs is projecting the US Dollar a fair bit higher as one could just as reasonably point out in terms of interest-rates buy the rumour and sell the fact. After all who wants to be a “muppet”.

The economic impact

If we were analysing the UK then the rally in the US Dollar since the summer of 2014 would be equivalent to a 4.75% rise in Bank Rate. Again care is needed because the US Dollar’s role as a reserve currency and the fact that in relative terms it is less of a trading nation means one would expect a lower impact on two counts.

The US Federal Reserve itself is noticeably reticent on the issue I was all over their speeches earlier in the year when the US Dollar but they veered away from being specific. However Vice-Chairman Fischer tell us this.

Thus, it is plausible to think that the rise in the dollar over the past year would restrain growth of real GDP through 2016 and perhaps into 2017 as well.

If we use the chart he produced and add the current numbers to it then we might reasonable expect there to be a total reduction in the path of US GDP by around 1.5% peaking late next year. The effect on core inflation is faster and would be of the order of 1% and if it is not in play now it soon will be. Here is the chart that he used.

I counsel a dash of salt with such analysis as it is a generalised expectation and in reality there are always other influences.

What about trade?

The main player in the impact on economic growth is trade and the New York Fed offered us a view back in July on the expected impact. It concentrates on the impact of exports because the impact on US imports is lower via its role as the reserve currency. For the UK or Europe a change in the currency changes the price of oil,copper,steel. many foods and so on but the US does not see that due to the vast majority being priced in the US Dollar.

The numbers here are as follows.

The New York Fed trade model suggests that a 10 percent appreciation of the U.S. dollar is associated with a 2.6 percent drop in real export values over the year. Consequently, the net export contribution to GDP growth over the year is 0.5 percentage point lower than it would have been without the appreciation and a cumulative 0.7 percentage point lower after two years

So in approximate terms we have a present impact in play of around double that.

Ceteris Paribus

The estimates above all rely on that latin phrase which means “all other things being equal”. Of course they never are! And the history of the credit crunch is that a lot is in play at whatever point you choose. Let me illustrate by picking just one influence the price of Dr.Copper.

This has been falling since early 2013 in this phase although the peak was back in 2011. Over the past year it has dropped by just over a quarter to US $2.24. Now if we look at its impact on the US economy we see that step one provides a boost via a cheaper price for a basic commodity. Monetary policy muddies the waters a little as the US Federal Reserve of course does not like something which it has contributed to which is lower inflation. But a simple step one is easy. Happy Days.

However it does not stop there as there are losers such as commodity producers as well as other winners such as other commodity consumers. Then we have something perhaps not so cheery if we consider why it is falling in price? As if that is less demand than we thought we had then Taylor Swift needs to get ready for a burst of “trouble,trouble,trouble”. On that road we can look at yet another disappointing set of trade figures from China over the weekend as it is a major commodity player/consumer.

If we look at other countries you might think that they would be unreservedly happy as they have a lower exchange rate versus the US Dollar in general. The Bank of Japan and the European Central Bank will be pleased it is helping with something they wanted anyway. But others such as many South American countries and others will be frowning as their falls have created problems with inflation. You might think that such a thing is very odd in our current disinflationary environment but I guess over time there have been examples of fires in the Arctic.

Also it would be remiss of me to remind you of the generalisation that commodity prices often move in the opposite direction to the US Dollar which creates its own cross-currents. This time around a stronger US Dollar has also seen falls in the gold price.


There is much to consider here and let me return to the subject of interest-rates. Back in September a major factor in the US Federal Reserve’s inaction was in my opinion concerns over low commodity prices and a strong dollar. Those who automatically assume it will raise next month might lie to note that they are back. The dollar rise reigns back the chances of a rate rise but of course did it depend on expectations of it? I will stop there on that point as you can just keep going and merely point out that for the US and indeed Euro area and UK in 2015 the main monetary player has been the exchange rate as yes I do count the beginnings of ECB QE in that especially after the latest disappointing business lending figures. But of course the relationship between QE and currency value is another area where one can end up “spinning around” like Kylie albeit much less gracefully.

One important factor we do not know is how long this will last as we will not know the full impact until as George Bension put it “hindsight is 20/20 vision”.

As for musical influences well the financial markets have been singing along to Aloe Blacc for a while now.

I need a dollar dollar, a dollar is what I need
hey hey
Well I need a dollar dollar, a dollar is what I need
hey hey
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me

How does a fall in median income of 6.5% fit with a US interest-rate rise?

Today is one where all eyes will be on New York at 7 pm UK time today. This is because the US Federal Reserve will announce its latest decision on interest-rates and via its Forward Guidance has raised expectations of an interest-rate rise. This would be its first of the credit crunch era and in fact the first change in trend for more than a decade as it was 2004 when it last voted for what became a series of interest-rate rises. Makes you think doesn’t it? Also I make the point on here from time to time that interest-rates have been in their own secular decline for quite some time which I shall illustrate with a very long-term chart of US bond yields and thanks to Barry Ritholz for it.

What this shows is that panics have been quite common really on a longer-term perspective and that there was a time before the US Federal Reserve. But my main point is that since 1981 there have been ebbs and flows in crises that seemed important at the time but Status Quo summed up the trend for interest-rates.

Down,Down Deeper and Down

Accordingly there are very few people around who were actively trading and dealing when the trend in the 1970s was from Yazz.

The only way is up baby.

Thought for thought and this is why the central banking mantra is this as expressed in Hit Me Baby One More Time fashion by Bank of England Governor Mark Carney yesterday in evidence to the UK Parliament.

The path of Bank Rate is much more important than the precise timing of the first increase, however…… I expect Bank Rate increases, when they come, to be gradual and limited to a level below past averages.

He returned to this subject later on.

It also seems likely that the equilibrium interest rate, having been sharply negative during the crisis, will move only slowly back up towards historically more ‘normal’ levels.

If you look at the long-term chart I have presented above it is hard not to have a good laugh at Governor Carney’s definition of “normal”. But he means that he expects UK Bank Rate to rise to around 2.5% which is about half of what was considered for a while to be normal for the UK as the NAIRU was considered to be around 4.5%. Non Accelerating Inflation rate of Unemployment in case you were wondering but do not disturb yourself too much as it is best forgotten and left in some backwater.

The Impact of “Open Mouth Operations”

This is where central bankers promise something under what is called Forward Guidance. In the UK and US this has involved promises of higher interest-rates but so far it has involved false starts with the US markets starting to price interest-rate rises towards the end of last year. This was because in her first press conference Fed Chair Janet Yellen gave a timescale of six months after the end of Quantitative Easing.

So what was supposed to be a guided path has had several misfires but the markets are like Pavlov’s Dogs these days as they await the next central banking handout and we have seen moves in two main areas.

The US Dollar

It must be living in the United States that prompted Bank of England policy maker Kristin Forbes to point this out last week and the emphasis is mine.

Sterling’s effective exchange rate has appreciated 17% since its recent trough in the spring of 2013. The U.S. dollar has appreciated by about 20% over the same period, while the euro has weakened by 7%.

If it was the UK then it would be equivalent to a 5% rise in interest-rates but the US is much more insular so let me say certainly 1% and maybe a bit more. The exact cause is a combination of perceived economic improvement and Forward Guidance which of course interrelate.

Let me jump to something which the European Central Bank has released this morning in its monthly review.

the outlook for real GDP growth has been revised down, primarily due to lower external demand owing to weaker growth in emerging markets.

Now if it is feeling that with a lower Euro what must US exporters be feeling with a higher level for the US Dollar? I think the interest-rate rise equivalent is pushing well above 1% now.

Bond Yields

These have been rising over the past month or so with the US Treasury Note (10 year)  yield rising from a nadir of 2% to 2.28% as I type this. The US 2 year yield has risen proportionately more from 0.57% to 0.8%. Whilst this may not be much in terms of the chart above it means that is now yields more than the German ten-year. That would be a trade which would have some excitement today would it not?

Also we have something of an illustration of the world power of the Federal Reserve as bond yields in general have risen over this time.

The outlook

Other central bankers have gone out of their way to express fears over the immediate outlook. From Bank of England Governor Carney.

Actual headwinds to UK growth could grow if a potential further material slowing of growth in China and more broadly in emerging markets materialises.

From the ECB this morning.

Notably, current developments in emerging market economies have the potential to further affect global growth adversely via trade and confidence effects.

What about inflation?

Yesterday we were told this by the US Bureau of Labor Statistics.

The all items index increased 0.2 percent for the 12 months ending August, the same increase as for the 12 months ending July.

So it is a full decimal point away from the target. Even worse in this context is the fact that it uses a measure (PCE Inflation) which tends to be some 0.4% or so lower than this.

So we can see that as the oil price fall washes out of annual comparisons there will be a rise but enough to go above target? Certainly nowhere near the position back in 2004 (H/T @moved_average).

YoY CPI 0.2%..last time Fed raised in ’04 …3.3%


Like the UK the United States is seeing a bit of a pick-up as yesterday’s data contained this too.

Real average hourly earnings for all employees increased 0.5 percent from July to August……This increase in real average hourly earnings combined with a 0.3-percent increase in the average workweek resulted in a 2.3-percent increase in real average weekly earnings over this period.

However a counterpoint to this has been published by the Census Bureau.

In 2014, real median household income was 6.5 percent lower than in 2007, the year before the most recent recession…… and 7.2 percent lower than the median household income peak ($57,843) that occurred in 1999.

Poorer this century? Well we know why interest-rates have continued to fall then..

Also my argument that there is a road to negative interest-rates gets a tick as I note that the last 3 years of “recovery” have made no statistically significant change.

Much remains to be done about poverty too.

In 2014, the official poverty rate was 14.8 percent. There were 46.7 million people in poverty……The 2014 poverty rate was 2.3 percentage points higher than in 2007, the year before the most recent recession.


There is much to consider here and let me start with a more philosophical question. Is this the end of inflation targeting? I have raised this question before and the issue is whether it is possible in the credit crunch era to look a couple of years ahead? In my opinion the answer is no. On this road looking at the Census Bureau numbers we also have the issue of what is a recovery?

Such thoughts are the ones which in my opinion are likely to stay the hand of the Federal Reserve this evening. Central bankers are pack animals and we have seen what the Bank of England and ECB think. If a rise went wrong the Federal Reserve would run the risk of looking very foolish and would undo what they consider to be years of work and success. Oh and every central bank that has raised interest-rates in this fashion in the credit crunch era has then subsequently cut them!

Songs for an interest-rate rise

Just in case I would not want to miss out.

The Only Way Is Up by Yazz

Higher and Higher by Jackie Wilson

Move On Up by Curtis Mayfield

Start Me Up by the Rolling Stones

Coming Up by Paul McCartney and Wings

Or if you feel like a break

Wake Me Up When September Ends by Green Day

More suggestions are welcome…..

The US interest-rate rise conundrum continues

It was only yesterday that I analysed the risk that the European Central Bank eases monetary policy again. In essence it boils down to the level of the Euro with a soupcon of oil price influence. But there is quite a list of central banks considering easing policy further to join the 60 or so moves we have seen so far in 2015. However the major central bank which is the US Federal Reserve wants us to believe that it will raise interest-rates under its policy of Forward Guidance and wants us to forget the couple of false starts on that front that 2015 has already seen!

Over the past week or so we have had a veritable smorgasboard of views from Federal Reserve voting members from a definite yes (Esther George) to a hint of further easing and hence no (Kochlerkota). The majority view is this from Vice-ChairMAN Stanley Fischer in his speech at Jackson Hole.

With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening.

The tenet of his speech is that inflation is on the way back to 2% with the implied view that interest-rates need to rise soon in response. That is what we are supposed to think.

Currency Wars

I note that Mr.Fischer also steers us towards this in his speech.

The rise in the dollar since last summer, of about 17 percent in nominal terms, with its associated declines in non-oil import prices, could plausibly be holding down core inflation quite noticeably this year.

This is a monetary tightening although with the US Dollar being the reserve currency with the majority of commodities priced in it there is a smaller influence than say the UK. I note he also points us to an economic model which suggests the impact will not last long.

Finally, PCE inflation shows a sizeable but transient drop due to declining import prices.

The United States is traditionally not that concerned about the impact of its monetary policy on others but the flip side of the appreciation discussed has been seen just this morning. From Darlington Dick.


The so-called emerging market currencies are getting what the Duke of Wellington called a “damned hard pounding” and if we return to the originators of the Currency Wars theme then even an Olympics and a football World Cup are being cast aside. From Bloomberg.

Brazil’s real led losses among major currencies and fell to a new 12-year low……..The currency declined for a fourth straight day, falling 1.7 percent to 3.7611 per dollar, the weakest level since 2002.

Poor Brazil has been alternately frozen (the original Currency Wars complaint) and then heated up by the changes in perceived US monetary policy, like a football really.

The International Monetary Fund

This seems to get ever more concerned about a rise in US interest-rates as its latest statement makes clear.

Advanced economies should maintain supportive policies. In most advanced economies substantial output gaps and below-target inflation suggest that the monetary stance must stay accommodative.

Does it mean the US? Well the specific section carries on the theme.

In the United States, growth in the first half of the year was 1.8 percent, compared to 3.8 percent in the 2nd half of 2014. The growth slowdown reflected harsh winter weather, port closures, and a strong downsizing of capital expenditure in the oil sector in Q1, and relatively sluggish business investment in Q2. Recent revisions in the U.S. national accounts suggest that productivity growth during 2012-14 was lower than previously thought.

What about going forwards?

Longer-term growth prospects are weaker, reflecting an aging population and low total factor productivity growth.

Indeed the IMF goes so far as to drop quite a hint.

with little evidence of meaningful wage and price pressures so far,

It also mimics the “Warning,Warning” of the robot Robbie in the Swiss Family Robinson films.

Risks are tilted to the downside, and a simultaneous realization of some of these risks would imply a much weaker outlook.

There is also a hint as it turns out in the location of the G-20 meeting which is Ankara where US delegates will find that there US Dollar expenses will go much further than they did.

The Beige Book

This is where the various regional Federal Reserves take a look at the economy in their area and the latest version was released last night. So what do we learn?

Six Districts cited moderate growth while New York, Philadelphia, Atlanta, Kansas City, and Dallas reported modest increases in activity. The Cleveland District noted only slight growth since the last report. In most cases, these recent results represented a continuation of the overall pace reported in the July Beige Book.

So good news but hardly signs of a boom and whilst some see it in the labour market section I am less convinced.

Most Districts reported modest to moderate growth in labor demand, although Boston, Cleveland, and Dallas cited only slight increases in hiring. This tightening of labor markets was said to be pushing wages up slightly in selected industries or occupations, especially in the New York, Cleveland, St. Louis, and San Francisco Districts.

If there is a boom this is in a familiar area.

Reports on residential and commercial real estate markets across the Districts were mostly positive. Existing home sales and residential leasing widely improved, with home prices moving up in most areas.

This backs up a theme from the CoreLogic numbers released yesterday as well.

On a month-over-month basis, home prices increased by 1.7 percent in July compared to June data…..Home prices, including distressed sales, increased 6.9 percent in July 2015 compared to July 2014. June marks the 41st consecutive month of year-over-year home price gains.

A central bank rasing interest-rates to slow house price growth? I will believe that when I see it! After all they are presented as wealth gains and not inflation in modern central banking theory. Also on a technical note the US uses rents and not prices in its CPI (Consumer inflation) measure. It is one of the factors holding it up with primary rents rising at just under 3.6% and maybe set for a rise.


Tomorrow sees the US employment and non-farm payrolls report for August. Regularly we see moves which are statistically insignificant considered as policy moving events! In case you were wondering the Bureau of Labor Statistics estimates that for July the statistically significant change was 107,400. Rather gives a perspective to a 10k or 20k difference to expectations doesn’t it? That is before the fact that the two different surveys often give conflicting answers.

However the US Federal Reserve persists with the mantra that an interest-rate rise is on its way. In itself a 0.25% increase is not much of a change but that ignores how tightly wired the world financial system and economy remains. So the song for September 17th is from Daniel Bedingfield.

If only I could get through this
If only I could get through this
If only I could get through this
God, God gotta help me get through this

Perhaps the Federal Reserve could play it as background music. although surely they must fear what might happen if they raise and therefore will delay yet again. If so perhaps the song should be from Green Day.

Summer has come and passed
The innocent can never last
Wake me up when September ends

Can the United States Federal Reserve raise interest-rates?

This evening we will see the latest set of meeting Minutes from the Federal Reserve Open Markets Committee which is the interest-rate and indeed Quantitative Easing arm of the US central bank. Rather like the Bank of England the FOMC has been teasing everybody about a prospective interest-rate rise for some time now but just like it nothing has actually happened. It has remained a mirage in the distance that is apparently just out of reach. You might like to contrast that in these times with interest-rate cuts around the world which flash up across the various media with quite some regularity these days So far this year there have been 30 or so interest-rate cuts in 2015 including China, India,Korea, Australia and a host of others including Switzerland, Denmark and Sweden who have plunged into the icy cold world of either negative interest-rates or further into them. You may note that there is quite an asymmetry there!

What about the US economy?

The latest set of economic growth data were poor.

Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 0.2 percent in the first quarter of 2015, according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.2 percent.

So there was not only a very weak reading but quite a slowdown from the end of 2014. This was quite a lurch downwards from the 3% annualised growth that had been doing the rounds in the financial markets not so long ago. Indeed as recently as February the Bank of England made yet another forecasting error.

much weaker than the 0.6% expected at the time of the February Inflation Report (or annualised ~2.5%)

Since then we have seen very poor trade figures thrown into the mix.

The U.S. Census Bureau… announced today that the goods and services deficit was $51.4 billion in March, up
$15.5 billion from $35.9 billion in February, revised

This meant that the quarterly picture for trade was now as follows.

Year-to-date, the goods and services deficit increased $6.4 billion, or 5.2 percent, from the same period in 2014.

Accordingly the latest estimates for that quarter are now in negative territory as we await the later updates. The only hope is that a more complete data set finds a positive nugget or two.

Also as we recall the way that central banks panic at the thought of negative inflation there was this tucked away in the data.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, decreased 1.5 percent in the first quarter, compared with a decrease of 0.1 percent in the fourth.

Ordinary workers and consumers will welcome lower energy and to a lesser extent food prices but of course central bankers are made very nervous by them. What about the banks? What about the debt?

What about now?

Something rather familiar has been happening and I shall take you over to the Atlanta Federal Reserve whose GDP tracker has been on form.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 0.7 percent on May 19, unchanged from May 13.

Over the past week the number had been pulled lower by weak industrial production data and then pushed back up by strong residential housing numbers. So there is the distinct possibility that over the first half of 2015 the US economy will see no growth at all. This is very different from what is calls the “Blue Chip consensus” which has gone from just above 3% per annum growth to just below it. Quite a gap! Just like last time.

Ominously perhaps today’s Bank of England Minutes remain optimistic for US economic growth.

These effects were likely to be temporary, pushing up on growth in Q2: Bank staff expected growth of 0.7%.

Ah that word temporary again! Has anything actually proved to be temporary after an official claim about bad data?

As recently as the middle of March the Federal Reserve told us that US GDP growth in 2015 would be between 2.3% and 2.7% which means that it will really have to charge ahead in the second half of this year.

Wage growth and productivity

This is a measure which most central banks are tracking closely right now. The latest employment report data is below.

In April, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $24.87. Over the past 12 months, average hourly earnings have increased by 2.2 percent.

Hardly racing away is it as the last quarter of 2014 saw growth of 2% per annum? If we look back to the pre credit crunch period then depending on which measure you use you would estimate it at being 3-4% per annum.

Also somewhat ominous for possible wage growth is this research from the Atlanta Fed about productivity.

For example, over the past three years, business sector output growth averaged close to 3 percent a year. Labor productivity growth accounted for only about 0.75 percentage point of these output gains.

Thus it is not only the UK which has its concerns about labo(u)r productivity and the new pattern is very different from the past.

Business sector labor productivity growth averaged 1.4 percent over the past 10 years. This is well below the labor productivity gains of 3 percent a year experienced during the information technology productivity boom from the mid-1990s through the mid-2000s.

If these productivity trends are now permanent then real wages are on quite a different path to what people hope they will be and of course the path for interest-rates changes too.

Business surveys

These are hard to read at the moment as highlighted by the latest purchasing managers report from Markit.

The seasonally adjusted final Markit U.S. Composite PMI™ Output Index (covering manufacturing and services) posted 57.0 in April, down from 59.2 in March and the lowest reading for three months.

It would be ominous if there was a slow down from the weak official economic growth data for the first quarter of this year. But as I am sure you have noticed the PMI report had economic growth charging forwards earlier this year!

Monetary Policy has tightened

There is much more to monetary policy than just official interest-rates especially these days. If we look at market interest-rates then the ten-year bond yield has risen from just above 1.6% in late January to 2.27% now. This has pulled mortgage rates back up again after the falls seen in 2014 and January of this year. Whilst the US Dollar is no longer at its highs the trade-weighted dollar index is at 95.5 compared to 80 a year ago which shows how much the US Dollar has risen.

Some care is needed because the US Dollar is the reserve currency and also because the US economy is in proportional terms less of a trade dependent nation than many. But if you were setting US policy you would be wondering if March’s poor trade figures were the beginning of a new weaker trend.


There are many ways of looking at the situation. I have thought for some time that a new version of Forward Guidance is in operation where the Fed (and the Bank of England) promise interest-rate rises but in reality do not actually mean to carry them out. They hope that “expectations” as in market behaviour will do the job for them and make actual rises unnecessary. They of course ignore the dangers of moral hazard and to credibility of crying wolf.

Added to this are signs of weakness from the US economy which are far from alone in the world. For example after a good start to 2015 the Euro area (h/t @markbartontv ) surprise index has not only reversed but gone negative recently. If matters are going so well in China why does it keep cutting interest-rates? Indeed why are so many cutting interest-rates. Now America is often quite insular and may be bothered less by the rest of the world than one might think but it will worry about how much higher the US Dollar would go if it raised interest-rates.

So this is a situation rather like the UK General Election as even those who say they will raise rates are likely to change course when it comes to actually doing so. As Change (with one Luther Vandross) put it.

But now I know
I don’t need you at all
You’re no good for me

I’ve changed my mind