surveillance - bloomberg l.p. ecb member of the supervisory board ignazio angeloni and jose vinals,...
TRANSCRIPT
Tuesday
June 7, 2016
www.bloombergbriefs.com
Productivity; World Bank Outlook; California PrimaryBEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS
WHAT TO WATCH: The final print of is expected to show a 0.6 non-farm productivitypercent decline in the first quarter, slightly smaller than the 1 percent fall initially reported,8:30 a.m. are forecast to rise 4 percent, a 0.1-percentage point dropUnit labor costs -from the initial print. The World Bank issues its Global Economic Prospects 2016report, following a January projection for 2.9 percent global growth this year, 4 p.m.
ECONOMICS: ECB Member of the Supervisory Board and Ignazio Angeloni Jose , director of the monetary and capital markets department of the IMF, will speak Vinals
on a panel in New York at 11:25 a.m. is forecast to slow to an Consumer borrowing$18 billion advance in April following a 10 percent annualized gain of $29.7 billion in March — the fast pace since 2001, 3 p.m.
GOVERNMENT: U.S. and will be held in presidential primaries caucusesCalifornia, Montana, New Jersey, New Mexico, North Dakota (Democrats only) and South Dakota. The Associated Press said that its count shows had Hillary Clintonsecured the number of pledged delegates and superdelegates required to claim the Democratic nomination. Indian Prime Minister will be in Washington Narendra Modithrough tomorrow and meet with President Barack Obama to discuss trade, energy, environment and defense. Modi will also address a joint session of Congress.
(All times local for New York.)
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QUOTE OF THE DAY
"I continue to think that the federal funds rate will probably need to rise gradually over time to ensure price stability and maximum sustainable employment in the longer run." — Fed Chair Janet Yellen, in the of a speech text
given in Philadelphia. Read more .here
COMMENTARY IN THIS ISSUE
Atlanta Fed President Dennis Lockhart discusses the Fed's path after a policyless-than-stellar jobs report and potential impediments including Brexit and the U.S.presidential election: Michael McKee.
The last time labor-market conditionswere this bad was during the throes of the recession, the Federal Reserve's index shows: Richard Yamarone.
The market's to Friday's jobs reactionreport — a sharp drop in yields suggesting fixed income traders see economic trouble ahead — was understandable, but may have been an overreaction: Mohamed El-Erian.
EQUITIES DATA MONITOR
SURVEILLANCE
Productivity Rebound May Spell Trouble for Hiring
The drop in productivity growth in the first quarter should be lessened as a result of upward revisions to GDP and a slightly lower pace of job creation based on the latest payroll revisions. Market participants will pay little attention to these revisions. However, the linkage between firmer productivity and slower job growth amid tepid economic gains should serve as a reminder to analysts of why the past several quarters' low productivity growth has been good news for the labor market.
— Carl Riccadonna, Bloomberg Intelligence Economist
Source: Bloomberg
Stocks rallied after Federal Reserve Chair Janet Yellen quelled speculation U.S. interest rates will be raised in July.
June 7, 2016 Bloomberg Brief Economics 2
SURVEILLANCE
Atlanta Fed President speaks Dennis Lockhart
with Bloomberg's Michael McKee about the
Federal Reserve's policy path after a less-than-
stellar jobs report and potential impediments
including Brexit and the U.S. presidential election.
Q: Is June still on the table?A: Well, let me just speak for myself. I think the combination of the jobs report onFriday and the Brexit consideration justify patience, but I'm speaking only for myself.The meeting is live, I don't know how it's going to come out. The committee could arrive at a decision to increase the Fed funds rate, but as I assess the situation currently, I'm prepared to be patient.
Q: What does patient mean? Would July be a meeting at which you would consider a rate increase?A: I think patient, for me, again, means first getting beyond the Brexit vote and seeing how the data come in for the next few weeks. My fundamental view is that the economy remains on a moderate growth track, let us say around two percent, and that it will be sustained for the rest of the year and beyond, so I'm notreally changing my overall view of the economy just because of the jobs report on Friday. However, the weakness of the jobs report is something that I think justifies a little bit more patience.
Q: If you don't think it's a new trend, then what do you think happened to
the jobs report? I think there are two, possibly three A:
ways it could be interpreted. The first is that it's indicating a slowdown in the economy. I don't believe that's the case, as I just said. I don't believe that's the case. The second interpretation is, it's thenatural slowing of job generation as we get closer and closer to full employment, and that's clearly a possibility. The third is that what we've seen with this most recentreport and the revisions to the earlier reports is simply the waxing and waning of data, the to and fro that we see in the numbers in an economy that's never
going to be totally linear, so that's possibleas well. The key point for me is, it does not take me off of my basic view of the economy growing at around two percent.
Q: For a Fed policy maker, it's where the risk and reward line is. Where is the greater risk? What is the cost/benefit ratio at this point?A: I don't personally see a lot of cost to being patient to the July meeting at least. So I don't think the FOMC is behind the curve from the point of view of inflation, and I think we can be watchful and see how things develop over the next few weeks.
Q: Is the current level of monetary policy putting maybe a floor under growth and inflation or is it actually
contributing to growth at this point? I have to believe that the policy as it A:
now stands continues to stimulate the economy and I don't see that it's putting a floor under growth and inflation. I think it's net stimulative and that's not to say that the neutral rate isn't fairly low, but nonetheless, I think we're still at a stimulative stance of policy.
Q: Do you have a number for a neutralrate?
We debate this all the time, and you A:can argue that the neutral rate is currentlyabout where the Fed funds rate is, or maybe 1, 1.25, but it's certainly within that range. I buy into the view that the neutral rate changes over time and as the economy continues to move ahead, the neutral rate will rise, but at the current time, I think it's in the range of sort of where we are, maybe a little lower, even, to 1 or 1.25 percent.
Q: Given that, where do you see the Fed funds rate at the end of the year?
In other words, where are your dots? I have revised my thinking on that A:
since December. First, I'll say, we have enough meetings. We have five meetings including the June meeting next week, so there are enough meetings to conceivably— if the data justified it — to go to three
moves, but I'm more inclined to think in terms of two moves between now and the end of the year, and of course, I have to caveat that. That depends on how the economy performs.
Q: When you look at the calendar for meetings, does the presidential race cross your mind, especially given the nature of this campaign where you could easily become an issue that could decide the presidency?A: Oh, I really doubt that. I do think as the final weeks of the campaign and the election unfold that much of the electorate will be sizing up the economy and their economic prospects. I think that's been shown with very good scholarship on the question, so the economy and the state of the economy is clearly part of the equation. Whether a policy decision would swing the election, I find that very far-fetched.
Q: Your former colleague Narayana Kocherlakota has written on "Bloomberg View" that the Fed has something of a credibility problem developing, because it keeps leading the markets to think that rates could increase and then they don't do anything. What do you think of that?A: I think when we say that policy isgoing to be data dependent, we're not giving much guidance to the markets at all and the data come in and sometimes the individuals on the committee, or the committee itself will change direction to some extent. Is that a credibility problem? That's, to me, that's just being true to the guideline that we've set for ourselves, andthat is, we're going to let the economy's performance and how that shows up in data really dictate what the policy decisions are. That inevitably means that policy is not set in stone and it's going to shift as the economy evolves, and I don't think that adds up to a credibility problem of any serious degree but I understand Narayana's point of view.
This interview has been edited and condensed.
Listen to audio of the the full inteview on the
Bloomberg terminal .here
LABOR MARKET RICHARD YAMARONE, BLOOMBERG INTELLIGENCE ECONOMIST
June 7, 2016 Bloomberg Brief Economics 3
LABOR MARKET RICHARD YAMARONE, BLOOMBERG INTELLIGENCE ECONOMIST
Yellen’s U.S. Job-Market Gauge Posts Fifth Month in RedThere is more to U.S. labor-market
conditions than the pace of job creation. Average hourly earnings, the unemployment rate and hiring plans all play an integral role in determining just how strong or weak employment conditions are. According to the Labor Market Conditions Index (LMCI), created by the Federal Reserve Board of Governors and Chair Janet Yellen in 2014, things are turning ugly. The last time conditions were this bad was during the throes of the 2007-09 recession.
The Fed’s headline LMCI fell to minus 4.8 in May. This followed a severe downward revision to minus 3.4 in April, which was initially estimated to have fallen to minus 0.9. For the fifth consecutive month, this measure of the labor market situation posted negative readings. The last time the index was negative for three straight months was April-June 2009, when the U.S. economy was emerging from the recession. For all of 2015, the average monthly increase in the LMCI
Read the full analysis with a live version of this chart on the Bloomberg terminal . here
was 1.8.The latest LMCI report is a real red flag
for the central bank, given that half of its mandate is the promotion of full employment. The economic expansion has just entered its seventh year, and a
softer employment situation may make things difficult for continued strength, especially since most of the heavy lifting has been provided by the household sector.
DATA & EVENTS
Labor Market Conditions Index
June 7, 2016 Bloomberg Brief Economics 4
DATA & EVENTS
TIME COUNTRY EVENT SURVEY PRIOR
7:00 Brazil FGV Inflation IGP-DI MoM 0.89% 0.36%
7:00 Brazil FGV Inflation IGP-DI YoY 11.00% 10.46%
8:30 U.S. Nonfarm Productivity -0.60% -1.00%
8:30 U.S. Unit Labor Costs 4.00% 4.10%
10:00 Canada Ivey Purchasing Managers Index SA 51 53.1
10:00 U.S. IBD/TIPP Economic Optimism 48.2 48.7
15:00 U.S. Consumer Credit $18.000b $29.674b
16:01 Worldwide World Bank Issues Global Economic Prospects 2016 Report — —
19:50 Japan BoP Current Account Balance ¥2303.0b ¥2980.4b
19:50 Japan Trade Balance BoP Basis ¥919.0b ¥927.2b
19:50 Japan GDP SA QoQ 0.50% 0.40%
19:50 Japan GDP Annualized SA QoQ 1.90% 1.70%
19:50 Japan GDP Nominal SA QoQ 0.60% 0.50%
19:50 Japan GDP Deflator YoY 0.90% 0.90%Source: Bloomberg. Surveys updated at 5:30 a.m. New York time.
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CALENDAR
Click on the to see the full range of economists' forecasts on the terminal. highlighted releases
OVERNIGHT
The euro-area economy grew faster than previously estimated at the start of the year, driven by investment and a pickup in consumer spending. Gross
in domestic product rose 0.6 percentthe first quarter, the European Union’s statistics office in Luxembourg, said today. That’s the rate Eurostat initially reported on April 29 before revising growth down to 0.5 percent on May 13.
German industrial production in April in a sign that Europe’rebounded
s largest economy is benefiting from a pick-up in investment. Output, adjusted for seasonal swings, rose 0.8 percent from March, when it dropped a revised 1.1 percent, data from the Economy Ministry in Berlin showed today. The reading, which is typically volatile, compares with a median estimate for a 0.7 percent increase in a Bloomberg survey of economists. In Spain, industrial production was unchanged in April from the previous month.
Australia’s central bank stood pat on interest rates as it tries to prevent house prices reigniting in an economy growing near its 30-year average while grappling with weak inflation. The Reserve Bank
, which cut in May, avoided of Australiaforward guidance and left the benchmark at a record-low 1.75 percent today, as forecast by all but one of 26 economists surveyed. Its decision came less than a week after data showed an annual expansion of 3.1 percent in the first quarter and as April unemployment held at 5.7 percent, below its two-decade average.
Indian central bank Governor urged patience Raghuram Rajan
regarding his future plans after holding interest rates at a five-year low. “In all such cases the decision is reached after discussions between the government and the incumbent," Rajan told reporters in Mumbai today.
Europe
Asia
MARKET INDICATORS
Oil Near 'Sweet Spot' Puts U.S. Rig Count Back in Focus
Nine oil rigs returned to operation in the U.S. last week, the biggest gain since December and only the second addition this year, according to Baker Hughes Inc., raising concern that a production rebound may stifle crude’s recovery. Oil has surged from a 12-year low earlier this year, putting it within range of a“sweet spot” for shale output that Citigroup Inc. sees between $50 to $70 a barrel. Prices have gained amid disruptions to global supply and a slide in U.S. production, with 500,000 barrels a day cut from the market as the rig count fell to the lowest level since 2009.
— Ben Sharples, Bloomberg News
June 7, 2016 Bloomberg Brief Economics 5
MARKET INDICATORS
Source: Bloomberg. Updated 5:20 a.m. New York time.
June 7, 2016 Bloomberg Brief Economics 6
COMMENTARY MOHAMED A. EL-ERIAN, BLOOMBERG VIEW COLUMINST
June 7, 2016 Bloomberg Brief Economics 7
Bloomberg Brief: Economics
COMMENTARY MOHAMED A. EL-ERIAN, BLOOMBERG VIEW COLUMINST
Markets May Have Overreacted to Jobs ReportThe very sharp drop in yields on U.S.
Treasuries on Friday suggests that the fixed-income markets have interpreted the last week's disappointing jobs report as an indication that the economy is facing diminishing demand momentum. As a result, traders significantly lowered their expectations of an interest rate hike by the Federal Reserve this summer, which also drove down yields elsewhere in the world.
This reaction is understandable, but it is but one of three possible conclusions to be drawn from the jobs report for May released Friday. The other two hypotheses are a lot less definitive about demand as well as the outlook for wages and inflation. And because each of the possible conclusions has some supporting evidence, none should be treated as dominant, at least yet, which may suggest that Friday’s market moves could have been an overreaction.
Undoubtedly, job creation in May was disappointing: Just 38,000 positions were added, far below the consensus expectations of about 160,000. And to make matters worse, the data for March and April were revised downward by a combined 59,000 jobs.
With a large drop in yields of around 10 basis points for both 2-year and 10-year Treasury bonds, the fixed-income marketsimmediately signaled notable concerns about the prospects for U.S. demand and
therefore economic growth and inflation. As a result, market participants essentially took a June interest rate hike completely off the table while significantly delaying expectations for the timing of any subsequent raises as well as their frequency. After all, the Fed had already expressed concerns about the fragility of the global economy and the resulting headwinds for U.S. growth, which has yet to reach “escape velocity.”
But that analysis holds only if the hypothesis of challenged demand turns out to have been correct. The other two possible explanations for the weak jobs data, if relevant, would qualify the markets’ conclusion.
One month’s numbers do not confirm a turning point. This is especially true of the inherently noisy monthly employment data. Moreover, there are other indicators suggesting that the U.S. economy, though far from excellent, continues to move forward. This data fluidity should lead to greater caution about any overly deterministic conclusions about the impact of Friday’s report, especially given that it contradicts the trend that was apparent in many of the previous months' employment data.
The third possibility is that the disappointing job-creation numbers have more to do with supply than demand. After all, the already frustratingly sluggish participation rate dropped by 0.2 percent,
to 62.6 percent, very close to its historical low. Simultaneously, wages grew by 0.2 percent in May, which brought the year-on-year increase to 2.5 percent. These add to other signals that are consistent with the view that the U.S. labor force may be experiencing the beginning of a skill-mismatch problem — though the data remains extremely partial and highly anecdotal.
For now, there is insufficient information to determine which of these three hypotheses will prevail. Indeed, all three could be in play at present, adding to the “unusual uncertainty” facing policy makers at the Fed.
This isn't to say that the Fed may in fact raise interest rates when its policy-making officials meet next week. It won’t. The probability of that happening was already constrained by the uncertainty surrounding the referendum on the U.K. membership of the European Union later this month.
But it does suggest that it may have been premature for markets to make suchdrastic changes to the outlook for interest rates for the rest of the year. And if they did come to a conclusion too hastily, as I suspect, investors will continue on a quite volatile interest rate journey this year as expectations for Fed actions fluctuate.
This column does not necessarily reflect the
opinion of the editorial board or Bloomberg LP
and its owners.
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