U.S. economy expected to slow, damaged by trade war: Reuters poll

In World Economy News 24/08/2018

U.S. economic growth will slow steadily in coming quarters after touching a four-year high in April-June, according to a Reuters poll of economists, who expect President Donald Trump’s trade war to inflict damage.

Boosted in part by $1.5 trillion of tax cuts passed late last year, the U.S. economy expanded at an annualized rate of 4.1 percent in the second quarter, its strongest performance in nearly four years.

But the latest poll of more than 100 economists taken Aug. 13-21 showed they expect the U.S. economy to lose momentum and to end next year growing at less than half that rate.

The U.S. economy was forecast to grow 3 percent in the current quarter and 2.7 percent in the next, a slight upgrade from the previous poll.

But the short-term boost to growth from tax cuts was expected to wane. Economists trimmed their growth projections across most quarters next year leaving the outlook broadly unchanged and vulnerable to the trade conflict with China.

“The trade measures taken by the U.S. so far and the retaliation by foreign governments will probably slow down the economy only marginally,” noted Philip Marey, senior U.S. strategist at Rabobank.

“However, that could change in the case of a global trade war in which a range of foreign countries take protectionist measures aimed at the U.S., which is after all the party that is trying to change the status quo.”

Nearly two-thirds of 56 economists who answered an extra question said they have considered the impact of Trump’s expanding trade war in their U.S. growth predictions. That was a nearly identical proportion to a poll of economists covering the euro zone published on Wednesday [ECILT/EU].

The remaining 20 said the trade dispute has had no influence on their forecasts but underscored the downside risk if trade tensions deepen.

“At this time, with what we know and believe will occur, we acknowledge that risk to the outlook is to the downside with the trade disputes. That said, we have not substantially lowered our U.S. GDP growth outlook. Further deterioration and eventual performance could certainly change our outlook, however,” said Sam Bullard, senior economist at Wells Fargo.

While Trump has said these trade tariffs will benefit the U.S. economy, no economist polled by Reuters shared that view.

All the tariffs imposed and the retaliatory measures until now have been largely confined to Chinese industrial machinery, electronic components and other intermediate goods and has had only a limited impact on the U.S. economy.

However, the next round of tariffs planned for late September are aimed at consumer products and likely to have a negative impact on the overall economy as consumer spending contributes to over two-thirds of U.S. gross domestic product.

While the consensus suggests a slowdown in the world’s largest economy starting next year, only one of over 100 economists polled predicted an outright recession in 2020.

The poll gave a one-in-three chance of a U.S. recession in the next two years, a slight downgrade from a 35 percent probability of that happening in the previous poll.

But bond markets are telling a different story. The U.S. yield curve, as measured by the gap between two- and 10- year Treasury notes – is now just 23 basis points, the flattest since just before the last financial crisis.

That suggests a yield curve inversion – where the spread goes negative and which has accurately predicted five of the past six recessions – is coming soon.

Despite the threat from trade tensions, the Federal Reserve is still forecast to raise interest rates by 25 basis points in September and once more in December, taking the fed funds rate to 2.25 to 2.50 percent by the end of 2018.

For next year, though, economists forecast only two rate increases compared with three suggested by the U.S. central bank’s own “dot plot” projections.

Minutes released on Wednesday from the Fed’s latest policy meeting, held July 31-Aug. 1, hinted further removal of policy accommodation was likely to come “soon”, should strong data continue to support current economic projections.

The dollar snapped a five-day losing streak as traders took the minutes as a signal rates will rise next month.

Like economists in the latest poll, Fed officials also discussed the possible damage of trade conflict on consumer spending and business investment.

“The fading impulse from fiscal policy and impacts from trade uncertainty are a 2019 story … and the Fed will be focused on how its outlook is tracking today and how financial conditions are evolving,” noted economists at Morgan Stanley.

“Feeling no pain from its actions thus far, monetary policymakers are inclined to continue hiking.”

Source: Reuters (Polling by Mumal Rathore and Sujith Pai; editing by Chizu Nomiyama, Larry King)

Trade war will come back to bite US economy, suggests poll

In World Economy News 24/08/2018

US economic growth will slow steadily over the coming quarters after touching a four-year high in April-June, according to a Reuters poll of economists who expect President Donald Trump’s trade war to inflict damage.

Boosted in part by a $1.5 trillion tax cut package passed late last year, the US economy expanded at an annualised rate of 4.1 per cent in the April-June quarter, its strongest performance in nearly four years.

But the latest poll of over 100 economists taken Aug 13-21 showed the US economy will lose momentum over the coming quarters to grow at less than half that rate by the end of next year.

In the current quarter, the US economy was forecast to grow 3 per cent and then 2.7 per cent in the next, a slight upgrade from the previous poll.

But the short-term boost to growth from those enormous tax cuts was expected to wane. Economists trimmed their growth projections across most quarters next year leaving the outlook broadly unchanged and vulnerable to the trade spat with China.

“The trade measures taken by the US so far and the retaliation by foreign governments will probably slow down the economy only marginally,” noted Philip Marey, senior US strategist at Rabobank.

“However, that could change in the case of a global trade war in which a range of foreign countries take protectionist measures aimed at the US, which is after all the party that is trying to change the status quo.”

Nearly two-thirds of 56 economists who answered an extra question said they have considered a damaging impact from Trump’s expanding trade war in their US growth predictions. This was in nearly identical proportion to a poll of economists covering the euro zone published on Wednesday.

The remaining 20 said the trade spat has had no influence on their forecasts, underscoring the downside risk to the outlook if trade tensions deepen.

“At this time, with what we know and believe will occur, we acknowledge that risk to the outlook is to the downside with the trade disputes. That said, we have not substantially lowered our US GDP growth outlook. Further deterioration and eventual performance could certainly change our outlook, however,” noted Sam Bullard, senior economist at Wells Fargo.

While Trump has said these trade tariffs will benefit the US economy, no economist polled by Reuters shared that view.

All the tariffs imposed and the retaliatory measures until now have been largely confined to Chinese industrial machinery, electronic components and other intermediate goods and has had only a limited impact on the US economy.

However, the next round of tariffs planned for late September are aimed at consumer products and likely to have a negative impact on the overall economy as consumer spending contributes to over two-thirds of US gross domestic product.

While the consensus suggests a slowdown in the world’s largest economy starting next year, only one of over 100 economists polled predicted an outright recession in 2020.

The poll gave a one-in-three chance of a US recession in the next two years, a slight downgrade from a 35 per cent probability of that happening in the previous poll.

But bond markets are telling a different story. The US yield curve, as measured by the gap between two- and 10- year Treasury notes – is now just 23 basis points, the flattest since just before the last financial crisis.

That suggests a yield curve inversion – where the spread goes negative and which has accurately predicted five of the previous six recessions – is coming soon.

Source: Reuters

Drop in U.S. jobless claims points to labor market strength

In World Economy News 24/08/2018

The number of Americans filing for unemployment benefits fell last week, a sign the labor market was holding firm despite tensions between the United States and its trading partners that have led to tit-for-tat tariffs.

Initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 210,000 for the week ended Aug. 18, the Labor Department said on Thursday.

It was the third straight week of declines for claims, which have dropped so low that economists have scrambled for explanations. In July, claims fell to their lowest level since 1969 even though the workforce is much larger than in prior decades.

Economists polled by Reuters ahead of Thursday’s report had forecast claims rising to 215,000 in the latest week.

“At this rate, we will be talking about a new low again pretty soon,” said Stephen Stanley​, chief economist at Amherst Pierpont Securities.

Prices of longer-dated U.S. Treasuries were trading slightly higher while U.S. stock prices were mixed. The dollar .DXY was stronger against a basket of currencies.

A separate report from the Commerce Department showing a fall in sales of new homes gave fresh indications of a cooling U.S. housing market.

But the strength in the U.S. labor market has been a key reason behind the Federal Reserve’s ongoing campaign to raise interest rates.

Minutes of the U.S. central bank’s last policy meeting, published on Wednesday, showed officials discussed raising rates soon to counter excessive economic strength, although policymakers also examined how global trade disputes could batter businesses and households.

The Fed has already raised rates twice this year and is widely expected to do so again in September.

The claims data is being closely watched for signs of layoffs as a result of the Trump administration’s protectionist trade policy, which has led to an escalating trade war with China and tit-for-tat import tariffs with trading partners, including the European Union, Canada and Mexico.

While there have been reports of some companies either laying off workers or planning to as a result of the import duties, that is not yet evident in the claims data.

Thursday’s claims report showed “no sign of disruption in the U.S. economy despite recent trade policy tensions,” said Jesse Edgerton, an economist with J.P. Morgan.

Economists say a robust economy is helping the labor market weather the trade storm.

The Labor Department said data for Maine were estimated in the latest week. The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, dropped 1,750 last week to 213,750.

The claims report also showed the number of people receiving benefits after an initial week of aid dropped 2,000 to 1.73 million for the week ended Aug. 11. The four-week moving average of the so-called continuing claims fell 5,000 to 1.74 million.

Source: Reuters (Reporting by Jason Lange; Editing by Paul Simao)

Beijing retaliates as new US tariffs kick in on $16 billion of Chinese goods

In World Economy News 24/08/2018

A new round of U.S. tariffs on $16 billion worth of Chinese imports kicked in on Thursday, prompting Beijing to retaliate with its own levies on American goods worth the same amount.

The latest trade escalation comes as officials from the world’s two largest economies meet for tariff negotiations in Washington.

At 12.01 a.m. EDT on Thursday, the U.S. began collecting additional 25 percent duties on 279 Chinese import product categories identified by U.S. Trade Representative. Key products that will be hit by the duties include semiconductors, chemicals, plastics, motorbikes and electric scooters.

Beijing retaliated with its own fresh tariffs on $16 billion worth of additional imports from the U.S. including fuel, steel products, autos and medical equipment. The levies took effect the same time that the U.S. tariffs were imposed on Thursday, state news agency Xinhua reported, citing an announcement from the Customs Tariff Commission of the State Council.

China “resolutely opposes” the latest tariffs by the U.S. and will fight back against the latest duties, the Chinese Commerce Ministry said in an online statement, adding that Beijing will file a complaint to the World Trade Organization against the U.S.

The latest American tariffs — which come on the back of $34 billion worth of Chinese goods that were implemented in July — have spurred U.S. importers to place additional orders to be shipped and delivered ahead.

That has already contributed to higher ocean and air freight rates, and elevated warehousing costs in America, said Henry Ko, managing director for Asia at Flexport, a U.S.-based freight forwarding company. Overall, the entire supply chain will incur additional costs, added Ko.

“If trade war actually continues, prices for products across many industries will increase,” Ko told CNBC.

Little respite seen

U.S. and Chinese officials met on Wednesday in Washington for a new round of trade talks, but many are not expecting an easy compromise.

Even the U.S. president is not expecting much progress. Donald Trump told Reuters on Monday that he did not “anticipate much” from the talks led by U.S. Treasury Under Secretary David Malpass and Chinese Commerce Vice Minister Wang Shouwen.

The talks are the first formal interaction between U.S. and Chinese officials since June, when U.S. Commerce Secretary Wilbur Ross unsuccessfully sought to secure major Chinese purchases of U.S. soybeans and liquefied natural gas.

“I don’t see this ending soon, that’s for sure,” said Scott Kennedy, deputy director of the Freeman Chair in China Studies at the Center for Strategic and International Studies.

“The gulf between the Trump administration and the Chinese is as wide as the Pacific and it looks like it’s getting wider because the Trump administration thinks they are winning,” Kennedy told CNBC.

“The Chinese don’t look like they want to give in either. So I think the way this continues to play out is further escalation, finger-pointing and blaming, not a settling down of this anytime soon,” Kennedy added.

Trump has threatened to impose duties on over $500 billion of Chinese goods exported annually to the U.S. unless China agrees to sweeping changes in its intellectual property practices, industrial subsidy programs and tariff structure.

Beijing has denied Washington’s allegations that it systematically forces the unfair transfer of U.S. technology and insists it adheres to World Trade Organization rules.

“I think really if the hawks in the Trump administration get their way, where this ends is in a disengagement of the two economies, not in a settlement through the kinds of negotiations that have been going on in Washington today,” said Kennedy.

Afterall, these are “two sides who still think they have the upper hand if not the ability to withstand pressure from the other side,” Kennedy added, noting that the Chinese economy is still growing even though its stock markets have taken a hit recently.

Markets should expect bilateral tit-for-tat trade actions to continue for the foreseeable future as both the U.S. and China have managed to convince themselves that they wouldn’t “lose out in this trade war too much,” said Bo Zhuang, chief China economist at investment research firm, TS Lombard.

Beijing will allow the Chinese yuan to “passively devalue” in order to cope with the impact of the U.S. tariffs although authorities will likely blame any decline in thecurrency on the markets, Zhuang said.

“One way or the other, they have to do something. Otherwise the Chinese economy is going to tumble,” Zhuang added.

Source: CNBC

US-China trade war hits $100 billion in goods

In World Economy News 23/08/2018

From Harley-Davidson motorcycles and American bourbon to Chinese parts and machinery, the world’s two largest economies have exchanged punitive tariffs that slice through a wide swath of products.

As of Thursday, the United States is charging 25-per cent import duties on an additional $16 billion in Chinese products, bringing the total to over 1,000 items valued at about $50 billion in trade a year.

China has responded dollar-for-dollar on hundreds of US products, putting the total value of affected goods at $100 billion, one-seventh of total annual US-China trade.

The Trump administration says its aggressive stance is to pressure Beijing to change policies that allow the theft of US technology and undercut American producers.

The tariffs are aimed at Chinese goods, such as aircraft parts and computer hard drives, that Washington says have benefited from unfair trade practices.

China has accused the United States of starting the “largest trade war in economic history”.

Computers, electronics and machinery are among the hardest-hit, including $1.1 billion in imports of computer processors, and the same amount of electrical machines.

The next biggest victims are $700 million in integrated circuits, $500 million in solar cells, and $400 million in computer memory.

Also on the US hit list are milking machines for dairy cows, incubators for baby chicks, flight data recorders, x-ray tubes, bulldozers and arc lamps as well as motorcycles and mopeds.

While the top five targeted Chinese products total about $9 billion, there are dozens of products that have seen no imports — or in very small amounts — over the past two years.

Spacecraft, helicopters, microwave tubes, nuclear reactor parts, telescopes, locomotives and retread tires are among the goods subject to tariffs but unlikely to be hit by them in practice.

Ironically, the goods the United States has targeted are mostly intermediate products manufactured in China by multinational companies imported by US-based manufacturers, and miss Chinese firms, according to analysts.

The Peterson Institute for International Economics says nearly all of the US tariffs imposed on China to date are on intermediate goods and capital equipment needed by US industry.

China so far has retaliated in kind, hitting American agricultural goods and autos in July, along with new taxes on more than 300 US products Thursday.

Beijing’s latest volley is aimed at 333 US exports like hybrid electric and off-road vehicles, coal, dump trucks, asphalt, MRI machines and motorcycles, among other items.

Harley-Davidson will have to bump up the Chinese price of its iconic motorbikes at least 20 per cent, a store representative in Beijing said.

That adds to the American beef, pork, many types of fish, and dozens of fruits and nuts that were taxed in July.

The most painful perhaps is the tariff on US soybeans, which chokes off a key export market for American farmers, who shipped $14 billion of the beans to China last year.

The $50 billion in goods now subject to tariffs is only the first round.

The office of the US Trade Representative is looking into 25-per cent duties on another $200 billion in goods, with hearings underway this week. Those could take effect as soon as next month.

And as China has vowed to retaliate further, Trump has threatened to target all $500 billion in goods the US imports from the Asian giant.

Source: AFP

Trump and China are ratcheting up tariffs. Here’s what that means

In World Economy News 23/08/2018

Apple’s iPhone, umbrellas and shoes were some of the goods that made up the $505 billion worth of China-made products imported to the U.S. in 2017.

While many items imported to the U.S. are not taxed, American import duties totaled up to $33.1 billion that year — or about 1.4 percent of the total value of all imported goods, according to Pew Research Center. That percentage makes U.S. import tariffs among the lowest in the world, the Washington-based think tank said.

Still, many economists say increased tariffs would hurt not only the countries targeted by U.S. duties, but also the American economy itself.

“Any trade restriction is going to reduce trade and that’s not going to be good for China and obviously not good for the U.S. in the long run,” Hashem Pesaran, an economist at the University of Southern California, told CNBC.

A number of U.S companies have said increased tariffs hurt their businesses and increase prices for consumers.

“At the end of the day you become less efficient economically and therefore everybody will somehow suffer from it,” Pesaran said.

However, many — including Pesaran — remain positive about the fate of global trade.

“I somehow am optimistic that it won’t go that far,” he said. “One thing we’ve learned as economists, is that trade is good for everybody.”

Source: CNBC

India, other major countries casualties of booming American economy

In World Economy News 23/08/2018

Making America great again isn’t proving so great for other parts of the world.

With the rise in the dollar and interest rates already squeezing emerging economies just as President Donald Trump’s trade war threatens China, the US is set to be the only Group of Seven nation to see economic growth accelerate this year as Trump’s tax cuts kick in.

The end of the short-lived euphoria of a synchronized global upswing is already evident in financial markets. NatWest Markets notes its basket of so-called growth assets such as the Australian dollar and copper is down about 4.5 per cent this year compared with the almost 7 per cent gain of the Standard & Poor’s 500 Index.

The gap in performance “certainly captures the imbalanced nature of growth this year,” said Jim McCormick, head of cross-asset strategy at NatWest.

The global backdrop will frame discussions when the Federal Reserve holds its annual policy symposium this week in Jackson Hole, Wyoming, at which Chairman Jerome Powell will speak. The Fed’s two interest-rate hikes of 2018 have helped lift the dollar almost 6 per cent on a trade-weighted basis this year, making it costlier for international borrowers to repay loans.

For now, Mark Nash, head of fixed income at Old Mutual Global Investors, bets the domestic economy will keep the Fed raising rates although it could end up creating headwinds for itself.

“Once that pain in emerging markets gets particularly acute, that naturally will spread back to the US and change things in terms of how the Fed needs to manage domestic monetary policy,” he said on Bloomberg Television. “For now, you can’t fault what Powell is doing, but the implications of it might come back to haunt him.”

Evidence of a moderation outside of the US is already visible. Economists at JPMorgan Chase & Co. say although overall global growth is higher than its long-term trend thanks to the US, the share of countries performing above potential has fallen to 60 per cent from about 80 per cent in 2017.

China’s momentum has stalled as policy makers curb risky lending and the trade dispute with the US begins to bite, prompting policy makers to shift gears to signal a willingness to support activity. Economists also see a slowdown in Japan.

Across much of Europe, surveys and confidence indicators have turned lower this year in part because of export concerns. German factory orders — a gauge of future output in the euro area’s largest economy — posted their first annual decline in almost two years in June.

Italy is squaring up for a clash with investors over its fiscal plans, with implications for debt costs, while there’s no end to the uncertainty surrounding Brexit in the U.K.

Then there’s emerging markets. Turkey’s lira has plunged amid a political crisis, Venezuela has executed one of the biggest devaluations in history and Argentina is jacking up rates to protect its currency. While none have the heft to drag the global economy into a recession, the resulting fallout on markets could be a blow to confidence if the pain spreads to emerging market powerhouses such as Brazil.

Tom Orlik, chief economist at Bloomberg Economics, doesn’t expect emerging markets take down the world. He observes that excluding China, emerging and developing economies accounted for 24.6 per cent of global output last year, down from a peak of 26.7 per cent in 2013.

Cross border trade is though deteriorating, with growth rates in emerging economies slowing by a fifth in August, according to a gauge by logistics giant Kuehne + Nagel Group. They calculate that commerce in Brazil, South Korea, Taiwan, and India is shrinking by more than 5 per cent year-on-year.

“It is no longer a question of ‘if’ but more a matter of ‘how much’ Asian growth will slow in the second half,” Robert Subbaraman Singapore-based head of emerging markets economics at Nomura Holding said.

Source: Bloomberg

Fed Signals Readiness to Hike Again If Economy Stays On Track

In World Economy News 23/08/2018

U.S. central bankers are ready to raise interest rates again so long as the economy stays healthy, according to a record of the Federal Reserve’s most recent policy meeting.

“Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation,” minutes of the July 31-Aug. 1 Federal Open Market Committee meeting released Wednesday in Washington said.

The minutes said that “further gradual increases” in their target rate “would be consistent with a sustained expansion of economic activity, strong labor market conditions and inflation near the committee’s symmetric 2 percent objective over the medium term.” Many officials, the minutes said, “noted that it would likely be appropriate in the not-too-distant future to revise the committee’s characterization of the stance of monetary policy” in its statement, the minutes said. Describing policy as “accommodative” would at some point “fairly soon,” no longer be appropriate, the minutes said.

U.S. stocks fluctuated and the dollar fell following the report. Led by Jerome Powell, a Trump appointee who took over the chairmanship in February, policy makers are gradually raising rates. They aim to give the economy room to run while also trying to keep inflation expectations anchored.

Jackson Hole

There’s little evidence that the seven quarter-point increases since December 2015 are hurting growth. Nevertheless, the rate increases have drawn criticism from President Donald Trump. Powell may update his outlook when he gives a speech Friday on “Monetary Policy in a Changing Economy” at the Kansas City Fed’s annual forum in Jackson Hole, Wyoming.

Fed officials left the benchmark lending rate unchanged earlier this month while upgrading their description of economic growth in their statement to “strong,” compared to “solid” in June.

Much of their discussion during the meeting involved upside and downside risks.

Some participants raised the concern “that a prolonged period in which the economy operated beyond potential could give rise to inflationary pressures or to financial imbalances that could eventually trigger an economic downturn,” the minutes said.

Fed district banks reported that firms had “greater scope than in the recent past to raise prices” in response to strong demand or rising input costs.

Fiscal Stimulus

They debated the impact of the fiscal stimulus with some noting “larger or more persistent positive effects” as a potential upside risk. A few participants indicated “that a faster-than-expected fading” of fiscal stimulus or a larger-than-anticipated subsequent fiscal tightening “constituted a downside risk.”

“All participants pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risks,” the minutes said.

The staff gave a presentation on the lower boundary on interest rates and alternative policy tools. Participants emphasized there was “considerable uncertainty” about the economic effects of unconventional tools, the minutes said, and agreed to continue studying the topic at future meetings.

The staff forecast continued to project that the economy would grow “at an above-trend pace.” Staff economists also “continued to assume that the projected decline in the unemployment rate would be attenuated by a greater-than-usual cyclical improvement in the labor force participation rate,” the minutes said.

Data showing a robust U.S. labor market with inflation around the central bank’s 2 percent target have solidified investor expectations of another hike at their meeting next month.

The minutes also contained a rare mention of the chairman, saying Powell “suggested that the committee would likely resume a discussion of operating frameworks in the fall,” covering topics such as the size and composition of the balance sheet and the implication of new financial rules on reserve demand.

Source: Bloomberg

The Fed May Be About to Make a Mistake

In World Economy News 23/08/2018

The natural state of a capitalist economy is expansion. Recessions occur when “something breaks” rather than an expansion simply dying of old age. Unfortunately, central banks have a history of pumping the brakes for too long and too hard when attempting to contain growth and inflation and are often the cause of a recession.

Given that the Federal Reserve has now shifted away from its so-called third mandate of financial stability, which dominated much of the post-crisis period, and back to worrying about faster inflation, concern about too much tightening is warranted. While inflation is indeed accelerating, investors remain skeptical that higher prices are returning with the vengeance needed to justify the several more interest-rate hikes the Fed is talking about. We fear another Fed mistake is in the offing.

The chart below shows the percentage of official Fed communications — speeches, testimonies and statements — by topic since the mid-1990s. Inflation concerns and hawkish rhetoric make up well more than half the talk, and are crowding out dovish comments and global and financial-stability concerns.

Zeroing in on inflation, Fed Chairman Jerome Powell and his fellow policy makers at the central bank have talked more about inflation in 2018 than any other post-crisis year. A good example is Chicago Fed President Charles Evans, a longtime monetary dove, who has shocked Fed watchers by putting on his seldom-used hawk talons. Evans suggested the Federal Open Market Committee may need to raise rates to “somewhat restrictive” levels to combat anticipated inflation.

Evans justified his position by pointing to economic surveys which see more inflation on the horizon. In a Bloomberg Opinion column in May we argued that such surveys no longer work. Nevertheless, investors are acknowledging the Fed’s commitment to battling higher prices by fully pricing in a rate hike at the Sept. 26 FOMC meeting. Even the December meeting shows a very high 70 percent probability of a hike.

The next chart shows that this aggressive pace of rate hikes has decoupled from realized economic growth. The blue line shows the Citigroup U.S. economic data change index, which is an aggregate measure of incoming economic releases relative to one-year averages. The orange line shows the number of rate hikes priced in over the next 12 months. The data is clearly softening, yet expectations for rate hikes remain elevated. Inflation concerns are superseding actual economic data.

Is the Fed right to worry so much about inflation? Six years ago, the Fed adopted a 2 percent inflation target. As the chart below shows, other than the first few months after it was implemented, this target hasn’t been reached. Yet Fed officials are preparing for a battle by assuming inflation will exceed a target it has not hit it in seven years.

To illustrate how Fed talk is running ahead of market expectations, the chart below uses the central bank’s own words to estimate the number of rate hikes expected over a 12-month period. We modeled the number of rate hikes synonymous with Fed rhetoric from 1996 through 2007, and then projected it starting in 2008. The blue line provides a market-based expectation for rate hikes over the next 12 months taken from the futures market. The spread between market and Fed expectations for rate hikes is shown in the bottom panel. Values below zero show periods when Fed talk is more hawkish than market pricing.

This spread between Fed rhetoric and market expectations is also shown in blue in the chart below. It is compared to U.S. 10-year Treasury note yields. Periods of the Fed being more hawkish than markets have coincided with declining yields. Conversely, when the Fed is less hawkish than the market — positive blue line — yields have risen. However, this circumstance has been infrequent in the post-crisis period, which we believe has contributed to the inability of 10-year yields to break out to the upside. Fed rhetoric is giving bond vigilantes a reason to drive yields higher.

The case for more Fed tightening hinges on inflation. The Fed assumes it will return, and it is talking about hiking well ahead of the economic data and market expectations. If policy makers are correct, and the economic surveys are right this time and inflation returns, they have the correct policy. But if the surveys are wrong — like they have been for two decades — and the Fed is worrying too much about something that doesn’t materialize, then it risks “breaking” the nine-year old expansion and becoming the catalyst for a recession. Evans needs a better argument.

Source: Bloomberg

America’s Booming Economy Comes With a Cost for Global Growth

In World Economy News 23/08/2018

Making America great again isn’t proving so great for other parts of the world.

With the rise in the dollar and interest rates already squeezing emerging economies just as President Donald Trump’s trade war threatens China, the U.S. is set to be the only Group of Seven nation to see economic growth accelerate this year as Trump’s tax cuts kick in.

The end of the short-lived euphoria of a synchronized global upswing is already evident in financial markets. NatWest Markets notes its basket of so-called growth assets such as the Australian dollar and copper is down about 4.5 percent this year compared with the almost 7 percent gain of the Standard & Poor’s 500 Index.

The gap in performance “certainly captures the imbalanced nature of growth this year,” said Jim McCormick, head of cross-asset strategy at NatWest.

The global backdrop will frame discussions when the Federal Reserve holds its annual policy symposium this week in Jackson Hole, Wyoming, at which Chairman Jerome Powell will speak. The Fed’s two interest-rate hikes of 2018 have helped lift the dollar almost 6 percent on a trade-weighted basis this year, making it costlier for international borrowers to repay loans.

Minutes of the Fed’s most recent policy meeting, due later on Wednesday, may provide clues on the outlook for rates in 2019. For now, Mark Nash, head of fixed income at Old Mutual Global Investors, bets the domestic economy will keep the central bank raising rates although it could end up creating headwinds for itself.

“Once that pain in emerging markets gets particularly acute, that naturally will spread back to the U.S. and change things in terms of how the Fed needs to manage domestic monetary policy,” he said on Bloomberg Television. “For now, you can’t fault what Powell is doing, but the implications of it might come back to haunt him.”

Evidence of a moderation outside of the U.S. is already visible. Economists at JPMorgan Chase & Co. say although overall global growth is higher than its long-term trend thanks to the U.S., the share of countries performing above potential has fallen to 60 percent from about 80 percent in 2017.

China’s momentum has stalled as policy makers curb risky lending and the trade dispute with the U.S. begins to bite, prompting policy makers to shift gears to signal a willingness to support activity. Economists also see a slowdown in Japan.

Across much of Europe, surveys and confidence indicators have turned lower this year in part because of export concerns. German factory orders — a gauge of future output in the euro area’s largest economy — posted their first annual decline in almost two years in June.

Italy is squaring up for a clash with investors over its fiscal plans, with implications for debt costs, while there’s no end to the uncertainty surrounding Brexit in the U.K.

Then there’s emerging markets. Turkey’s lira has plunged amid a political crisis, Venezuela has executed one of the biggest devaluations in history and Argentina is jacking up rates to protect its currency. While none have the heft to drag the global economy into a recession, the resulting fallout on markets could be a blow to confidence if the pain spreads to emerging market powerhouses such as Brazil.

Tom Orlik, chief economist at Bloomberg Economics, doesn’t expect emerging markets take down the world. He observes that excluding China, emerging and developing economies accounted for 24.6 percent of global output last year, down from a peak of 26.7 percent in 2013.

What Our Economists Say:

“From Asia’s 1997 meltdown to the periodic crises afflicting Latin America, seismic shocks for emerging markets have been little more than ripples on the surface of their developed neighbors. A look at the aggregate numbers for emerging markets’ share of global output, trade, and financial market capitalization suggests this time will be little different.”

–Tom Orlik, Bloomberg Economics

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Cross border trade is though deteriorating, with growth rates in emerging economies slowing by a fifth in August, according to a gauge by logistics giant Kuehne + Nagel Group. They calculate that commerce in Brazil, South Korea, Taiwan, and India is shrinking by more than 5 percent year-on-year.

Asia’s slowing bears watching. Excluding Japan, the region’s contribution to global growth was 40 percent in 2017 compared with 23 percent in 2007, reflecting its larger economic size and deepening integration with the world, according to Robert Subbaraman, Singapore-based head of emerging markets economics at Nomura Holding.

“It is no longer a question of ‘if’ but more a matter of ‘how much’ Asian growth will slow in the second half,” Subbaraman said.

Source: Bloomberg