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2018-08-06Macro `n Cheese

What did I miss?

Welcome back! Since people are gradually starting to come back from vacations, Roger – also just back – thought it would be a good idea to write a wrap-up of what has happened, complete with some graphs of course.

It’s that time of the year, again, when clients and colleagues start to come back from vacations asking that same old question – So, what did I miss?I thought we would entertain ourselves with discussing a few graphs of economic developments over the past few weeks. You know the tendency for Euro Area data to under-perform compared to US data that we saw before vacations? It’s still on.


Admittedly, the ‘degree of surprise’ is diminishing, but I attribute this to expectations being revised for the Euro Area (the opposite holds for the US). These impressions solidify when looking at the most important outcomes during the past few weeks:



Now about that strong Q2 US GDP-outcome, I think it’s important to dive into some detail:


While most analysts agree that it was a strong1 outcome, some suggests it’s a temporary growth spurt, e.g., due to the tax cuts as well as soybean exports picking up, in anticipation of higher Chinese tariffs. Others, nonetheless, go all philosophical; “One swallow does not a summer make, nor one fine day; similarly, one day or brief time of happiness does not make a person entirely happy”. More optimistic economists (now that’s an oxymoron for you) flat out admit that the economy is booming, especially considering that inventories cut one full percentage point from growth.

1 Which was duly noted in the FED's communication after the 1 August policy meeting. The only material change in the statement was regarding growth, now characterized as “strong” rather than “robust”.

Now, my own take is a middle-of-the-road approach. At 4.1% AR, Q2 GDP-growth was undeniably strong and, yes, the inventory contribution serves to underline that strength. But comparing contributions to GDP across the two latest quarters insinuate that current demand is strongly policy induced. First, the contribution from non-residential fixed investments decreased, suggesting that the much-touted investment boom (concentrated to extractive industries, btw) after the Trumpian corporate tax cuts is already starting to fizzle out. Furthermore, the net exports contribution is by and large an effect of agricultural goods exports, which lends credibility to the ‘soybean-explanation’ mentioned above.

And, last but definitely not least, it was private consumption expenditures that really got the economy to rock in Q2. There is indeed some upward trend in [nominal] earnings, but households have also enjoyed strong tax cuts, and between Q1 and Q2 they even cut down somewhat on savings. This, I believe, taken together, was the principal reason for strong consumer demand in Q2. In short, I would more actively ponder if the strong Q2 outcome was more than a one-off if fiscal positions where long-run stable and monetary policy “normalized”.

Of course, I do find the household’s strong demand growth encouraging. This article by President Obama’s CEA-chair is well-measured, and especially when read in conjunction with this comment, covers a lot of the current economic and policy debate (and is more or less where I stand, as well). Nevertheless, to me, the productivity-puzzle remains a question mark.

In my opinion, this discussion is nicely demonstrated by another data set that was published in conjunction with the national accounts numbers, the Employment Cost Index.



Whereas the more optimistic trend seen over the past couple of years seems intact, the pace of improvement is excruciatingly slow (and volatile).

In sum, then, the divergence in economic developments between the US and the Euro Area noticed during spring and early summer is continuing. The FED and the ECB are conducting monetary policy accordingly. Id est, it is steady-as-she-goes in the US and hedging-all-bets in the Euro Area (or perhaps ‘Waiting For Godot’ is a better way to label Euro Area monetary policy discussions).


How about the rest of the world?

At the time of writing, the Bank of England just announced that they would hike rates for the second time and despite claims of this being perfectly anticipated, the Sterling strengthened (at least initially). Anticipated maybe, but was it right? From what I hear and read, the Brexit-negotiations are not going all too smoothly. However, with one hike a year as a “rule-of-thumb”-forecast, maybe it doesn’t matter all that much?

Bank of Japan tweaked their yield-curve-control policy somewhat and now allow 10-year rates as high as 0.2%, which financial markets will probably be quick to challenge. As is customary, these days, BoJ pushed the date for reaching the inflation target further on in time.

Bacen (Banco Central do Brasil) has also left the interest rate unchanged (as did Bank of Mexico), betting that the recent inflation spike has little to do with the weak BRL but is all attributable to the paralyzing truckers’ strike last month. Reserve Bank of India does not seem as lenient, hiking rates to fight off rising cost pressures.

Truth been told, there has been very little focus on Chinese economic data over the past months, but the government’s alleged push-back on excessive lending receives a lot of attention as does the nagging feeling that maybe, just maybe, China is using the exchange rate to compensate for the tariffs that President Trump and his acolytes are championing.



However, the USD’s weight is ¼ of the CFETS-index, implying that the weakening of the CNY we have witnessed over the past few weeks is mainly a result of USD-strength as the CNY has simultaneously held steady to other countries’ currencies. (The opposite was true when the CNY appreciated during 2017.) Should these developments endure even if the USD was to stabilize against other currencies, I would, nonetheless, be more inclined to call foul.

There is of course a lot more going on in the world economy then what I have managed to detail in this short summary, but it should cover the main events over the past few weeks.

I look forward to discussing developments through autumn with all of you!



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We don’t usually have views and opinions about economic and financial states of affairs, (not ones that we express publicly as a company, anyway). We do believe, however, that people can and do appreciate a variety of perspectives. What you’ve just read is the perspective of our resident chief economist. While we think he’s very smart, Macrobond Financial does not expressly endorse the views he presents here. And, as the old adage goes, you shouldn’t believe everything you read (not without finding the data, performing a few analyses and presenting it in a nice chart). We want to make it clear that we are not offering this information as investment advice. That being said, if you have the application you can easily check everything that’s mentioned here, and decide for yourself. If you don’t have the application, now you have a great reason to get it.