Thursday, July 19, 2007
So yesterday's big event risk was, at the end of the day, pretty bland. US core CPI was modestly higher than expected, but no one cared as they were waiting for Bernanke. The Fed chair's testimony was, to Macro Man's reading, relatively balanced, offering something for just about everyone to use to justify their preconceived viewpoints.
Predictably, hawks focused on the failure to downgrade the 2007 inflation forecast and the observation that the headline PCE deflator is running at a pace that's much too high for comfort. Doves, meanwhile, anchored on the surprising modest downgrade to 2008 growth expectations. To Macro Man, the most interesting bits of the whole farrago dealt with issues away from the economic cycle. That BB devoted 1/5 of his testimony to discussing the Fed's brand new regulatory vigour on subprime smacks of horse-already-bolted ass-covering of the first order. And Barney Frank's grandstanding on income inequality (a valid and pressing political issue, but surely one outside of the remit of the testimony) only serve to increase Macro Man's conviction that protectionism is a legitimate and pressing threat, and one that will get an increasing amount of airplay over the next sixteen months.
Macro Man owes the Central Bank of Russia an apology. Comrades, I never should have doubted your commitment to revalue the rouble. After the Rosneft fiasco of a couple weeks ago, the RUB has surged back (and indeed, through) the reval level against the EUR + USD basket. Now, about that James Bond style foreign policy....
Plenty of news from China as well, with the stats bureau releasing a torrent of statistics last night. Most significantly, GDP growth surged 11.9% y/y, the highest reading since 1995. Although China does not release quarterly expenditure-based breakdowns, ancillary data suggests that consumption, investment, and of course net exports all contributed to the strong reading. Retail sales growth of 16% y/y is impressive, though in comparison to per capita income growth of 18%, it's less so. Indeed, despite the strong growth of nominal and real incomes (and the paltry return on bank deposits), Chinese consumers continue to build savings.Slightly more troubling was the news that CPI rose 4.4% y/y, substantially higher than the forecast of 3.6% and the highest since September 2004. Macro Man is always amused by commentaries on Chinese inflation. Many of the same people who note the regime's desire to minimize social unrest by creating 10-15 million jobs per annum cheerfully dismiss the impact of sharply rising food prices (8.3% y/y in May.)
Now, Macro Man is au courant with the strong rise in Chinese labour productivity, but as far as he is aware that has not yet extended to workers being able to function for extended periods of time without victuals. Moreover, a "let them eat cake" response towards food price inflation has not historically been conducive to socio-political stability. And lest we think that food price inflation in China is a localized phenomenon attributable to temporary distortions, consider the remarkable correlation of food inflation in China and the US over the last few years, despite the obvious differences in their food consumption baskets.