Friday, January 08, 2010

The Evidence For The Prosecution

Is Macro Man's non-predicition # 6 about to get thrown back in his face? The stars seem to be aligning for markets to seriously contemplate the timing of Fed rate hikes. Consider the evidence for the prosecution:

* Kansas City Fed president Thomas Hoenig (a noted hawk and a 2010 voter) said overnight that the Fed should move sooner rather than later on rates.

* St. Louis Fed president James Bullard (a hawk and 2010 voter) observed that housing is stabilizing, today's job report could show positive growth, and that the economy is strong enough to withstand some withdrawal of policy stimulus.

* Krishna Guha in the FT has an article suggesting that the Fed's own Taylor rule model suggests that the optimal policy rate turned positive in the middle of last year.

* The Federal Financial Institutions Examination Council issued an advisory yesterday on interest rate risk management. Perhaps this represents a warning shot on liquidity-gorged carry trades?

* Rumours of a seasonal-adjustment driven uber-print for today's payroll figures.

The confluence of these factors is curious, to say the least. Then again, so, too is the relatively muted reaction for fixed-income markets; US yields are still down on the week. Of course, while Hoenig and Bullard are hawks, they do have dovish counterparts on the board....most notably a certain "B. Bernanke", whose Great Depression scholarship will no doubt make him all too familiar with the 1937 comparisons that have arisen in recent days.

The implication that the Fed's own Taylor rule analysis is interesting, but hardly overwhelming; after all, it was just a few weeks ago that several FOMC members were arguing for more QE! That's hardly the behaviour of a group that is going to put rates up any time soon.

As for the rate advisory, it looks like it was lifted straight from a textbook. Reading the actual text, it's pretty clearly not intended for any sort of sophisticated institution; indeed, it looks like an addition to a guideline corpus that extends back nearly 15 years. So Macro Man is a bit loathe to itnerpret this as a "nudge, nudge, wink, wink" warning that rates are going up soon.

Finally, the employment data. While it may well prove positive, and that may perhaps result from s/a factors, it seems odd that none of the 76 professional forecasters surveyed by Bloomberg appear to have noticed the impact cited by Zerohedge; the highest forecast of that group is a "mere" +100k.

In any event, as cited yesterday, the spare capacity in the labour market is enormous; based on the U-6 data, the true level of unemployment in the US is over 26 million; that's more than the entier population of Australia or Saudi Arabia.
That looks like quite a bit of resource slack to Macro Man, especially for a central bank with an employment mandate. So in any ways, he hopes for a big print today that sends short-end yields screaming higher; it could well set up an entry point for the first big trade of the year.


Anonymous said...

Everyone seems mega-bullish. I start worrying about it. Everyone bets on a better number this afternoon and the market could rally by more than 3%.

What will happpen if the number is not good? a mini-panic?

Anonymous said...

"first big trade of the year" - if you mean shorting the crap out of any fixed income instrument in any developed country you like, then I agree with you.

Anonymous said...

Oh, the economists noticed the impact cited by ZeroHedge. It's just better to have a lower number and overshoot dramatically (for the rigged market up purposes) than to be in the ballpark and come in to consensus.

Donlast said...

It is clear there is an all-pervasive trust in the integrity of all markets and their participants, especially those participants with the mojo.

I think its time to go greyhound racing at Romford. At least you can see that all the dogs have got four legs.

Macro Man said...

Don, funnily enough, some lads from the office are going to Romford dogs with GS next week. (I'm taking Mrs. M to see Billy Connolly. It'll do her good to see someone that swears more than me.)

leftback said...

Weak number. Bulls may argue this is good news as it means continued easing. Given all the holiday retail hiring this isn't exactly a picture of a robust economy. But then we knew that, right?

Crisis Management said...

ADP strikes again.

leftback said...

The next NFP is likely to be worse b/c of the annual tendency by BLS in the January number to remove some of the B/D voodoo adjustments to the NFP.

To be honest you get a much smoother and better picture from looking at hours worked and U-6, these NFP numbers and ADP are incredibly noisy.

Anonymous said...

why did CHF get smack after payrolls?

Bob_in_MA said...

The jobs number for January may get a boost from a seasonal adjustment: Christmas season retail hiring was less than usual, so the seasonal adjustment may drive the headline number up (the decrease in seasonal workers will be smaller because there were fewer of them.)

wcw said...

Yeah, that report was punk. Employment/population down to 58.2 (last time we were that low was 1983; first time we hit that as a new high with women entering the workforce was 1973). Aruoba-Diebold-Scotti business conditions index below zero again on the print. Dollars to donuts we're growing production again nevertheless, but if employment continues this weak it's going to be Yellen's L-with-slight-upslope bottom for a while. Ugh.

FWIW, I'm positioned for a probable meander with potential for a stupid, hard up move. Still looking for good setups.

Greg said...

I think its amazing that market participants twist themselves into knots trying to over analyse an NFP number that we all seem to agree is wrong and has fundamental problems in its calculation

Anyone who actually went shopping during the x-mas season knew things were not picking up... people buying mostly essentials and window shopping, stores operating deliberately understaffed, and the price discounting had started way back in middle November

Of course, you wouldn't know any of that if you were myopically glued to your Bloomberg screen and redacted versions of the Fed's announcement.

What if the Fed used the word "the" instead of "a" everyone wondered? What is the symbolism / meaning of that change?

What if we all actually went outside and looked at what is really happening instead of worrying about what a bunch of disconnected politicians think is happening?

PJ said...

Two things were interesting to me about NFP:

This was the first month since April that BLS numbers didn't show substantially better payroll changes than ADP. Could be that after 7 months of data manipulation BLS no longer has room to rig numbers upward.

Second, the market reaction. Curiously muted to a very weak number. Lots of call buying in response to it.

I'm with Bob in MA, I expect a relatively good report next month. But as I said a few months ago, due to flawed statistically adjustment procedures, initial claims reports will come in far better than the underlying reality, and so people may get expectations for monthly NFP to be better than the are based on seemingly great claims data. So NFP could disappoint.

But I do see some improvement in the labor market in late December after the Dec 12 survey date, so Jan report should be the first positive one for payrolls (excepting Nov +4,000).

k1 said...

Question for the experts: Simon Johnson on CNBC recently warned about the TBTF banks taking on more risk and growing their balance sheets since the crisis. (not posting a link b/c I've seen the clip on several blogs recently, but will if people can't find it easily).

In the clip, Faber challenges Johnson on his numbers, but neither provides concrete evidence for or against the assertion. Can any of the folks here point out the figures Johnson refers to? To either prove or disprove?

Ambling Aussie said...

Australia seemed to escape the recession in 2009 and here it's like living on a different planet. But Macro Man's stats on Chinese commodity imports paint a very worrying picture for Australia, since it's 2009 performance was based entirely on Chinese commodity imports.