Down the hole?

It's Jackson Hole week, and markets are at least slightly abuzz at a speech given by Stan Fischer wherein he observed that the Fed is close to its targets.  This in turn has been taken as a sign that the door for a 2016 rate hike remains open, even though the immediate policy outlook received short shrift from his speech- it was mostly focused on the issue of low productivity growth.  Still, the belief is there that perhaps the core of the Fed is edging away from its permanently glass-half empty worldview, given that Dudley has also seemed receptive to a rate rise recently.  The million dollar question, of course, is whether Janet Yellen also cleaves to this belief, and if so will she get off the fence in Jackson Hole.

The preponderance of historical evidence suggests that the answer to that question is an unequivocal "no", of course.  For the past few years, the slightest wobble at home or abroad has served to exercise a veto power over policy normalization (which is really what the current campaign is all about), and it seems difficult to credit that much of a radical change to that modus operandi is in the offing.

That being said, it does seem as if the domestic economy's momentum has improved recently; the Atlanta Fed's GDP Now measure looks for Q3 growth just shy of 4% annualized.  To a large degree, this represents payback for the weakness of the prior couple of quarters; still, payback is a helluva lot better than an empty hole where growth was supposed to be.

A natural reaction is to observe that the GDP Now forecast is usually overly optimistic.   Natural, but incorrect.   Macro Man went back and tabulated the final GDP Now forecast for each quarter along with the eventual out-turn.  In point of fact, the Atlanta measure has under-estimated growth by a cumulative  1.4% over the last five years, as illustrated in the chart below.

  
So if the GDP Now forecast is correct (and admittedly it could still be revised down, perhaps dramatically), that would represent the strongest rate of GDP growth in two years, and take YTD growth back to a 1.87% annualized rate, which is pretty close to trend these days.  Obviously a forecast is a pretty flimsy foundation for a policy shift given the Fed's past behaviour, which is no doubt why many on the committee want to see the forecast come to fruition before countenancing another (oh-so) modest shift in the policy stance.  On the other hand, as the old saying goes money talks and bullshit walks, and Esther George at least seems tired of the Fed's two-year stroll down Uncertainty Lane.

While fixed income puts over the past few years have been the greatest waste of money since buying the Pets.com IPO, it's interesting to note that bonds have entered what might be termed the "corridor of uncertainty", pictured below.   The current price zone has represented the support level since the Brexit vote while also serving as resistance prior to that episode.

As noted last week Macro Man trimmed some of his tactical fixed income short before the minutes, and he will almost certainty cut the rest before Janet takes the mic in Wyoming.  However, it is worth bearing in mind that if she decides that part of a "resilient monetary policy framework" is not panicking every time a Chinese noodle stand runs into a spot of bother, bond could really go down the hole (both literal and figurative.)

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