Liveblogging: The Anglo-Saxon Chronicle: Erkenbert

August 9, 2019: Weekly Forecasting Update

FRED Graph FRED St Louis Fed

There was essentially no news about real GDP last week: The Federal Reserve Bank of New York nowcast continues to stand at 1.6% for 2019:Q3. We did see another fifteen basis points of market easing at the long end of the yield. Curve: the 10-Year TIPS yield is now 0.09%. And that, of course, makes equity stock market investments a deal. Patrick Chovanec is worth reading:

Patrick Chovanec: Outlook: "Besides consumption and government spending... the rest was negative in Q2...

...Exports fell by −5.2% while imports were flat... business investment fell by −0.6%, its first quarterly decline in over three years.... Durable goods orders in Q2 were down −2.1% from a year ago.... (The slowdown in U.S. manufacturing matches similar purchasing manager surveys in Europe, Japan, and China, which are all in outright contraction).... Residential investment fell −1.5% in Q2.... New housing permits... were down −4.5% in Q2, from a year ago...

The new tariffs on China—10% on virtually all imports that aren’t already tariffed at 25%, scheduled to take effect in September—are exactly what U.S. companies across multiple sectors have worried and warned about for nearly a year now. Though their direct impact may be limited, the prospect of further escalation hangs like a cloud over business confidence....

Given these uncertainties, U.S. share prices may look daunting even at a 12-month trailing P/E ratio of 19.1x operating earnings, which is far from excessive by historical terms. But they look better compared to U.S. Treasuries at an implied P/E ratio of 60x, returning little more than inflation, or the nearly $15 trillion in bonds around the world selling at negative yields. Safe harbors are expensive, and likely to prove costly over the longer term, even if the economy could stumble in the meantime. With an equity risk premium at 5.6%—before the latest dip in share prices and bond yields—the prospective rewards to riding out the storm, as opposed to running for cover at any price, are too high for an investor who can endure a few bumps along the way to ignore...


Talking Points:

  • The Federal Reserve has, largely through jawboning, eased policy substantially over the past six months.
  • The trade wars that Trump is waging is a major source of uncertainty, and a possible recession risk.
  • U.S. potential economic growth continues to be a hair above 2%/year.
  • There are still no signs the U.S. has entered that phase of the recovery in which inflation is accelerating.
  • There are still no signs of interest rate normalization: secular stagnation continues to reign.
  • There are still no signs the the U.S. is at "overfull employment" in any meaningful sense.
  • The Trump-McConnell-Ryan tax cut has been a complete failure at boosting the American economy through increased investment in America.
    • But it has been a success in making the rich richer and thus America more unequal.
    • And it delivered a short-term demand-side Keynesian fiscal stimulus to growth that has now ebbed.
    • Those who beat the drum for it owe us an explanation for why they got it wrong.
    • They have not provided one: shame on them.

  • A change from one week ago: The market continues to low4r interest rates at the long end of the yield curve.

  • A change from one month ago: A no-deal Brexit is now not just a possibility, but more likely than not.

  • A change from 3 months ago: The Federal Reserve has—behind the curve—become convinced that it raised interest rates too much in 2018, and is now likely to cut them.

  • A change from 6 months ago: Trump trade-war tensions are higher.

#macro #forecasting #highlighted  #mediumform
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