Albert Edwards at Society General commented today on Central Bank Hubris, deflation, and the flattening of the US yield curve. Here are some email snips.
How’s this for Grade 1 central bank hubris?
Peter Praet, the ECB’s chief economist said in a recent interview that, “Since the crisis, we have had serious concerns about deflationary risks on several occasions in the euro area, but now we can say they have disappeared.”
Really? Has he seen the chart above, which shows core CPI in the Eurozone heading sharply lower and now approaching its all-time low seen at the start of 2015! Not only that, but Eurozone inflation expectations are also declining again, after surging in the aftermath of Donald Trump’s election. To be fair, Praet was focusing on the rise in headline inflation in the Eurozone, which touched 2% in February before dropping back in March to 1½%. After some 18 months bobbing around the zero mark, I can understand why central bankers might be heaving a sigh of relief, but for them to take credit for a recovery in headline inflation is totally disingenuous given it has been entirely driven by a recovery in the oil price.
Similarly, Janet Yellen was quoted saying the Fed is “doing pretty well” in meeting its congressionally mandated goals of low and stable inflation and a full-strength labor market. It’s this sort of comment that has led Marc Faber to want to short central bankers, the only way being to buy gold. The increasing volume of central bank hubris may even explain the recent breakout of gold to the upside!
It is not just eurozone inflation expectations that seem to be in retreat. The same thing is happening in the US too (see chart below). I am always surprised how dominated 10y inflation expectations are by short-term movements in the oil price and headline inflation, but it was noticeable just how rapidly inflation expectations ran up in the wake of Trump’s election – way in advance of what might have been expected by the bounce in the oil price.
One might have thought the surge in the oil price from its trough some 12-18 months ago might have had more impact on wage inflation, but so far that does not seem to be the case.
Despite the euphoria in the markets about the “reflation trade”, survey inflation expectations have continued to drift downwards. One thing is certain: for central banks to call victory over deflation may prove very premature indeed. Nemesis awaits.
Reflation Trade Is Over
The reflation trade is over. It is fitting central banks now brag about oil-related and Trump-related phenomena over which they had zero control.
I discussed similar ideas in a series of recent posts including:
- Yellen’s Self-Serving Assessment: Fed is “Doing Pretty Well”
- “Secular Low in Bond Yields Remains in the Future” says Hoisington’s Lacy Hunt.
- PPI Services Shows No Price Pressures
- Hard-Boiled vs Soft-Boiled Economic Egg Debate: Cracking the Shells
- Six GDP Estimates: ZeroHedge, Mish, GDPNow, Nowcast, ISM, Markit
Mike “Mish” Shedlock.
Medex Man said:
I am going to let Soros’ troll army fill up the next few Mish posts. Maybe Mish will filter them out, who knows.
Happy Easter Mish
Please do not comment using a pseudonym of name “MishTalk” “Mish” or anything that could conceivably be mistaken for me. Such comments will be deleted regardless of merit.
Happy Easter Everyone
Deflation is a blessing for shoppers.
Jon Sellers said:
Happy Eater Mish and fellow commentators! Flying in from Soros’ troll army!
Question of the day: why the heck would rising oil prices impact wage pressures? You want a pay increase cause of higher gas prices? How about you find a new job?
I would think that rising oil prices would cut into the wages of workers. Best example would be an independent truck driver who has to pay for his own fuel. Fuel is a cost and comes out of any profit the driver makes.
If fuel is an inconsequential cost, wages could rise faster. This would happen where we switch from incandescent bulbs and copper wiring to LED bulbs and fiber optics, from internal combustion engines to electric vehicles, from energy storage in coal, natural gas, and oil to batteries. All of them still use fossil fuels to be produced but at a slower rate.
Carl R said:
As a practical matter, rising wages do lead to wage inflation. Yes, when gas prices rise, and it cuts into their standard of living, employees might seek other jobs. Employers don’t want to lose their good employees, so employers do give wage increases. They raise prices, to adjust, of course, which is why oil price increases eventually flow into all goods. The CPI not including oil doesn’t shift as fast as when you include it (in either direction), but over the long term they are about the same.
When Yellen says she thinks she’s doing pretty well, what that really means is that she thinks this is as good as it gets. People making financial decisions in the belief that the Fed (almost a decade after the financial crisis!) knows how to improve the economy will be in for a rude surprise when the economy continues to do nothing but sputter at best, and fall into another crisis at worst. Either way, the folks at the Fed will consult their economic textbooks for yet more pseudo scientific mathematical formulas that they will try to pass off as economic theory, even as their irrelevance becomes more and more obvious.
Tony Bennett said:
Retail sales were fugly this morning
A big miss for March … + January and February revised lower.
Another whack to Q1 GDP estimates.
The ballon cannot be inflated any further, it is time for regression or if you prefer, slow growth bordering on stagflation, the mother of all disasters for our financial grow at all cost system.
Peaceful and Happy Easter to everyone.
Some indicators lining up for slow down.
Tony Bennett said:
“The reflation trade is over.”
March out this morning
expected … 0.0%
actual … -0.3%
expected … +0.2%
actual … -0.1%
Looking more and more like Mish was right.
The Fed’s next move will be a rate cut.
Thinks so too.
Considering events in North Korea, Syria, MOAB’s in Afghanistan et al, and with rate cuts being an indicator of defeat on the part of the money controllers, my guess is the War Trade is now on. This was, of course, the end game should all else fail,,,,and here we are.
Seems social, infrastructure etc. boondoggle spending largess is off the table, but war is an easy sale. Just need a few 8×10 glossy color photos of dead kids buzzing through the corporate media and voila, public demand is created for unlimited MIC spending.
Got Military Industrial Complex Stawks? Oh, and judging by the way this out of control bureaucracy screws things up on a very predictable basis, might want to mix in a little precious metals insurance,,,,,, for when they lose the Mother of All foreign meddling campaigns.
To follow all of this “data” is only to pretend that we somehow can use it to predict the future, but it must surely be apparent by now that the only ones who can predict the future are those who are actually creating our future. This “data” feels like it is intended as a pacifier, something to suck on that actually provides no real sustenance, but keeps our interest and appetites alive. Keeps us in the game. Just one more throw of the die. One more spin of the wheel. That there is a chance…..
Our fate ultimately will be determined by the gamblers and the owners of the casino, whether we are direct participants or not. There is NO action that we can undertake that is not in response to what they have created, and as such cannot be perceived as escaping their influence.
Tony Bennett said:
Well, CPI “crashing” for March helped real wage earnings … but still losing the war.
Real average hourly earnings for all employees increased 0.5 percent from February to March, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from a 0.2-percent increase in average hourly earnings combined with a 0.3-percent decrease in the Consumer Price Index for All Urban Consumers (CPI-U).
From March 2016 to March 2017, real average hourly earnings were unchanged, seasonally adjusted. The unchanged real average hourly earnings combined with a 0.3-percent decrease in the average workweek resulted in a 0.3-percent decrease in real average weekly earnings over this period.
Jon Sellers said:
Gotta love deflation…
In their shoes – wouldn’t you want to shout mission accomplished first if you knew you had to change tack in the near future even if mission wasn’t accomplished?
Or more appropriately, if you knew you were incapable of fulfilling any mission. Wizard of Oz – that’s all the Fed is.