Yellen: No Rate Rise Until Economic Outlook Clears Janet Yellen affirmed the Federal Reserve won’t be raising interest rates until new uncertainties about the economic outlook are resolved, echoing conclusions investors drew Friday after weak jobs data.
(…) Her comments represented a shift from less than two weeks ago, when she confidently said a strengthening economy meant the Fed likely would move rates up again in the “coming months.” She dropped that time frame reference Monday. (…)
Ms. Yellen also said a number of “considerable and unavoidable” uncertainties could affect the economic outlook and the path of interest rates, including sluggish global growth, weak business investment, low U.S. productivity growth and uncertainty about the outlook for inflation.
“The uncertainties are sizable, and progress toward our goals and, by implication, the appropriate stance of monetary policy will depend on how these uncertainties evolve,” she said. (…)
On an upbeat note, Ms. Yellen said she expects the economic expansion to continue, noting that overall the labor market’s progress has “been quite positive,” household incomes have been rising, the housing sector is strong and fiscal policy is now providing a boost to the economy, rather than a drag. (…)
“Speaking for myself, although the economy recently has been affected by a mix of countervailing forces, I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones,” she said.
(…) and then went on to list a number of reasons she thinks that is so, including the low level of weekly jobless claims and the recent step up in consumer spending.
What she didn’t do, however, is give even a hazy indication of when the Fed might again raise interest rates. This was in contrast to last month when she said it would be probably be appropriate to raise rates “in the coming months.” And it was in contrast to the minutes of the Fed’s April meeting, which repeatedly mentioned the possibility of raising rates at next week’s meeting. (…)
FYI, in her speech yesterday, Mrs Yellen used the word “uncertain” 15 times and “uncertainties” 5 times. Is this really dovish?
The WSJ’s James Mackintosh writes an interesting piece today: You Know Almost Nothing About the Economy; Get Used to It
(…) The payrolls figures have a huge margin of error, are subject to big revisions, and offer little in the way of guidance to the future. The Bureau of Labor Statistics is 90% sure that its conclusion of 38,000 jobs created is right to within 115,000 jobs, and so lies somewhere in the range of a loss of 77,000 to the creation of 153,000 jobs.
(…) payrolls are subject to big revisions, averaging 43,000 in either direction since 2003 and occasionally, as in November of 2012 and 2014, adding more than 100,000 jobs to the initial report. It is possible the bad May figures could be revised away. (…)
The hardest thing to do is to accept the uncertainty. With error margins, revisions and the shifting structure of the economy, it isn’t only jobs figures that might mislead. Paul Donovan, global economist at UBS Investment Bank, points out that many survey measures have become less reliable as fewer consumers fill them in, although this doesn’t apply to the corporate payrolls survey. The rise of self-employment means even company data, though, are less representative than before. (…)
Not only don’t we know where the economy is going. We don’t even know where it is, and after revisions we frequently find we were wrong about where the economy was, too. (…)
Investors who give up their pretensions to know where the economy is going can find ways to construct sensible portfolios. The first is to focus on the one thing you do know: how much you paid. Buy low, and there’s more chance of being able to sell high. The second is scenario planning. While you can’t reliably forecast the economy, you can look at possible extreme outcomes and invest accordingly. The final one is diversification. It may not help much in a crisis, when everything moves together, but in the absence of any other information, a spread of assets and countries is the best alternative to perfect foresight.
This is not a paid advertisement for Bearnobull, although it is what I advocate:
- Accept that we don’t know the future.
- Understand where we are on valuations to be able to calculate potential upside vs downside (reward vs risk) based on fundamentals.
- Monitor trends in economic data and investor sentiment.
- Assess scenarios from the above.
- Set investments on probabilities, emphasizing valuations over trends. It is not as bad to be wrong on trends when valuations are low then when they are high. Buying low brings time on your side.
- Be disciplined and patient.
Regarding economic uncertainty, one way to live with volatile and unreliable data is to focus on trends rather than on specific data points. Another way is to focus on the more solid data sets. Markit’s PMI surveys are the best sources. The data come from corporate purchasing managers whose job it is to monitor and understand what’s going on upstream and downstream, i.e. at the client level (demand) and at the production level (supply). These guys specialize in trend analysis, their data is accurate (within the limits of a survey), timely and never revised. Markit does the same surveys on manufacturing and services across the world simultaneously every month, even providing flash estimates three-quarters of the way. This is why I post them dutifully.
Shipping volume is often used to track global trade, but air freight levels are even more closely tied to global production levels, an International Air Transport Association analysis shows. A softening in world trade demand in early 2016 is echoed in air freight volumes during that period, IATA says.
Trains too as this Raymond James chart shows:
And trucks (RJ):
China warned on hostile business climate US officials and EU executives feel increasingly unwelcome
Foreign multinationals feel increasingly unwelcome in China, American officials and European business executives said on Tuesday, at the start of a second day of high-level Sino-US talks.
“Concerns about the business climate have grown in recent years, with foreign businesses confronting a more complex regulatory environment and questioning whether they are welcome in China,” Jack Lew, US Treasury secretary, said ahead of a meeting with senior US and Chinese business executives. (…)
Only 47 per cent of European businesses plan to expand their China operations, according to the chamber’s annual business confidence survey, down from 56 per cent last year and 86 per cent in 2013. (…)
It said 41 per cent of its members planned to cut costs in China, led by the car industry.
European executives from the car, chemicals, transport and logistics, and IT and telecoms sectors reported the highest level of overcapacity among the companies surveyed, as well as the largest decreases in revenue in 2015 compared with the year before. (…)
China is not about to seriously attack is excess capacity problem:
(…) based on a new report by Fathom Consulting, it appears that China is also dramatically misreporting what may be the one most critical for social stability metric, its unemployment rate, which when stripped away of the political propaganda, is more than three times greater than the officially reported rate.
According to Fathom, China’s underemployment Indicator has tripled to 12.9% since 2012 even while the official jobless rate has hovered near 4% for five years. (…)
BTW, Markit’s China PMI surveys have been documenting the negative employment trends in China for quite a while, first in manufacturing, lately also in services.