JACKSON WHOLE

Expectations from this year’s Jackson Hole summit were so high that it is appropriate to devote a separate post to what was said, what was heard and what was understood. The media and broker narratives are just as important in gauging the impacts on market sentiment (my emphasis). If your time is limited, please at least read the segment about the U.K. experience. You may be surprised!

Job Woes Muddle Yellen’s View Federal Reserve Chairwoman Janet Yellen pointed to an improving U.S. job market, but was noncommittal about how this progress would affect monetary policy.

(…) The U.S. jobless rate has fallen sharply in the past year, to 6.2% in July, but Ms. Yellen said she was uncertain whether that drop and other improving labor-market measures indicated an economy getting closer to overheating or one still convalescing from the 2008 financial crisis.

Ms. Yellen’s tone has subtly shifted in the past few months. In a March speech she expressed confidence that inflation and wages were being repressed by slack in labor markets—such as part-time workers and long-term unemployed—reasons to keep interest rates low. Her remarks Friday show she is less wedded to this view. (…)

Taking measure of the job market has been complicated, she said, by early worker retirements, rising worker disability enrollments, a shift toward part-time work in the service sector and an assortment of other factors which make it hard to take hiring and jobless rate data at face value. (…)

Yellen Hawks Foggier Rate Future

(…) Now Ms. Yellen also is talking about the possibility of raising rates sooner and at a brisker pace in the case of a “faster convergence” toward the Fed’s labor market and inflation goals.

Additionally, Ms. Yellen noted that the labor market may not have as much slack as stagnant wages might seem to indicate. The inability of some employers to push down wages during the economic slump may have resulted in “pent-up wage deflation” that could hold worker pay down even as the labor market tightens. (…)

Even if the Fed chairwoman isn’t necessarily ready to change her thinking on labor-market slack, she is signaling that it is open to change. And that could cause the Fed to move more quickly, or forcibly, than many investors realize. 

Yellen debuts with sense of balance But shift in stance still raises possibility of earlier rates rise

(…) The main shift in Ms Yellen’s speech was towards a more neutral position on the amount of underemployment in the US economy. She gave more weight to possible structural changes in the labour market and pointed to the danger of raising rates too late as well as too early. (…)

Dan Greenhaus, chief strategist at BTIG, said: “At seemingly every turn, when articulating the view that a given indicator suggests labour market weakness or slack, she balances the observation with an alternative argument.” (…)

Ms Yellen’s bottom line was that the “underutilisation of labour resources still remains significant”, so interest rate rises are not imminent. But her remarks show how debate within the Fed is becoming more balanced, raising the risk of earlier, as well as later rate rises.

Wait, wait, it’s not that clear:

Yellen did say, near the end of the speech, that “if progress in the labor market continues to be more rapid than anticipated by the [FOMC] or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter.”

Briefly stated:

If anything, the speech probably muddied the picture by focusing on the many difficult puzzles that come with tracking movements in inflation and labour markets — and mostly without solving any of them, for the very good reason that they remain unsolvable.

On the one hand, on the other hands:

In discussing the labor market—the confab’s focus—Yellen introduced so many qualifications that, instead of the proverbial two-handed economist, she more resembled a Hindu goddess with a half-dozen or more appendages. (Barron’s)

AN ENGLISH LESSON:

Bank of England admits mistake over labour market growth

(…) Investors in the UK have complained about conflicting signals from the BoE about how soon interest rates might start to rise from their record low of 0.5 per cent.

Last year, the BoE said rates would stay on hold at least until unemployment fell to 7 per cent – something it predicted would take more than two years.

“We were wrong,” Mr Broadbent [deputy governor of the Bank of England] acknowledged on Saturday. “Employment grew significantly faster than we’d expected and, despite material rises in participation, unemployment reached 7 per cent only eight months later.” (…)

The end result as Markit reported in early July:

U.K.: Record rise in starting salaries as skill shortages worsen

Starting salaries for permanent staff and temporary worker pay rates surged higher in June, according to recruitment industry survey data. Starting salaries rose
at the fastest rate since the late-1990s and temp pay growth hit a near seven-year high as skill shortages worsened amid surging demand for staff.

Recruitments consultants, ranging from some of the largest employment agencies to small head-hunting firms, reported that the availability of candidates to fill
permanent vacancies deteriorated to an extent far greater than anything seen since Markit began collecting survey data on behalf of REC and KPMG in 1997.

The deteriorating availability of staff comes at a time when demand for staff has surged. So far this year, recruitment agencies have reported that companies’
demand for both permanent and temporary or contract staff has risen at the fastest rate seen since 1998, with a slight upturn in the growth of demand seen in June.

Upward pressure on salaries paid to people starting new permanent jobs hit the highest in the survey history in June. The survey measure of average hourly rates paid for temporary and contact staff meanwhile signalled the strongest rise for nearly seven years.

Note here that Mr Broadbent, the BOE deputy governor, said on Saturday that wage growth in the UK have been much weaker than the BoE had expected. While some of this weakness could be unwound later this year, he said, it was also possible that wage growth had adjusted to “a protracted period of low productivity growth”.

Markit raises another possibility:

The weakness of the official pay statistics relative to the survey data may simply reflect the lag between the official data and the survey data. The survey measures
of pay pressures tend to move in advance of official pay data by around eight months (see chart). The survey therefore suggests that official pay growth may pick up in the second half of 2014.

However, even the weakness of the official statistics in April seems at odds with the more buoyant labour market picture. For example, construction companies are reported widespread skill shortages of tradesmen and subcontractors as the sector booms. PMI survey data show that rates paid to sub-contractors are rising at  survey record pace as a result. Official data, meanwhile show that average construction sector pay fell 0.7% on a year ago in April. Back in February it had been rising at an annual rate of 2.9%.

Similarly, although the manufacturing sector is booming to a degree not seen for two decades and taking on staff at a record pace in the second quarter, the official data suggest that average pay growth in the UK’s factories has slowed from 2.8% in February to just 2.1% in April.

Such weakening pay trends do not fit standard models of wage price behaviour. Either something is very different this time around in terms of the way companies set employee pay (that the surveys are not picking up), or the official data may be understating pay growth for reasons that we do not yet understand.

Scary, isn’t it? See how quickly things can change. Supply is always slow to adjust and when demand gets strong enough, wages need to rise.

The U.S. construction sector is not really booming at this time but labor shortages are nevertheless reported throughout the trade. Construction worker employment rose 3.6% Y/Y in July. Manufacturing employment was only up 1.5% Y/Y in July but that was up sharply from +0.6% in March. During the last 3 months, manufacturing employment has risen at a 2.2% annual rate. But official stats may also be lagging in the U.S.: Markit’s August flash manufacturing survey was in booming territory:

The seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™(PMI™) registered 58.0 in August, up sharply from 55.8 in July and the highest reading for over four years. All five components of the Manufacturing PMI had a more positive influence on the headline index than in July, led by a robust and accelerated increase in employment. (…)

Volumes of new work received by manufacturing companies rose at a sharp pace during August (…).

Moreover, job creation picked up since July and the latest rise in staffing levels was the fastest for almost a year-and-a-half.

In case you are wondering if the U.K. economy is growing so much faster than the U.S.:

If it were to happen that U.S. housing would accelerate along with corporate capex (remember, manufacturing is accelerating), construction would also turn sharply up.

Finally, FYI, what the broker economists are saying (via Zerohedge):

Goldman (Jan Hatzius):

• We think the tone from Chair Yellen’s Jackson Hole speech was broadly balanced, perhaps slightly more so than in past speeches.
• She noted both the more rapid-than-expected pace of recent labor market improvement, as well the still-significant level of labor underutilization.
• She continued to emphasize the “dashboard” approach to assessing the state of the labor market, while at the same time stressing uncertainties in determining exactly how much slack remains in labor markets and how price and wage developments should be interpreted.

Barclays (Michael Gapen)

• Don’t see Yellen core views as having changed but rather see shift in tone as “normal evolution” as Fed is closer to achieving dual mandate
• Discussion on wages signals Fed not looking for 3-4% wage growth as precondition to raise rates
• Maintain view first rate hike to come in June 2015

Scotiabank (Guy Haselmann)

• Yellen’s speech “was very balanced,” seemed more ambiguous about how much slack there is in U.S. economy
• “She had more confidence about the amount of slack in the economy before, and today she admitted that it is difficult to gauge. So the speech was a bit less dovish than expectations”

Deutsche Bank (Alan Ruskin)

• Very balanced nature of Yellen speech a disappointment to those who expected her to live up to dovish reputation
• Surprised by more hawkish tone on wages; seemed reluctant to use soft real wages as gauge of labor market slack
• “This was not a speech from a policy maker who was making a strong argument to ‘wait and see the whites of the eyes of inflation’ before reacting”

Brean (Russ Certo)

• Yellen’s speech hints at “tightening faster” rather than later
• “My takeaway is that she used to think there was X% of slack in the labor force,” now has revised her estimates “so we now have less than X%”

GMP (Adrian Miller)

• Yellen “not dovish enough,” bond investors having  “modest temper tantrum”
• Nod to troubles measuring slack “could be considered somewhat more hawkish than her previous firmer views”

Capital Economics (Paul Dales)

• Yellen doesn’t seem to have changed view there’s still “significant” slack in labor market
• If FOMC minutes signaled Fed was 2 steps closer to hiking rates, Yellen’s speech could be seen as taking one step back

CRT (Ian Lyngen)

• Yellen seems more comfortable with idea that some of labor market utilization may be structural as well as cyclical

Renaissance Macro (Neil Dutta)

• There’s risk of earlier rate increases, given uncertainty cited by Yellen on conditions that will gave way to rising wages and what that means for inflation
• Even so, markets are very confident that speed, end- point of tightening cycle will be “slow and low” and that Fed will start in mid-to-late 2015
• “In some respects, the markets continue to ignore Yellen”

MY TAKE:

Nothing reassuring from this otherwise good speech. Mrs. Yellen remains firm on her views…but is wavering on her convictions and announces flexibility (i.e. uncertainty) in future policies, acknowledging that she may be wrong. She needs more data before arriving at a more definitive conclusion. But she is using a dashboard with so many indicators that, in all likelihood, the dashboard may actually never blink in one single color. Markets may see positively the notion that she seems more likely to err on the dovish side. On the other hand(s), we are some 200 bps below neutral so the risk of getting way behind the curve is not insignificant.

I feel like in a canoe steered by unsure, hesitant skippers about to enter a series of rapids. I instinctively secure my floating device and brace myself for likely bumps and possible encounters with treacherous rocks. I am hopeful that we will make it to the end of the rapids because this is a big and strong enough boat but I don’t know if we will get there healthy enough to continue the journey.

(Frances Hopkins)

Investors don’t fancy uncertainty. Mrs. Yellen has opened the door to never ending discussions, potential bickering and open disagreements among Fed officials. Nothing to boost P/E multiples. Here’s what we got on Friday:

• Fed’s Lockhart: Unemployment Rate Overstates Job Market Progress. The Fed can likely wait until the middle of 2015 to begin raising interest rates from rock-bottom lows, given a job market that still shows signs of weakness and inflation that remains below central bank’s 2% target, Atlanta Fed President Dennis Lockhart said Friday in an interview with The Wall Street Journal. He said he remains fairly optimistic about the economy’s growth prospects. He thinks U.S. gross domestic product will average around a 3% annual rate coming quarters.
• Fed’s Williams: Economy Still Benefitting From ‘Strong’ Fed Support—Fox Business Network. San Francisco Fed President John Williams repeated Friday that he believes it will likely be about a year before the central bank ends its ultra-easy money stance. “The economy is still benefiting from strong support from the Fed, and we don’t want to remove that yet,” Mr. Williams said in an interview on Fox Business Network.
• Fed’s Bullard Points to Late First Quarter 2015 Rate Increase—CNBC. St. Louis Fed President James Bullard told CNBC Friday that the debate within the central bank is now fully centered on when to end its easy-money policies. “We are pretty close“ to achieving the Fed’s job and inflation goals, Mr. Bullard said in the interview. “We’ve really had pretty strong growth, and I think the labor markets are showing that.”

Feb-March, June or Aug.-Sep.

Meanwhile, in Europe, Draghi calls for help

Draghi Signals Shift From Austerity Focus

(…) “It would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy, and I believe there is scope for this, while taking into account our specific initial conditions and legal constraints,” Mr. Draghi said in his prepared remarks.

Although Mr. Draghi’s comments didn’t constitute an endorsement of rampant deficit spending to boost euro-zone economies, they nevertheless marked a shift away from years of preaching by ECB officials that governments needed to shrink deficits and undertake economic reforms even during times of economic weakness. (…)

“The risks of ‘doing too little'” and allowing temporary unemployment to become more entrenched “outweigh those of ‘doing too much’—that is, excessive upward wage and price pressures,” Mr. Draghi said. (…)

Recent exchange-rate movements should be “sustained by the diverging expected paths of policy in the U.S. and the euro area,” Mr. Draghi said. The Federal Reserve is widely expected to raise interest rates by the middle of next year, whereas the ECB is expected to keep its main lending rate near zero for years.

“We stand ready to adjust our policy stance further,” Mr. Draghi added, an indication that large-scale purchases of public and private debt, known as quantitative easing, remain an option to keep inflation from staying too low for too long. (…)

I don’t know if Germans will respond positively to Draghi’s plea but I am sure the French got the message loud and clear…

Central bank puts are not was they used to be.