Thursday, August 8, 2013

Claims keep declining

First-time claims for unemployment came in as expected, but the more important news is that they continue to trend lower.

This chart shows the long-term trend of claims (using their 4-week moving average) and the 52-week moving average of that. Clearly, the trend remains down. There is no sign at all of any deterioration in the labor market as of last week. There is thus no reason to think that the economy can't continue to grow by at least 2%.

As the above chart of 10-yr Treasury yields shows, rates have moved sharply higher in the last few months, and are significantly higher than they were at last summer's low. This, despite valiant efforts by the Fed to purchase Treasuries and MBS. It's worth repeating that this is not really a paradox, since it merely goes to show that the Fed has very little power to artificially depress interest rates. Fed purchases may seem large, but they are very small in relation to the outstanding stock of bonds, all of which are priced off Treasuries. The market sets bond yields. The market has taken interest rates higher because the market has more confidence in the economy's ability to grow. Thus, QE makes less sense, and the tapering of QE seems reasonable. The bond market is even looking ahead to the day when the Fed not only stops buying bonds but begins to raise the interest rate it pays on reserves.

According to Fed funds and Eurodollar futures contracts, the market doesn't expect the Fed to raise rates meaningfully for the next two years (June Fed funds futures currently reflect a tightening of only 25 bps, to 0.5%). According to the market's current thinking, therefore, the tapering of QE may take many months, and the beginnings of a modest tightening could be two years in the making. This is hardly a scary picture. Indeed, if the economy continues with present trends it's difficult for me to see the Fed waiting as much as two years before beginning to adjust rates higher.

The market is getting used to the idea that interest rates are going to move higher, and it's all due to the market's new-found realization that the economy is on more sustainable growth path, even though that growth is very slow compared to what it could be. The more evidence—such as declining claims—we see that the economy is avoiding a recession, the more reason there is for interest rates to move higher. That's not a threat to growth, it's a validation of growth, however modest.


William said...

OECD, Composite Leading Indicators, August 2013

08/08/2013 - Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, continue to signal diverging growth patterns across major economies. The CLIs point to moderate improvements in growth in most major OECD countries but stabilising or slowing momentum in large emerging economies.

The assessment this month is practically unchanged from last month’s assessment in all major economies except China where the CLI is now pointing to slowing momentum.

The CLIs for the United States, Japan and the United Kingdom point to economic growth firming.
In the Euro Area as a whole, the CLI continues to indicate a gain in growth momentum. In Germany, the CLI points to growth returning to trend. The CLI for Italy continues to signal a positive change in momentum while the CLI for France points to relatively stable momentum.

The CLI for Canada points to growth close to trend rate. The CLI for India continues to show signs of a tentative positive change in momentum. On the other hand, the CLIs for Russia and Brazil continue to point to slowing momentum.

Benjamin said...

Well...I like Grannis' optimism, and without optimism, nobody would ever do anything.

I do have a worry, and that is that no recovery lasts forever.

If we do not see inflation and interest rates rise to old norms, we will enter the next recession already near ZLB-low-inflation-deflation land.

In other words, The Fed will be out of conventional ammo, starting from Day One of the new recession.

Unless the Fed overcomes its timidity in the use of QE, this could mean a Japanland scenario developing.

I would rather see inflation rise into the moderate range of 3 to 4 percent or so, and see interest rates go up 300 basis points too.

The Fed so far lacks the resolve to target such aggressive goals. The Bank of Japan, until this year, also lacked that resolve.

William said...

ECRI Weekly Leading Indicator

A measure of future U.S. economic growth edged up last week to the highest in over three years, while the annualized growth rate improved to its highest in over a month.
The Economic Cycle Research Institute said its Weekly Leading Index rose to 131.8 in the week ended Aug 2, which was the highest since May 2010.

The index's annualized growth rate climbed to 5.3 percent, the highest level since late June, from 4.9 percent a week earlier.

William McKibbin said...

According to Scott's chart, unemployment claims have fallen to levels not seen since January 2008. Let's face it, the long-term unemployed in America are facing a tough set of choices, including: a) destitution; b) forced marriage into money; c) crime; d) emigration; or e) suicide. So far, suicide is the leading cause of declines in unemployment claims, or so it seems...

PS: Life is getting harder for those in the 99% crowd...

M Miller said...

2.58% on 10 Year Treasury with housing recovery and auto recovery and Fed tapering on the way.

Listen, if we have a 4% 10 year note with 5% unemployment, housing and autos on fire, emerging markets on fire, commodities on fire before 2007, trust me, we are not going much higher on 10 year treasuries in 2014.

We are in a lower nominal GDP world, with low inflation, and much slower labor force growth globally.

We are in a structurally deflation or disinflationary future. Rates will stay low regardless of the Fed.

Benjamin said...

M Miller--

You make a good point. Even in a strong economy, we had dead inflation and interest rates.

The USA today faces four threats it it prosperity.

1. Russia
2. Al Queda
3. Taliban
4. The FOMC and an independent Fed

The first three are hardly serious threats, and if they do something, can be dealt with.

The fourth threat is an independent quasi-public federal agency. You can do nothing about them.

They are the biggest threat to American prosperity.

Look for the Fed's wing-tipped shoe right in the neck of the economy soon.

BTW, one of my former heroes, Paul Volcker, just penned a piece for the NY Review of Books, advocating that Fed be rid of that noisome dual mandate---the Fed should be freed of any obligations to foment economic growth.

I rather face 100 Al Quedas than a central bank run by bankers and not accountable to democratic institutions....

William said...

RE: "four threats"

As the great American philosopher Pogo once said, "I saw the enemy and the enemy was us."

Hans said...

"This, despite valiant efforts by the Fed to purchase Treasuries and MBS. It's worth repeating that this is not really a paradox, since it merely goes to show that the Fed has very little power to artificially depress interest rates."

I am puzzled by the use of the word "valiant" unless of course, it is a ringing (bells swinging right to left and back) endorsement of not only the Central Bank and it's powers but also policy.

If as the author claims of limited ability to influence rates (rig and manipulate) then why has the 30 bond reached historical levels?

The 10-year USTB:

Ben Jamin and William, good points indeed..

The Big Three all can now make military reduction, as rot and rust only require basic building blocks available at most locations, on the cheap.

Roy said...


Your blog, with the rest of blogspot/blogger is blocked in China.

It would be greatly appreciated if you could add the module to receive your words of wisdoms by email.

Many thanks!

Scott Grannis said...

Roy: happy to oblige.