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Economic Reports Are Wild Guesses, Not to Be Trusted

Economic Reports Are Wild Guesses, Not to Be Trusted

By    |   Monday, 18 November 2019 11:28 AM

In the U.S.-China trade negotiations, there were reports of telephone conversations over the weekend. The discussions were constructive, the South China Morning Post reported.

However, this isn't likely to be sufficient for financial markets to pay too much attention.

We have had reports of constructive discussions before. What matters is whether President Donald Trump wants to do a deal and then when and how wide any deal is likely to be in terms of scope.

Calling it phase-one is all very well, but for investors there is now very little prospect of a phase-two or phase-three at least not before the elections next year.

Trying as much as possible into phase-one is therefore important for financial markets.

Besides that, on Friday we got the Philadelphia Fed’s Fourth Quarter 2019 Survey of Professional Forecasters that predicts real GDP will grow at an annual rate of 1.7 percent in Q4, which is down from 2.0 percent from the latest survey.

On an annual-average over annual-average basis, the forecasters expect real GDP to grow 2.3 percent in 2019, 1.8 percent in 2020, and 2.0 percent in 2021 and 2022, respectively.

For investors it could be helpful keeping in mind that the so-called professional forecasters see growth rising again very “mildly” to 2.0 percent in 2021 and 2022.

Over in China, the People’s Bank of China (PBOC) has signaled greater difficulties in the Chinese economy in the latest monetary policy report.

In what seems to be something of an understatement given “trade uncertainties,” the report describes the external environment as “complex”.

However, the overall tone of the report is being interpreted by the financial markets in a slightly hawkish manner or perhaps in a less dovish manner. There were also comments in the report about the need to anchor Chinese inflation expectations.

Generally speaking, a country’s consumers’ inflation expectations are disproportionately impacted by high frequency purchases like food. Food prices are behind the pickup in Chinese inflation.

This overall is not a report that suggests policy tightening as such, but it does suggest a more cautious approach to future policy, especially when compared to the August report.

Interestingly, the PBOC has lowered the seven-day reverse repurchase rate, which is a closely watched lending rate in China, to 2.50 percent from 2.55 percent. The move comes just two weeks after the PBOC cut the borrowing cost on its medium-term lending facility (MLF), used by banks for longer-dated funding needs, by the same margin, Reuters reported.

Over in Europe, the Swedish Riksbank, which is the central bank of Sweden, is perhaps alone in the central bank community in suggesting some excitement in the near future.

There is an assumption that Sweden will raise interest rates next month (December) after criticism that negative interest rates just are not working. This is mildly interesting as the Rikskbank was the first in 2015 to experiment with the negative interest rate financial tax.

Maybe more interesting is the Riksbank’s rather strong criticism of the, quote, catastrophe at “Statistics Sweden” (the Swedish government agency responsible for producing official statistics regarding Sweden. National statistics in Sweden date back to 1686.)

Statistics Sweden did make a tiny error in the calculation of the employment. The unemployment rate being nearly one percent lower than originally reported.

This is a reminder to investors who often have a trusting, if not somewhat naïve faith, that economic data are accurate. Economic data are a wild guess and the guesses are generally getting wilder and wilder. Surveys are becoming less and less reliable as a means of gaging the economy. Data are revised more and more often and big data are still rather biased at a macroeconomic level.

So, Sweden, may have something to teach to the rest of the world, both in terms of negative interest rates and in terms of trusting data too much.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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This is a reminder to investors who often have a trusting, if not somewhat naïve faith, that economic data are accurate.
economic, data, guesses, investors
Monday, 18 November 2019 11:28 AM
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