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Economic Reports Will Force Fed to Abandon Its Dovish Stance

Economic Reports Will Force Fed to Abandon Its Dovish Stance

Wednesday, 06 April 2016 09:53 AM Current | Bio | Archive

Better late than never, I guess.

IMF Managing Director Christine Lagarde recently said: “The world outlook is clouded by weak growth, no new jobs, no high inflation, still high debt … the good news is that the recovery continues; we have growth; we are not in a crisis … the not-so-good news is that the recovery remains too slow, too fragile, and risks to its durability are increasing.”

As an investor, you must remember that the IMF forecasts are practically always 6 to 12 months behind what’s actually going on in the real world.

By the way, Lagarde is a lawyer with no formal education in economics. 

Notwithstanding recent economic data flow have been surprising on the upside, markets have given plain weight to Lagarde’s opinion rather than to economic reality. Once again, rational market hypothesis dies a little bit more.

Tuesday, the S&P 500 dropped 1 percent to 2,045.17, leaving it practically unchanged for the year and ending the longest streak of calmness in 13 months. The Dow Jones Industrial Average fell 0.8 percent while the Nasdaq Composite Index lost 1 percent.

Technically speaking, these drops confirm, at least to me, we have had a bear-market relief rally, which lasted about 30 trading days. That is a normal time-span for a bear market relief rally. We also have seen a lot of “short” positions being covered while volatility died down.

Again, these key elements are all typical characteristics of a bear-market relief rally.

I think as far as the market rally is concerned, “that was it!”

I think the first estimate of Q1 GDP growth, please keep in mind initial data have been consistently been under-reporting economic growth. This has been the case for 75 percent of U.S. GDP data estimates since the start of 2010.

Elsewhere, we have the release of the Federal Open Market Committee (FOMC) minutes of the March 15-16 meeting.

For investors, as well as economists, this is of heightened interest, not because what is written in it, but because of what has happened since March 16.  

Fed Chair Janet Yellen’s attempt to exert authority in a collegiate Fed system and to put a dovish stamp on the economic outlook is all the more remarkable because former economic “allies” seem to be opposing her views.

For instance, San Francisco Fed President John Williams, who is known as being “neutral,” was signaling a complete different bias to outlook on the very same day of March 29, when Yellen was signaling a willingness to be behind the curve.

With data having come in stronger than expected since the FOMC meeting, the views on the economy at the meeting may be a little dated.

However, the points of emphasis of the Fed are of most interest to what extend is the rise in inflation viewed as a durable rise in inflation, for instance.

In this context, we just got from the Organization for Economic Co-operation and Development (OECD) its latest update on consumer price inflation wherein core inflation, which excludes food and energy prices, came in at 2.3 percent year-over-year (y/y) for the United States, at 0.8 percent for the Euro area and at 1.9 percent for the 34 member states of the OECD as a whole.

Finally and in context of the OECD inflation data release, yesterday’s March Non-Manufacturing ISM Report On Business that gave us positive numbers overall, also confirmed U.S. services inflation now shows a growth rate of 3.6 percent y/y and 7.9 percent m/m notwithstanding the prices "Series index" for March still remained below the 50-mark, coming in at 49.1 but up from 45.5 in February.

Anyway, there is a rather strong case to be made for higher pricing power in the services sector, which represents more than 80 percent of the U.S. economy.

The big question remains, for how long can the Fed maintain its dovish stance when the real economy in the U.S. tells us otherwise.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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The big question remains, for how long can the Fed maintain its dovish stance when the real economy in the U.S. tells otherwise.
fed, economy, investors, prices
Wednesday, 06 April 2016 09:53 AM
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