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Markets Look at a False Economy That Is Weaker Than It Is in Reality

Markets Look at a False Economy That Is Weaker Than It Is in Reality
(Dollar Photo Club)

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Friday, 29 April 2016 12:33 PM Current | Bio | Archive


The advance estimate for U.S. GDP growth during the first quarter came in at 0.5 percent quarter-over-quarter and at 2.0 percent year-over-year.

“Advance estimates” should always be taken with a grain of salt as there are always justified concerns about the seasonal adjustment process, especially at the start of the year and given the adjustments that have taken place in past years.

Besides that, it is also a fact that since the start of 2010, 75 percent of all U.S. GDP growth estimates have  been revised higher afterwards.

U.S. GDP growth figures are what they are and have to be seen in context of:
  • The headwinds still coming from weak global growth. In February the Conference Board’s projections for their Global Economic Outlook for 2016 was downgraded to 2.5 percent from 2.8 percent in November.
  • A still what is considered a strong dollar notwithstanding the dollar index has declined by about 6.5 percent since the beginning of December.
  • Depressed oil and gas activity that has weighed severely on trade and business investment in Q1 (Business investment -5.9 percent).
  • Business that has continued to work off well-provisioned inventories (Inventories -0.33 percent).
  • Consumer spending that posted its weakest gain in a year despite signs of resilience in the service sector.
“Fundamentals” remain supportive of growth, but the economic showdown is proving to remain sticky.

However, in today’s context of the Fed’s policy path, the first quarter data is really important because if the Fed considers it as reasonable then the prospects of a June rate increase should stay alive.

That said, and as the past couple of days were important ones for the Central Banks of Japan and the U.S., it has been really interesting to see how the world has been treated to a display of masterful inactivity on part of both Central Banks.

The BOJ has been “relatively” surprising for financial markets because there was some expectation for action from the Japanese.

The yen has strengthened through 107 per dollar for first time since October 2014 and the Nikkei 225 has moved 3.6 percent lower  in response to the lack of action. FYI: Japanese equity markets are closed today.

So, why would the Bank of Japan fail to ease at the time that the Bank of Japan reduced its own forecasts for growth and inflation?

There is a possible reason.

Inflation expectations
remain rampant in Japan as far as consumers are concerned.

The consumer price inflation (CPI) came in at -0.1 percent year-over-year while Japanese consumers constantly expect inflation to be about 3 percent.

This problem is because of what is known as “perception” or “frequency-bias.”

Consumers’ base inflation perceptions and inflation expectations are the prices of things that they buy frequently like food and energy. There is no prospect of consumers delaying consumption in anticipation of lower prices because there is simply no anticipation of lower prices.

However, the high inflation expectations combined with lower wage expectations may delay consumption on perceived declines in real disposable income.

The big risk for the Bank of Japan therefore is that if by weakening the yen they would raise food and energy prices and thereby raise already the constant high consumer expectations of inflation and because of that lower expectations of real disposable income, which consequently damage consumption.

It’s complicated, but it’s as simple as that.

Meanwhile, economists seem to have gained ground against the market watchers. Economists look at the economy as it is in reality. Markets look at a false economy that is weaker than it is in reality.

Those who worry about Main Street can very easily advocate a tightening of Central Bank policy. Those who worry about Wall Street can argue for delays to a tightening of Central Bank policy.   

This time, the Fed seems less concerned about international economics which is an interesting point because in reality not that much has changed internationally and global growth has generally been in line with expectations since the March FOMC meeting.

That raises the question of whether the concern about global developments the FOMC expressed in March was a “genuine” concern or merely a fig leaf of justification for policy “dovishness.”

Out of the euro area, we just got:

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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My morning thoughts on Friday, April 29, 2016.
gdp, economy, invest, yen
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2016-33-29
Friday, 29 April 2016 12:33 PM
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