Tags: real earnings | federal reserve | rates | economy

Hans Parisis' Morning Thoughts: Big Shocks to the Market Are Coming

Friday, 09 January 2015 07:26 AM Current | Bio | Archive

The real earnings data that will be released January 16 by the U.S. Bureau for Labor Statistics will be the real thing to watch for, certainly in the context on when the Federal Reserve will finally start raising rates.

Please keep in mind real earnings historical average wage growth rates have been between 2.5 and 3 percent and until now, as we can read in the Minutes of the Federal Open Market Committee (FOMC) on December 16-17: “… most participants saw no clear evidence of a broad-based acceleration in wages…”

In my opinion, long-term investors probably shouldn’t err considering the “real earnings” numbers as one of the prime catalysts/green lights for the Federal Reserve finally starting to raise its target range for the Fed funds rate that applies in short-term interbank lending.

I don’t think it’s an overstatement to say the day the Fed funds rates start going up, it will provoke unpleasant ripple effects in most economies in the world that at present are facing, and that for the foreseeable future, a wide-spread “dis-inflation” environment and that could, under a worst case scenario, end up in several places in an extremely damaging “deflation” environment.

In this context, today we got further worrying inflation numbers out of China, which is the second economy in the world, where annual consumer inflation in December came in at 1.5 percent year-on-year, and albeit up a notch to 1.4 percent from November, finally came in at 2 percent on average in 2014, which is a 5-year low and well below the Government’s 3.5 percent 2014 target rate.

The producer price index (PPI) performed even worse and declined once again by 3.3 percent over the same period, which was the 34th consecutive decline of the PPI, and was the biggest decline was since September 2012.

Already, the PBOC has stated it will further reduce financing costs to support the economy. It’s clear inflation in China is moving in the wrong direction.

Besides that, the just released “Consumer Price Index” as compiled by the Organization for Economic Co-operation and Development (OECD), which is an international economic organization of the 34 leading economies in the world, informs annual inflation in the whole OECD area slowed to 1.5 percent year-over-year to November 2014, down from 1.7 percent the month before, which of course doesn’t reflect yet the full impact of further falling oil prices.

Going somewhat deeper into numbers it becomes clear that the world’s systemically dangerous “problem child”, which is the Eurozone (EZ), is in deep trouble as it dangerously approaches the “deflation” zone now the latest flash estimate of Eurostat (Statistical Office of the European Communities) for December 2014 and which was released on Wednesday, indicates a negative -0.2 percent annual HICP inflation rate in the eurozone, which, if confirmed, would be the first contraction in the EZ inflation rate since October 2009.

I don’t know if the European Central Bank executive board member Benoit Coeure’s statement he gave yesterday is another sign of collective denial that plagues the eurozone, but to me it’s certainly a clear sign of unjustified complacency: “… The euro isn’t in deflation…”

Maybe he referred to deflation as a general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending.

As opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.

Among all the inflation numbers as published by the OECD, the numbers for the U.S. showed interesting numbers as the year-over-year November 2014 inflation rates came in as follows: (1) All items at 1.3 percent; (2) All items “non-food non-energy” at 1.7 percent, (3) Food at 3.4 percent; and (4) unsurprisingly energy at negative -4.8 percent. In case low oil prices persist for quite some time, there is no doubt the situation will bring a very important part of the energy sector with its directly related industries in deflation territory.

As the energy sector represents 5.9 percent of U.S. GDP, it’s too small to knock the ongoing U.S. expansion off its growth path in a serious way.

In my opinion, if the composition of U.S. inflation remains more or less in the present proportions of the so-called present “low” inflation environment in the U.S., I don't think it should be an obstacle for the Fed to start raising rates somewhere this year.

The unanswered going forward will remain: “How will markets in the U.S. as well as all over the world react to Fed’s lift-off to hiking its base rates.” The day that takes place, the U.S. will be pushed into real “decoupling” from many of the other important economies in the world.

I think, notwithstanding even the blind will have seen that event coming for a long enough time, many in so many places won’t like it at all.

Long term investors should better pay attention because shocks, which include unknown surprises, are coming …

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The real earnings data that will be released January 16 by the U.S. Bureau for Labor Statistics will be the real thing to watch for, certainly in the context on when the Federal Reserve will finally start raising rates.
real earnings, federal reserve, rates, economy
Friday, 09 January 2015 07:26 AM
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