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FT-IGM Macro Survey, on GDP, Inflation, Monetary Policy

From FT Friday, “Economists predict US interest rate rise in 2022”: The Federal Reserve will have to wind down its pandemic-era stimulus programme…

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From FT Friday, “Economists predict US interest rate rise in 2022:

The Federal Reserve will have to wind down its pandemic-era stimulus programme quickly and raise US interest rates in 2022 in response to higher inflation, according to a poll of leading academic economists for the Financial Times.

The latest survey conducted in partnership with the FT by the Initiative on Global Markets at the University of Chicago Booth School of Business suggests a much more aggressive approach to tightening monetary policy than the Fed’s most recent projections and market expectations indicate.

This is shown in the FT graphic.

The ungated survey can be found here. Some points that were of particular interest to me:

  • GDP q4/q4 growth in 2021
  • Core PCE 12 month inflation in 2021

Median growth in the most recent survey is 6% q4/q4. This is shown in Figure 1, in comparison to other forecasts.

Figure 1: GDP as reported (black), CBO projection (blue line), Administration (red squares), Survey of Professional Forecasters (green), FT-IGM (tan large square), and potential GDP as estimated by CBO (gray line), all in bn. Ch2012$, SAAR, all on log scale. Dates pertain to date of forecast finalization. NBER recession dates shaded gray. Source: BEA 2021Q2 2nd release, OMB FY’22 Budget, Philadelphia Fed SPF (May), and FT-IGM survey (September), CBO Economic Outlook (July), and author’s calculations. 

Since June, forecasters on average have become less optimistic, as shown in Figure 2.

Figure 2: GDP as reported (black), Survey of Professional Forecasters (green), FT-IGM September median forecast  (tan large square), FT-IGM June median forecast (purple box), and potential GDP as estimated by CBO (gray line), all in bn. Ch2012$, SAAR, all on log scale. Source: BEA 2021Q2 2nd release, OMB FY’22 Budget, Philadelphia Fed SPF (August), and FT-IGM survey (September), CBO Economic Outlook (July), and author’s calculations. 

Notice that the downward movement in forecasted Q4/Q4 growth — from 6.5% to 6%.

My point estimate was 5.4% (80%ile band was 5.1% to 5.7%), which is below the median response of 6% (90%ile was 6.4%, 10%ile was 4%). I was a bit surprised that I was so pessimistic relative to the overall group. After all, we already know Q1 and Q2 growth (SAAR): 6.3% and 6.6%; last week when I responded, the Atlanta Fed GDP nowcast (“GDPNow”) for Q3 was 3.7%. That means we have some idea of 3/4 of GDP growth (calculated q4/q4 — see how this differs from y/y on annual data). My 5% estimate for Q4 growth was a bit below the August Survey of Professional Forecasters median of 5.2%. To get the higher numbers, one has to believe both the Q3 outcome will be higher than the nowcast as of last week (and as of today’s revision, still 3.7%), and/or Q4 will come out higher than 5%.

The other issue is inflation. The survey focused on core PCE. Here’s the FT-IGM forecast compared against others.

Figure 3: Core personal consumption expenditure deflator as reported (black line), CBO (blue line), Survey of Professional Forecasters (green line), FT-IGM (tan large square), FT-IGM, and 80%ile band (tan +), 2012=100, all on log scale. NBER defined recession dates shaded gray. Source: BEA via FRED, Philadelphia Fed SPF (August), and FT-IGM survey (September), CBO Economic Outlook (July), NBER, and author’s calculations. 

The FT-IGM median forecast is for a December 2021 price level slightly higher than that indicated by the August Survey of Professional Forecasters. The FT-IGM early September forecast (survey take 9/3-8) is also 0.7% higher (log terms) than the one taken late June (6/25-6/28), reflecting the actual increase in reported PCE core deflator over the intervening two and half months (so 2 releases) and a slightly lower pace of inflation (the median Q4/Q4 forecasted growth rate rose from 3.0% to 3.7%).

Figure 4: Core personal consumption expenditure deflator as reported (black line), Cleveland Fed nowcast (red line), September FT-IGM median (tan large square), FT-IGM, and 80%ile band (tan +), June FT-IGM median (light blue open square), FT-IGM, and 80%ile band (light blue +), 2012=100, all on log scale. NBER defined recession dates shaded gray. Source: BEA via FRED, Cleveland Fed (accessed 9/11), and FT-IGM surveys (September, June), NBER, and author’s calculations. 

The Cleveland Fed’s current nowcast are running above the implied average growth rate of the deflator, as implied by the September IFT-IGM survey. If the Cleveland Fed nowcasts prove accurate, then the FT-IGM median level will be hit if core PCE inflation rate averages 1.04% in October-December.

Interestingly, while the point forecast rises noticeably, the 80%ile bands corresponding to the two forecasts overlap substantially.

We’ll get some additional information on prices in tomorrow’s CPI release.

 

Economics

Global Debt Expected to Surpass $300 TRILLION and GDP Growth Slows

Thanks to the all-encompassing “Helicopter Money” that is Modern Monetary Theory, global debt has soared to yet another record-high in
The post Global…

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Thanks to the all-encompassing “Helicopter Money” that is Modern Monetary Theory, global debt has soared to yet another record-high in the second quarter, as governments and consumers piled on the deficits.

According to data published by the Institute of International Finance (IIF), global debt— which accounts for government, bank, corporate, and household debt— hit an outstanding $296 trillion in the second quarter, up by $4.8 trillion since the first three months of the year, and more than $36 trillion since the beginning of the pandemic.

But the debt pile doesn’t stop there! with the unprecedented pace of borrowing, the IIF is now expecting global debt to soar past $300 trillion— which is likely a no-brainer because as per the famous realization by Cady Heron, the limit does not exist! Undoubtedly, thanks to MMT, not only will we surpass $300 trillion, but will also skyrocket past $400 trillion, catapult past $500 trillion, etc., until— well, infinity!

Among the countries reporting the highest levels of debt is China at the top of the list, with debt levels jumping by $3.5 trillion from the first quarter to a total of nearly $92 trillion between April and June. On the other hand, the US surprisingly noted a debt deceleration, with a total of approximately $490 billion— the slowest since the onset of the pandemic.

Also on the bright side, the IIF said that the debt-to-GDP ratio slumped for the first time since the Covid-19 crisis. The institute found that 51 of the 61 countries observed have seen their debt-to-GDP ratio fall in the second quarter, as economic activity has been on a strong rebound since the beginning of the year. This caused overall debt as a share of GDP to decline from a record-high of 362% to around 353% in the second quarter.

But, all good things must eventually come to an end, because according to hot-off-the-press projections published by Fitch Ratings, global GDP is set to grow by only 6% in 2021, down from a previous June forecast of 6.3%. “Supply constraints are limiting the pace of recovery,” the report explained, adding that,a greater share of demand growth is being reflected in price increases and US inflation forecasts have been revised up again.”

As such, Fitch downgraded its 2021 forecast for China from 8.4% to 8.1% growth, and trimmed growth expectations for the US economy from 6.8% to 6.2%. The Eurozone, on the other hand, had its growth forecast for the current year boosted to 5.2%, up from 5% in June.


Information for this briefing was found via the IIF and Fitch Ratings. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

The post Global Debt Expected to Surpass $300 TRILLION and GDP Growth Slows appeared first on the deep dive.

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Economics

“Team Transitory” Suffers Blow As Used Car Prices Resume Surge

"Team Transitory" Suffers Blow As Used Car Prices Resume Surge

In the past month, a feud has broken out between the so-called "team transitory",…

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"Team Transitory" Suffers Blow As Used Car Prices Resume Surge

In the past month, a feud has broken out between the so-called "team transitory", comprising mostly of pro-Fed, pro-Biden commentators, who urge the public to ignore the "transitory" hyperinflation that by now is painfully obvious to everyone (see today's UMich report for the gruesome details), and not to blame either the Fed or the administration for the collapse in the dollar's purchasing power. Then there are the realists who see a much more ominous trend in deglobalization - you know, the same trend that allowed inflation to decline along with interest rates since the early 1980s - and warn that even when the currently supply chain logjam ends some time in 2022, inflation will still be far higher than in the past few decades.

The latest CPI print was viewed as a victory for "team transitory" because some of the prices that had spiked during the pandemic eased, led by used cars, whose prices this year soared amid supply chain disruptions and a rebounding economy has been a major contributor to the jump in U.S. inflation.

This was enough for TT to declare victory and proclaim that it's all downhill from there.

There is just one problem: real-time data is now showing that used car prices are once again on the rise after the summer slippage, confirming what we said moments after the CPI report was published this week.

The Manheim U.S. Used Vehicle Value Index, a measure of wholesale used cars, increased 3.6% in the first 15 days of September compared with the same period last month, and is again back near all time highs. That's the first month-over-month rise in the index since May; in total the index has risen by more than 50% since the COVID lows in early 2020. 

The index jumped 24.9% from the same period a year ago through the middle of the month, indicating that not only has the drop in used car prices ended but that higher prices are coming, and with them more humiliation for team transitory, as the spike in the Mannheim index assures a sharp jump in the CPI print either next month or in November.

"The latest trends in the key indicators suggest wholesale used vehicle values will likely see further gains in the days ahead,” according to the Manheim report.

"Wholesale used vehicle prices rose rather significantly in the first half of September compared to the first half of August," Michelle Krebs, an executive analyst at Cox Automotive, told Bloomberg"Dealers appear to be stocking up on used vehicles, which have seen supply stabilize somewhat, to have something to sell because new vehicle inventory remains low."

Elevated used car prices have primarily been due to snarled supply chains and a shortage of materials (such as semiconductors) for new car production, which pushed dealer inventories to all time lows...

... and forced consumers to buy on the secondary market.

“The main pressure continues to come from new car supply shortages. With the increase of delta variant, many manufacturers have significantly cut their production,” said Brian Benstock, general manager and vice president of Paragon Honda and Acura, a dealership in Woodside, Queens, in New York City. “A story about used cars cannot leave out the story about new cars.”

Incidentally new car prices are now also surging, and will likely continue to rise as carmakers have said production of new vehicles this fall will continue to be constrained by a chip shortage and the spread of Covid-19 in Southeast Asia. IHS Markit slashed its vehicle production forecast for this year by 6.2%, or 5.02 million vehicles, the biggest decrease to the outlook since the chip shortage emerged. In the latest sign of fallout, on Thursday, General Motors said Thursday it is cutting production at six North American assembly plants.

Finally, even ignoring used car prices, a more ominous increase is emerging in such core inflation as shelter costs and Owner Equivalent Rent.  Commenting on whether core inflation slowed or sped up in August, Bank of America economists said that the traditional measure of core CPI inflation rose just 0.1% mom in August, below the consensus (0.3%), BofA said the following:

  • The weakness was due to a bigger than expected reversal of the reopening spikes in a number of components.
  • Stripping the most volatile components of the CPI leaves a modest upward trend in “true” core inflation.

As BofA concludes, when it asks rhetorically "Is it time to break out the champagne" for team transitory, the bank responds "We don’t think so."

Tyler Durden Sun, 09/19/2021 - 11:00
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Actually, It All Makes Sense

Actually, It All Makes Sense

Back in June, we explained that the reason behind the market’s shocking response to the Fed’s hawkish policy…

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Actually, It All Makes Sense

Back in June, we explained that the reason behind the market's shocking response to the Fed's hawkish policy announcement when yields plunged instead of spiking higher, had little to do with what the Fed would actually do (as every Fed action is now in direct response to the market, which the FOMC is compelled to prop up no matter the cost) and everything to do with the market's read of r-star, and we quoted DB's head of FX strategy George Saravelos who said that everything that is going on "boils down to a very pessimistic market view on r*" or in other words, the same argument we made 6 years ago when we predicted - correctly - that the Fed's hiking cycle would end in tears (as it did first in November 2018 when the Fed capitulated on its hiking strategy after stocks plunged, and then again in Sept 2019 when the Repo crisis forced the Fed to resume QE).

The bottom line, for those who missed our lengthy take on this complex topic is that the equilibrium growth rate in the US, or r* (or r-star), was far far lower than where most economists thought it was. In fact, as the sensitivity table below which we first constructed in 2015 showed, the equilibrium US growth rate was right around 0%. This means that each and every attempt by the Fed to tighten financial condition will end in disaster, the only question is how long it would take before this happens.

Today, we won't recap the profound implications from Powell's huge policy error which we laid out previously (we suggest readers familiarize themselves with our recent work on the topic published in "Powell Just Made A Huge Error: What The Market's Shocking Response Means For The Fed's Endgame"), but we will touch on a recent blog by Deutsche Bank's Saravelos - who unlike most of his peers on Wal Street, has a clear and correct read on what is currently going on in the market - and to help clients comprehend what's actually going on, he has penned a simple framework to understand current market behavior. As Saravelos puts it, "there is no “puzzle” in the way global bond markets are behaving and it is entirely possible for yields to fall as inflation pressures rise."

As Saravelos explains, the starting point is that over the last six months the global economy has been experiencing a negative supply shock due to COVID. This can be most clearly seen in the incredibly sharp run-up in inflation surprises against the equally incredible sharp run-down in growth surprises.

In simple Econ 101 terms, we are  experiencing a leftward shift in the global economy’s supply curve. A negative supply shock (permanent or not) does two things: it lowers growth and increases inflation.

This is exactly what markets have been doing: inflation expectations are close to the year’s highs, but real rates (the closest market equivalent to a measure of real growth) are at the year’s lows.

The moves in the two variables are therefore entirely consistent with the incoming data.

Now what is most notable is that real yields have dropped more than inflation expectations have risen. The combined effect has been to lower nominal yields.

As Saravelos puts it, "there is nothing surprising about this, because there is nothing automatic about which effect dominates" and it ultimately depends on consumer sensitivity to rising prices, or in wonkish terms the slope of the demand curve: the greater the demand destruction from price rises, the bigger the negative effect on growth relative to inflation pushing yields down and vice versa. So, what the market is effectively doing, is pricing in substantial demand destruction from the supply shock.

Is this the correct thing to be pricing? Perhaps it is, we have been highlighting this unfolding demand destruction since May, and consumer confidence in the US is collapsing.

What about central bank reaction functions? There is an automatic belief in the market that higher inflation should mean more hawkish central banks. But as the DB strategist notes, "this belief rests on 30 years of demand shock management, where inflation has always and everywhere been positively correlated to growth." And as an interesting aside, according to Saravelos, Larry Summers was right about inflation risks this year but wrong about the cause: lower supply has dominated over stronger demand. A supply shock similar to the one we are currently experiencing means the central bank response is not obvious, and as a result "raising rates will only make the growth shock worse." By implication, tapering - which is tightening no matter what you read to the contrary - will similarly be a policy mistake and compound the economic slowdown, leading to an even more powerful easing reaction in the coming quarters.

Which brings us to central banks' characterization of the current inflation shock as transitory; as DB explains, it is another way of saying that they currently prefer to accommodate rather than respond to the supply shock. In terms of capital markets, ss long as the Fed looks through the shock, risk appetite will likely stay resilient, the dollar weak and volatility low. However, the moment the Fed does respond, all bets are off.

Bottom line, current market pricing is fully in line with a supply side shock with very strong demand destruction effects. A low r*, as we have been arguing since 2015 and again since June, is likely to prevail post-COVID only flattens consumer demand curves further. Saravelos concludes that "he continues to believe that it is the behavior of the consumer, including the desired level of precautionary savings as well as the response to the unfolding supply shock that is the most important macro variable for the market this year and beyond." As such, the latest UMich survey which showed that Americans are panicking over soaring inflation, and whose buying intentions have plunged to the lowest levels on record...

... is extremely alarming.

 

 

 

Tyler Durden Sat, 09/18/2021 - 17:00
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