Monday, June 18, 2018

Markets During Periods Of Federal Reserve Intervention – June 15, 2018 Update

In the August 9, 2011 post (“QE3 – Various Thoughts“) I posted a chart that depicted the movements of the S&P500, 10-Year Treasury Yield and the Fed Funds rate spanning the periods of various Federal Reserve interventions since 2007.
For reference purposes, here is an updated chart (through June 15, 2018) from the Doug Short site post of June 15 (“Treasury Snapshot:  10-Year Remains at 2.93%“):
The S&P500 during Federal Reserve intervention
The Special Note summarizes my overall thoughts about our economic situation
SPX at 2779.66 as this post is written

Friday, June 15, 2018

S&P500 Price Projections – Livingston Survey June 2018

The June 2018 Livingston Survey published on June 15, 2018 contains, among its various forecasts, a S&P500 forecast.  It shows the following price forecast for the dates shown:
Jun. 29, 2018   2720.0
Dec. 31, 2018  2824.0
Jun. 28, 2019   2850.0
Dec. 31, 2019  2880.3
These figures represent the median value across the forecasters on the survey’s panel.
I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 2772.79 as this post is written

Jerome Powell’s June 13, 2018 Press Conference – Notable Aspects

On Wednesday, June 13, 2018 Jerome Powell gave his scheduled June 2018 FOMC Press Conference. (link of video and related materials)
Below are Jerome Powell’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Powell’s Press Conference“ (preliminary)(pdf) of June 13, 2018, with the accompanying “FOMC Statement” and “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, June 2018“ (pdf).
From Jerome Powell’s opening comments:
Good afternoon and thank you for being here. I know that a number of you will want to talk about the details of our announcement today, and I am happy to do that in a few minutes. But because monetary policy affects everyone, I want to start with a plain-English summary of how the economy is doing, what my colleagues and I at the Federal Reserve are trying to do, and why. The main takeaway is that the economy is doing very well.
Most people who want to find jobs are finding them, and unemployment and inflation are low. Interest rates have been low for some years while the economy has been recovering from the financial crisis. For the past few years, we have been gradually raising interest rates, and along the way, we have tried to explain the reasoning behind our decisions. In particular, we think that gradually returning interest rates to a more normal level as the economy strengthens is the best way the Fed can help sustain an environment in which American households and businesses can thrive. Today, we have taken another step in that process by raising our target range for the federal funds rate by a quarter of a percentage point.
After many years of running below our 2 percent longer-run objective, inflation has recently moved close to that level. Indeed, overall consumer prices, as measured by the price index for personal consumption expenditures, increased 2 percent over the 12 months ending in April. The core PCE index, which excludes the prices of energy and food and tends to be a better indicator of future inflation, rose 1.8 percent over the same period. As we had expected, inflation moved up as the unusually low readings from last March dropped out of the calculation. The recent inflation data have been encouraging, but after many years of inflation below our objective, we do not want to declare victory. We want to ensure that inflation remains near our symmetric 2 percent longer-run goal on a sustained basis. As we note in our Statement of Longer-Run Goals and Monetary Policy Strategy, the Committee would be concerned if inflation were running persistently above or below our 2 percent objective. Of course, many factors affect inflation, some temporary and others more lasting, and at any given time inflation may be above or below 2 percent. For example, the recent rise in oil prices will likely push inflation somewhat above 2 percent in coming months. But that transitory development should have little if any consequence for inflation over the next few years. The median of participants’ projections for inflation runs at 2.1 percent through 2020. Relative to the March projections, the median inflation projection is a little higher this year and next.
Jerome Powell’s responses as indicated to the various questions:
STEVE LIESMAN. Steve Liesman, CNBC. Mr. Chairman, you said there’s a difference of opinion among economists. But looking at the longer-run GDP growth rates for the members of the Committee, there’s not a whole lot of differences. It’s one 8 to 2, or one 7 to 2, 1, depending upon how you count it. Is that showing us that not a single member of the Committee, including yourself, Mr. Chairman, agrees with economists over at the White House that they can achieve long-run sustained growth rates above or at 3 percent or higher? Do you believe in that?
CHAIRMAN POWELL. You know, first of all, that’s a — that’s a reasonable range, I think, of — it’s not that we’re all on the same number. But there are a range of views about potential growth. And there’s so much uncertainty around this. You know, we don’t — the thing about fiscal policy is, you don’t have thousands of incidents to, you know, to — you don’t have big data, in a way. You have very small data. You’ve got only a few instances here, so you have a lot of uncertainty around what the effects will be. They could be large. We hope they’re large. But I think our approach is going to be to watch and see and hope that in fact, we do get significant effects to, you know, to potential growth out of the tax bill and we’re just going to have to see. I think we’re looking at a reasonable range of estimates and we’re putting every — different participants are putting different estimates in and we’re going to be waiting and seeing.
MARTIN CRUTSINGER. Marty Crutsinger, Associated Press. At this meeting, you hiked your — the funds rate, you changed the dot plot to move from 3 to 4 for this year, and you took out a sentence that you’d been using for years about how long rates might stay low. But you say that none of this signals a change in policy views. But shouldn’t we see from this combination of things that the Fed is moving to tighter policy?
CHAIRMAN POWELL. I think what you should see is that the economy is continuing to make progress. The economy has strengthened so much since I joined the Fed, you know, in 2012 and even over the last couple of years. The economy is in a very different place. We — unemployment was 10 percent at the height of the crisis. It’s 3.8 percent now and moving lower. So, really what you — the decision you see today is another sign that the U.S. economy is in great shape. Growth is strong, labor markets are strong, inflation is close to target, and that’s what you’re seeing. For many years, as I mentioned, many years, we had interest rates held low to support economic activity. And it’s been clear that as we’ve gotten closer to our statutory goals, we should normalize policy, and that’s really what we’ve been consistently doing for some years now.
HEATHER LONG. Heather Long from the Washington Post. Can you give us an update on what the FOMC thinks about wages? Are we finally going to see that wage growth pick up this year? I know you’re forecasting a little bit more inflation, but is that going to translate through to wage growth?
CHAIRMAN POWELL. You know, wages have been gradually moving up. Earlier in the recovery, they were — there are many different wage measures, of course, but — so just — but just the generalized wages were running roughly around 2 percent and they’ve moved gradually up into between 2 to 3 percent, as the labor market has become stronger and stronger. I think it’s fair to say that some of us — and I certainly would have expected wages to react more to the very significant reduction in unemployment that we’ve had, as I mentioned, from 10 percent to 3.8 percent. Part of that can be explained by low productivity, which is something we’ve talked about at the Committee and elsewhere. But nonetheless, I think we had anticipated and many people have anticipated that wages — that in a world where we’re hearing lots and lots about labor shortages — everywhere we go now, we hear about labor shortages, but where is the wage reaction? So, it’s a bit of a puzzle. I wouldn’t say it’s a mystery, but it’s a bit of a puzzle. And frankly, I do think there’s a lot to like about low unemployment. And one of the things is, you will see pretty much people who want to get jobs — not everybody — but people who want to get jobs, many of them will be able to get jobs. You will see wages go up. You’ll see people at the — sort of the margins of the labor force having an opportunity to get back in work. They benefit from that. Society benefits from that. So, there are a lot of things to really like, including higher wages, as you asked. Our role though, is also to, you know, to make sure that that maximum employment happens in a context of price stability and financial stability, which is why we’re gradually raising rates.
VICTORIA GUIDA. I have a couple of regulatory questions. First of all, on the counter cyclical capital buffer, I was wondering, what are the chances that the Fed is going to need to use that in the next year or two? And then my second question is, there’s been a lot of talk lately in Congress about the ability for banks to serve marijuana businesses, and I was wondering if you think that banks should be able to serve those businesses in states where marijuana is legal?
CHAIRMAN POWELL. So, the counter cyclical capital buffer gives us the ability to raise capital requirements on the largest institutions, when financial stability vulnerabilities are meaningfully above normal, that’s the language that we’ve used. And that’s certainly a possibility. I wouldn’t say that — I wouldn’t look at today’s financial stability landscape and say that risks are meaningfully above normal. I would say that they’re roughly at normal. You have — you know, households are well — you know, are in good shape. They’re — they’ve pay down their debt, incomes are rising, people have jobs. So, households are not really a concern. And banks are highly capitalized, so that’s not really a concern. We see — there’s some concern with asset prices in a couple of pockets. But overall, if you if you bake it all in, I think we see generally financial vulnerabilities as moderate. Could that change, you asked, over a couple of years? Yeah, they could. You also asked about marijuana businesses. So, this is a very difficult area because we have state law — many state laws permit the use of marijuana and federal law still doesn’t. So, it puts, you know, federally chartered banks in a very difficult situation. I think it would be great if that could be clarified. We don’t have, you know — it puts the supervisor in a very, very difficult position. And, of course, this isn’t — our mandate has nothing to do with marijuana, so we don’t really — we just would love to see it clarified, I think.
STEVEN BECKNER. Steve Beckner, Mr. Chairman, freelance journalist reporting for NPR. About financial conditions, which worries you more, warnings that rising short-term rates are bringing the yield curve closer to inversion, or the fact that long rates have risen very slowly and in fact are nearly 20 basis points below their recent high? How do you account for the fact that long rates have been so slow to rise? And what does it say about the inflation outlook as well?
CHAIRMAN POWELL. So, let me — let me briefly mention the yield curve. I mean, I — the yield curve is something that people are talking about a lot, including FOMC participants. And I — they have a range of views. It’s something we’re going to continue to be talking about, it’s — but it’s only one of many things, of course, that we talk about. I think that that discussion is really about what is appropriate policy, and how do we think about policy as we approach the neutral rate. How do we understand what the neutral rate is? How do we know where it is? And what are the consequences of being above or below it? That’s really what — when people are talking about the slope of the yield curve, that’s really what they’re talking about. We know why – we know why the yield curve is flattening, it’s because we’re raising the federal funds rate. It makes all the sense in the world that the short end would come up. I think you asked the harder question is, what’s happening with long rates. And there are many things that move long rates around. Of course, there’s an embedded expectation of the path of short rates. There’s the term premium, which has been very low, by historical standards, and so arguments are made that a flatter yield curve has less of a signal embedded in it. In addition, I think what you saw most recently that you referred to, Steve, was just risk-on risk-off. In a risk-off environment, people want to own U.S Treasuries and you see, you know, Treasury prices go up, rates go down quite a lot. So — but I think ultimately, you know, what we’re — what we really care about is what’s the appropriate stance of policy. And there’s a — there may be a signal in that long-term rate about what is the neutral rate and I think that’s why people are paying attention to the yield curve.
NANCY MARSHALL-GENZER. Nancy Marshall-Genzer with Marketplace. Companies are buying back their shares at a record rate. Corporate debt is up. Consumer debt is rising. Are we in a credit bubble? Is that something that you’re worried about?
CHAIRMAN POWELL. So, if you look at households, you do not see excess credit growth. You don’t see high levels of credit going out, so not so much households. And that really was where the problems were before the financial crisis was, particularly in — among household borrowing, and particularly around mortgages. With — if you take banks, then of course, their leverage is significantly lower, or to say it differently, their capital is significantly higher. If you ask about non-financial corporates, that’s really where leverage is at levels that are high relative to history. But defaults are low, interest rates are low, you know, so it’s something — that’s something we’re watching very carefully. But again, I don’t think we see it as — I think there are a range of views on that, but we are watching non-financial corporates. Households are in good shape though, and that is — that is so important because that’s where — you know, that’s where we got into trouble before. And that’s — it’s often around property and particularly housing, where you see real problems emerge. We don’t really see that now, so we take some solace from that.

The Special Note summarizes my overall thoughts about our economic situation
SPX at 2772.86 as this post is written

Wednesday, June 13, 2018

June 2018 Duke/CFO Global Business Outlook Survey – Notable Excerpts

On June 13, 2018 the June 2018 Duke/CFO Global Business Outlook was released.  It contains a variety of statistics regarding how CFOs view business and economic conditions.
In this CFO survey press release, I found the following to be the most notable excerpts – although I don’t necessarily agree with them:
The Optimism Index in the U.S. remained at an all-time high of 71 on a 100-point scale this quarter. Optimism fell in Africa, Asia, Europe, and Latin America. The survey’s CFO Optimism Index is an accurate predictor of future hiring and overall GDP growth.
“This increased U.S. optimism appears to have increased expectations for M&A activity,” Graham said. “More than 70 percent of CFOs expect more mergers and acquisitions to occur over the next year.”
The proportion of firms indicating they are having difficulty hiring and retaining qualified employees remains near a two-decade high, with 41 percent of CFOs calling it a top concern. The typical U.S. firm says it plans to increase employment by a median 3 percent in 2018 and expects wages to increase 4 percent on average.
“The tight labor market continues to put upward pressure on wages,” said Chris Schmidt, senior editor at CFO Research. “Wage inflation is now a top five concern of U.S. CFOs.”
Wage growth should be strongest in the tech, transportation, and service/consulting industries. U.S. companies expect the prices of their products to increase by more than 3 percent over the next year.
The CFO survey contains two Optimism Index charts, with the bottom chart showing U.S. Optimism (with regard to the economy) at 71, as seen below:
Duke CFO Optimism chart
It should be interesting to see how well the CFOs predict business and economic conditions going forward.   I discussed past various aspects of this, and the importance of these predictions, in the July 9, 2010 post titled “The Business Environment”.
(past posts on CEO and CFO surveys can be found under the “CFO and CEO Confidence” label)
I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with many of the consensus estimates and much of the commentary in these forecast surveys.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 2775.63 as this post is written

Chicago Fed National Financial Conditions Index (NFCI)

The St. Louis Fed’s Financial Stress Index (STLFSI) is one index that is supposed to measure stress in the financial system.  Its reading as of the June 7, 2018 update (reflecting data through June 1, 2018) is -1.085.
Of course, there are a variety of other measures and indices that are supposed to measure financial stress and other related issues, both from the Federal Reserve as well as from private sources.
Two other indices that I regularly monitor include the Chicago Fed National Financial Conditions Index (NFCI) as well as the Chicago Fed Adjusted National Financial Conditions Index (ANFCI).
Here are summary descriptions of each, as seen in FRED:
The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.
The adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions.
For further information, please visit the Federal Reserve Bank of Chicago’s web site:
Below are the most recently updated charts of the NFCI and ANFCI, respectively.
The NFCI chart below was last updated on June 13, 2018 incorporating data from January 8, 1971 through June 8, 2018, on a weekly basis.  The June 8, 2018 value is -.81:
NFCI_6-13-18 -.81
Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed June 13, 2018:
The ANFCI chart below was last updated on June 13, 2018 incorporating data from January 8,1971 through June 8, 2018, on a weekly basis.  The June 8 value is -.52:
ANFCI_6-13-18 -.52
Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed June 13, 2018:
I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 2780.95 as this post is written

Charts Indicating Economic Weakness – June 2018

U.S. Economic Indicators

Throughout this site there are many discussions of economic indicators.  At this time, the readings of various indicators are especially notable.  This post is the latest in a series of posts indicating U.S. economic weakness or a notably low growth rate.
While many U.S. economic indicators – including GDP – are indicating economic growth, others depict (or imply) various degrees of weak growth or economic contraction.  As seen in the June 2018 Wall Street Journal Economic Forecast Survey the consensus (average estimate) among various economists is for 2.9% GDP growth in 2018.  However,  there are other broad-based economic indicators that seem to imply a weaker growth rate.
As well, it should be remembered that GDP figures can be (substantially) revised.

Charts Indicating U.S. Economic Weakness

Below are a small sampling of charts that depict weak growth or contraction, and a brief comment for each:

Total Federal Receipts

“Total Federal Receipts” growth continues to be intermittent in nature since 2015.  As well, the level of growth does not seem congruent to the (recent) levels of economic growth as seen in aggregate measures such as Real GDP.
“Total Federal Receipts” through May had a last value of $217,075 Million.  Shown below is  displayed on a “Percent Change From Year Ago” basis with value -9.7%, last updated June 12, 2018:
Monthly Treasury Receipts Percent Change From Year Ago
source:  U.S. Department of the Treasury. Fiscal Service, Total Federal Receipts [MTSR133FMS], retrieved from FRED, Federal Reserve Bank of St. Louis, accessed June 13, 2018:

Underperformance Of Consumer Staples Stocks

In the March 23, 2017 post (“‘Hidden’ Weakness In Consumer Spending?“) I wrote of various indications that consumer spending may be (substantially) less than what is depicted by various mainstream indicators, including overall retail sales.
One recent development that appears to be a problematical aspect of consumer spending is the performance of the consumer staples stocks.  As one can see in the chart below, there has been a marked relative weakness in these stocks (with the XLP serving as a proxy).  The chart shows a 10-year daily depiction of the XLP (top plot), the S&P500 (middle plot) and XLP:S&P500 ratio (bottom plot.)  While there can be various interpretations and reasons for this underperformance, it does appear to represent a “red flag” especially considering other problematical indications concerning consumer spending:
(click on chart to enlarge image)(chart courtesy of; chart creation and annotation by the author)
XLP v S&P500 chart


I have written extensively concerning unemployment, as the current and future unemployment issue is of tremendous importance.
The consensus belief is that employment is robust, citing total nonfarm payroll growth and the current unemployment rate of 3.8%.  However, my analyses continue to indicate that the conclusion that employment is strong is incorrect.  While the unemployment rate indicates that unemployment is (very) low, closer examination indicates that this metric is, for a number of reasons, highly misleading.
My analyses indicate that the underlying dynamics of the unemployment situation remain exceedingly worrisome, especially with regard to the future.  These dynamics are numerous and complex, and greatly lack recognition and understanding, especially as how from an “all-things-considered” standpoint they will evolve in an economic and societal manner.  I have recently written of the current and future U.S. employment situation on the “U.S. Employment Trends” page.
While there are many charts that can be shown, one that depicts a worrisome trend is the  Civilian Labor Force Participation Rate for those with a Bachelor’s Degree and Higher, 25 years and over.  Among disconcerting aspects of this measure is the long-term (most notably the post-2009) trend, especially given this demographic segment.
The current value as of the June 1, 2018 update (reflecting data through the May employment report) is 74.1%:
Civilian Labor Force Participation Rate: Bachelor's Degree and Higher, 25 years and over
source:  U.S. Bureau of Labor Statistics, Civilian Labor Force Participation Rate: Bachelor’s Degree and Higher, 25 years and over [LNS11327662], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed June 11, 2018:

Loan Demand And Related Measures

As seen in previous updates, various aspects of lending growth and related measures have shown a marked slowing in the growth rate.  Here is a measure, Net Percentage of Domestic Banks Reporting Stronger Demand for Commercial and Industrial Loans from Large and Middle-Market Firms, that shows a decline:
Net Percentage of Domestic Banks Reporting Stronger Demand for Commercial and Industrial Loans from Large and Middle-Market Firms
source:  Board of Governors of the Federal Reserve System (US), Net Percentage of Domestic Banks Reporting Stronger Demand for Commercial and Industrial Loans from Large and Middle-Market Firms [DRSDCILM], retrieved from FRED, Federal Reserve Bank of St. Louis;  accessed June 11, 2018:

Wages And Earnings

The level and growth rates of wages and household earnings continues to be (highly) problematical.  I have extensively discussed these worrisome trends in income and earnings.
As seen in many measures the problem is chronic (i.e long-term) in nature.
Shown below is a chart depicting the 12-month percent change in real average hourly and weekly earnings for private sector employees from January 2008 – April 2018.  As seen in the chart, growth in this measure over the time period depicted has been intermittent, volatile, and, especially since 2017, weak:
 12-month percent change in real average hourly and weekly earnings
source: Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, Real average hourly earnings up 0.2 percent for all private employees from April 2017 to April 2018 on the Internet at June 11, 2018).

Other Indicators

As mentioned previously, many other indicators discussed on this site indicate economic weakness or economic contraction, if not outright (gravely) problematical economic conditions.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 2786.85 as this post is written

Tuesday, June 12, 2018

NFIB Small Business Optimism – May 2018

The May NFIB Small Business Optimism report was released today, June 12, 2018. The headline of the Economic Trends report is “Small Business Optimism Soars, Continuing Historic Run, Hitting Several Records in May.”
The Index of Small Business Optimism increased in May by 3 points to 107.8.
Here are some excerpts that I find particularly notable (but don’t necessarily agree with):
The Small Business Optimism Index increased in May to the second highest level in the NFIB survey’s 45-year history. The index rose to 107.8, a three-point gain, with small businesses reporting high numbers in several key areas including compensation, profits, and sales trends.
The May report hit several records:
• Compensation increases hit a 45-year high at a record net 35 percent.
• Positive earnings trends reached a survey high at a net three percent.
• Positive sales trends are at the highest level since 1995.
• Expansion plans are the most robust in survey history.
Access to credit continues as a non-issue with 37 percent of owners reporting all credit needs were satisfied and 43 percent saying they were not interested in a loan, down seven points from last month and the lowest reading since 2007. Only one percent reported that financing was their top business problem. Owners planning to build inventories rose three points to a net four percent, the nineteenth positive reading in the past 20 months.
As reported in NFIB’s May jobs report, 23 percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, followed by taxes at 17 percent and regulations at 13 percent. Fifty-eight percent reported hiring or trying to hire, up one point from last month but 83 percent of those reported few or no qualified workers.
Here is a chart of the NFIB Small Business Optimism chart, as seen in the June 12 Doug Short post titled “NFIB Small Business Survey:  ‘Small Business Optimism Soars…’“:
NFIB Small Business Optimism
Further details regarding small business conditions can be seen in the full May 2018 NFIB Small Business Economic Trends (pdf) report.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 2782.60 as this post is written

Friday, June 8, 2018

Deflation Probabilities – June 8, 2018 Update

While I do not agree with the current readings of the measure – I think the measure dramatically understates the probability of deflation, as measured by the CPI – the Federal Reserve Bank of Atlanta maintains an interesting data series titled “Deflation Probabilities.”
As stated on the site:
Using estimates derived from Treasury Inflation-Protected Securities (TIPS) markets, described in a technical appendix, this weekly report provides two measures of the probability of consumer price index (CPI) deflation through 2022.
A chart shows the trends of the probabilities.  As one can see in the chart, the readings are volatile.
As for the current weekly reading, the June 8, 2018 update states the following:
The 2018–23 deflation probability was 4 percent on June 7, down from 5 percent on May 30. The 2017–22 deflation probability was also 4 percent on June 7, unchanged from May 30. These deflation probabilities, measuring the likelihoods of net declines in the consumer price index over the five-year periods starting in early 2017 and early 2018, are estimated from prices of the five-year Treasury Inflation-Protected Securities (TIPS) issued in April 2017 and April 2018 and the 10-year TIPS issued in July 2012 and July 2013.
I post various economic indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 2779.03 as this post is written