Jackson Hole Reconsidered

August 21st, 2014 6:38 pm

The FT has an article on the changing nature of the Jackson Hole conclave at which Ms Yellen will deliver an ex cathedra proclamation tomorrow. The article details how the list of invitees does not include street economists and has returned to its roots as a place for international central bankers to gather and break bread.

Via the FT:

August 21, 2014 10:12 pm

Yellen returns Jackson Hole to wonky roots

There will be no Wall Street economists in the audience when Janet Yellen addresses the Kansas City Fed’s annual Jackson Hole conference for the first time as chair of the Federal Reserve, taking it back to its roots as a wonky occasion for international central bankers.

For many years, economists from investment banks could rub shoulders with policy makers at the conference, and their expulsion reflects growing Fed sensitivity about any perception of privileged access for financiers

Even though investors have come to expect market-moving news from Jackson Hole – the theme of the event is labour markets this year – the shift in the guest list towards policy makers highlights that the conference was never designed to communicate monetary policy and Ms Yellen may not have a blockbuster in mind this year.

Whereas the 2013 forum included Wall Street economists such as Martin Barnes of BCA Research and Jim O’Sullivan of High Frequency Economics, plus regular financial guests such as Phillipa Malmgren of Principalis Asset Management, all are absent this year.

“Some of this is an issue around the potential appearance problems of having people from major primary dealers at a conference sponsored by the Fed,” said one economist of a Wall Street bank, who was not invited this year even though he has previously attended. He said he did not want to be named because he did not “want to sound like a crybaby”.

Ethan Harris, chief economist of Bank of America, who is not attending this year, noted that there was a risk that officials could miss out on the different vantage point of the financial sector.

In their place come guests such as William Spriggs, chief economist of the AFL-CIO, the umbrella organisation for America’s union movement.

“The primary audience for the Jackson Hole economic symposium has always been central bankers,” said Diane Raley, head of public affairs for the Kansas City Fed. “This year’s symposium focuses on labour markets, and the audience composition is designed to be a complement to this important public policy discussion and debate.”

The political sensitivity of the conference for the Fed was highlighted by a group of young civil society protesters, working the hall outside the conference room, wearing green T-shirts emblazoned with the slogan “What Recovery?”

While the Jackson Hole event is the pride and joy of the Kansas City Fed, the Federal Reserve in Washington has sometimes been uncomfortable as the hoopla around the conference grows year after year.

In his later years in office, Ben Bernanke made sporadic efforts to play the conference down, giving a low key speech in 2011 and skipping it altogether in 2013.

Having chosen to attend, Ms Yellen knows that her speech will be scrutinised closely for policy signals. Recent minutes of the Fed’s July policy meeting show that it is making progress on plans for when and how to raise interest rates, but it has still not reached any decisions.

One point Ms Yellen may choose to emphasise again is that the Fed will raise interest rates earlier than planned if the economic data keeps coming in stronger than expected.

The Fed has been using steadily stronger words to try and send that message, but financial markets have paid little attention, with the ten-year bond yield close to its lowest level for a year at 2.41 per cent. That could mean Ms Yellen sounds more hawkish than markets expect.

Most of this year’s Jackson Hole attendees come from a wide range of international central banks, from Brazil to Turkey to Latvia. One last-minute absentee was Ksenia Yudaeva, the first deputy governor of the Bank of Russia, perhaps reflecting tensions over Ukraine.

Mario Draghi, president of the European Central Bank, and Haruhiko Kuroda, governor of the Bank of Japan, are attending. They will both speak at the event.

Durables Goods Orders Next Week at An Historic Level

August 21st, 2014 6:29 pm

A fully paid up subscriber forwarded this note by SOcGen research in which they forecast that durable goods orders will record a gain of 24.5 percent when the number is released next week. That will exceed the previous record of 16.5 percent achieved in 2000. The research piece notes the customary vlatility of this series but given the size of this gain they believe that it signifies real strrength in spending on business investment.

Via SocGen:

Of the releases on the monthly statistical calendar in the US, one would be hard pressed to find one more prone to dramatic surprises than the Census Bureau’s advance report on durable goods orders. We expect next week’s report on bookings in July to add to that historical record. Powered by a jetliner-led surge in transportation equipment requisitions, durable goods bookings probably soared by a record 24½%, eclipsing the prior ‘all-time’ high percentage leap of 16.6% set in June 2000 by a country mile and then some. While market participants have been trained to strip out the ever-volatile transport category when assessing a report, July’s projected moon shot, with its implications for future nondefense capital goods shipments, may indeed be too large to ignore. Aside from the stunning lift from transport orders, we expect ‘hard’ goods bookings to climb by 1.3%, building on June’s 1.9% gain. Forecasted increases in nondefense capital goods orders and shipments excluding civilian aircraft, meanwhile, are expected to support our call for a pickup in business equipment spending in the second half of 2014.
Durable goods orders probably exploded in July
We expect durable goods bookings to jump by a record 24½% in July, after a comparatively paltry 1.7% gain in the preceding month, eclipsing the prior ‘all-time’ high monthly percentage rise of 16.6% recorded in June 2000. As was the case in that prior period, increased transportation equipment requisitions are projected to fuel the gain in headline orders (see table below left). Reflecting a fivefold leap in commercial aircraft bookings, transportation equipment orders likely swelled by 75.7% to an eye-popping $133.1 billion, accounting for 44% of all durables requisitions placed during the reference period. The Boeing Corporation reported that a record 324 commercial aircraft were ordered last month, a near trebling from the 109 jetliners booked in June. Although the number of planes ordered in July was just a touch above the 319 requisitions placed last December, the composition of last month’s bookings was far more heavily weighted towards more expensive models in the company’s product line. Applying posted prices to reported volumes, our calculations revealed that the estimated value of Boeing’s orders jumped by about $87 billion to $98.3 billion. Running those figures through our forecasting model which attempts to adjust for differences with the government’s series, we expect the Census Bureau’s series to rise by almost half that amount, or $48.4 billion, after seasonal adjustment (see chart below right). While jetliner bookings are expected to launch transportation orders into the stratosphere, our forecast also calls for solid increases in motor vehicle (+9.6%) and defense-related (+31.4%) bookings in July.
Non-transportation bookings expected to edge higher
While not expected to be the attention grabber in next week’s report, orders away from transportation industries likely will post a respectable aggregate gain in next week’s report. We expect such bookings to climb by 1.3% in July, building on June’s upwardly revised 1.9% increase. If the broad-based pickup in new orders reported by the Institute for Supply Management is accurate, computers & electronic products, electrical equipment, machinery and metals producers should all post increases in July. Our forecast, if realized, would place last month’s ex-transportation bookings 10.4% annualized above their April-June average, after a 13.8% spring-quarter gain.
Core nondefense capital goods orders and shipments likely posted gains
Supporting our call for a quickening in business equipment spending over the second half of 2014, closely followed tallies on nondefense capital goods orders and shipments excluding commercial aircraft are both expected to rise in the Census Bureau’s July report (see chart below). Sans the aforementioned leap in civilian jetliner bookings, nondefense capital goods orders probably edged 0.8% higher, building on the 3.3% increase posted in June. Our projection would place core nondefense capital goods requisitions 10.3% annualized above their current estimated April-June average, in one month eclipsing the 8.8% advance posted during Q2. Meanwhile, nondefense capital goods shipments excluding jetliner deliveries are projected to climb by 1.2%, leaving July’s level 4.1% annualized above the reported spring average, after a 5.6% winter-quarter gain.

San Francisco Fed Pres Chimes in on Rate Hikes

August 21st, 2014 1:12 pm

Via a fully paid up subscriber:

SAN FRANCISCO FED PRESIDENT WILLIAMS says that Fed officials “really want to be data dependent” when making policy and that the summer of 2015 is a reasonable date for the first rate hike. Rates could climb earlier if there is “really good” improvement in the economy and if inflation moves toward the Fed’s target. He sees no convincing evidence of wages rising faster. Rates will increase in “gradual” fashion over the next few years. Williams does not seem to be validating the notion that the notional timetable for rate hikes has changed. Timing depends on data still to come.

Five Year TIPS Result

August 21st, 2014 1:06 pm

Via CRT Capital:

* 5-year TIPS auction stops at -0.281% vs. a -0.275% 1:00 PM bid WI.
* Bid/Cover 2.48 vs. 2.64 average.
* Dealers were awarded 40.2% vs. 53% average for 5-year TIPS.
* Indirects get 56.3% vs. 40% norm.
* Directs take 3.5% vs. 7% average.
* Dealer Hit-Ratio: Dealers take 25% of what they bid for vs. 30% norm.
* Indirect Hit-Ratio: Customers take 77% of what they bid for vs. 72% norm.
* Nominal Treasuries were trading slightly better ahead of the auction and are largely unchanged since the results, Treasuries have generally held the price action.
* Volumes in the nominal Treasury market have been the strongest of the week (for whatever that is worth), with cash trading at 92% of the 10-day moving-average. 5s have been the most active issue, taking a 35% marketshare while 10s took 24%, 2s got 11% and 3s 17% — a fairly standard distribution.

Midday Miscellany

August 21st, 2014 12:53 pm

The Treasury market is quiet today and most participants support the view that investors are squaring positions and hunkering down in the deep weeds until Ms Yellen shows her cards. There is a TIPS auction in a few minutes and there are very conflicting views on that one. I wrote about it here.

Swap spreads have narrowed across the curve by about 1/2 basis point (maybe a little less in 2s). One portfolio manager thought this was position squaring as many held long spread positions as part of an Armageddon trade. There is no rate locking and the Armageddon vision has morphed into financial nirvana and those who paid a now unwinding.

TIPS Auction

August 21st, 2014 9:57 am

The Treasury in its infinite wisdom will auction $16 billion 5 year TIPS today. There is some good news and some bad news for the issue. The issue has cheapened significantly on breakeven. The breakeven was 203 as recently as June 24 and the WI trades around 188. One trader also noted that real yields are at levels which have previously attracted buyers. But there are several flies in the ointment. Inflation data has turned benign and if petroleum stays benign it is not likely to spike higher. The larger focus is carry. I will confess that I do not understand the esoterica of TIPS carry but one market maker in the product reports that the TIPs will have negative carry until February 2015. That trader notes that there is a big short in the April 2019 TIPS and he fears that once that special fades there will be a reauction of today’s issue and you will have a chance to buy cheaper TIPS as today’s bonds get resold.

Spread Product

August 21st, 2014 9:40 am

Corporate Bonds are opening firmer. One participant reports that intermediate industrials are 1 tighter and 25 year and longer paper is 2 tighter. The IG 22 is at 56 7/8 and tightened 7/8 overnight.

Supply will remain light until after the Labor Day Holiday when issuance should pick up again. We did have the one off VZ exchange yesterday as that firm termed out some debt.

Mortgages were slightly weaker to Treasuries at the open today. MBS outperformed Treasuries yesterday and one analyst noted that the hawkish interpretation of the minutes reduced fears about a pick up in prepays and that trumped fears of tapering (for now).

Separately, and I am doing this from my very very addled memory I believe the minutes did say that the Federal Reserve would cease reinvesting cash flow from MBS sometime after the first rate hike.

Europe PMI Analysis

August 21st, 2014 7:49 am

Via TDSecurities:

UK & Europe

EURBoth the German manufacturing and services PMIs registered small falls, but these falls were much smaller than had been expected after last week’s sharp fall in the German ZEW data. The details of the German PMIs continue to be decent but were mixed. In the manufacturing PMI, new orders grew at the slowest pace in a year, but the services PMI reported new orders at their strongest level for three years. Employment growth continues but continues to see a softer pace, and German businesses are still adding to backlogs and the pipeline of work.

The French PMIs were mixed but largely weak in the details, however, they do seem to offer some of the first glimmers of hope. New business in services increased for the first time since March at the fastest pace since August 2011, and as in Germany, manufacturing new orders were at their weakest since early-2013. In contrast to Germany, there was a sharp drawdown of backlogs, especially in manufacturing, but with persistent weak demand and new orders, there is a worry that the backlogs will prove insufficient to sustain businesses and we’ll continue to see the job cuts quicken, as we are close to the fastest pace of jobs cuts currently. We continue to see signs here of very weak prices to try and compensate for the lack of demand as well. So we have some strength coming into service sector new orders, but it’s hard to expect that is sustained.

The pan-Eurozone PMIs both slightly missed consensus expectations and suggest some weakness in peripherals in August. Overall, today’s PMIs continue to suggest that global manufacturing is struggling but the core of German growth remains strong, and very unusually is being driven by services.

Hawk Speaks

August 21st, 2014 7:37 am


Index Extensions

August 21st, 2014 7:26 am

Via a fully paid up subscriber

US TSYS: Prelim Barclays extensions for Sep 1:
- US Tsys +0.12 yrs
- Agencies: +0.03 yrs
- Credit: +0.05 yrs
- Govt/Credit: +0.09 yrs
- MBS: +0.07 yrs
- Aggregate: +0.09 yrs
- Long Govt/Credit: +0.11 yrs
- Intermed Credit: +0.05 yrs
- Intermed Govt +0.09 yrs
- Intermed Gov/Credit +0.08 yrs
- US High Yield: +0.05 yrs
- US TIPS (Series-L) empirical extension at -0.06 yrs, and real extension at
-0.07 yrs
- US Government Inflation-Linked (Series-B) Index extension is estimated at
-0.06 yrs