Analyzing Economic Indicators

When uncertainty is elevated, considering scenarios is more useful than debating a modal outlook. Today, there are at least two possible paths for the economy. In one, the conflict in the Middle East resolves quickly, oil and energy prices fall, and the impact on the U.S. economy is short-lived and muted. Under those circumstances, it likely would make sense to look through the temporary rise in energy prices, assuming inflation expectations remain well anchored.   But if the conflict becomes more protracted, a different scenario is possible. Disruptions in energy supply and associated cost pressures could persist, with increased risks for higher inflation, slower growth, and a weaker labor market. This would amplify the current tradeoffs for monetary policy, making it harder to balance the risks to both sides of our dual mandate. With all of this uncertainty, what’s the outlook for monetary policy? There is no single most-likely path. With policy in a good place, we need to remain flexible, able to respond to rapidly evolving risks. Now, this may seem vague, even dissatisfying.   But offering too much forward guidance in an uncertain world risks conveying a false sense of certainty, reducing rather than improving transparency, and making it harder for the public to clearly predict how the FOMC will react. So, for now, recognizing the uncertainty, examining potential scenarios, and staying focused on restoring price stability and supporting full employment no matter how the economy evolves is optimal communication and appropriate policy.

ISM's April PMI data for manufacturing was a bit of a mixed bag. The good news was that we saw some further uptick in new orders to 54.1 from 53.5 (seasonally adjusted). The bad news was that supplier deliveries lengthened even more (to 60.6 from 58.9). Two charts below from those data show the challenges the FOMC finds itself in regarding setting interest rates. These data are diffusion indexes where values > 50 indicate expansion. Thoughts: •The top chart shows ISM's prices paid for inputs index. This index soared to 84.6 from 78.3, which is the highest reading since the 2021-2022 inflationary cycle. This is clearly bad news and would push the FOMC to raising interest rates. •The bottom chart shows ISM's employment index. This fell to 46.4 from 48.7, which indicates further payroll contraction at an increasing rate. These data, also bad news, would push the FOMC to cutting interest rates. •As I've shared before, the combination of expansionary new orders but contraction of employment is not the norm, as those series have historically been very strongly positively correlated. Implication: The good news from ISM's April release is we aren't seeing signs yet that the spike in energy prices is depressing demand, as new orders have continued to expand. However, we are seeing substantial increases in prices for inputs that will be transmitted through supply chains over the coming months. We also aren't seeing manufacturers report expanding payrolls, though it's worth noting that we saw very strong payroll expansion in 2021 and 2022 from the BLS even though ISM's readings weren't as strong on that front. Friday's jobs data should shed some light on that front. #supplychain #manufacturing #freight #trucking #transportation

In a recent study, we analyse 145,000 point estimates and confidence bounds on the effects of monetary policy shocks on output and inflation collected from more than 400 primary studies. We show that interest rate hikes by central banks are less effective in reducing inflation than conventional wisdom suggests. Correcting for publication bias, the output cost of reducing inflation increases. Our results suggest that we need realistic expectations about what monetary policy can achieve in steering inflation - and a broader mix of policy instruments, including fiscal, industrial, and competition policies, to ensure price stability at a reasonable macroeconomic cost. Policy brief in English: https://lnkd.in/dSJfrzu2 Policy brief in German: https://lnkd.in/dCATquGS Full study: https://lnkd.in/dBjXWVQ8

WARNING SIGNAL EndGame Macro: 🇯🇵 Japan’s 40-Year Bond Yield Spikes. Japan’s 40-year government bond yield just surged to 3.39%, its highest level in over two decades, a flashing warning signal for the entire global financial system. 1. Why This Matters: The Cracks in Japan’s Financial Repression Model For decades, Japan has relied on financial repression keeping interest rates artificially low to manage its staggering 260% debt-to-GDP ratio. The Bank of Japan (BOJ) has been the perpetual buyer of last resort, owning nearly half of all Japanese Government Bonds (JGBs). But this latest yield surge tells us the long end of the curve is breaking free from BOJ control. •Pensions and Insurance Stress: Japanese pension funds and life insurers, which are heavily invested in ultra-long bonds, now face severe mark-to-market losses. •BOJ’s Yield Curve Control (YCC) Is Functionally Dead: While the BOJ still officially targets the 10-year yield, the market is now forcing its hand on the long end. •Repatriation Risk: Japanese institutional investors may begin pulling capital back home to take advantage of these higher domestic yields. That means selling U.S. Treasuries and European bonds, potentially pushing global yields higher. 2. Is This a Strategic Play by the BOJ? Governor Ueda may be signaling a policy shift without formally announcing it. Instead of directly intervening in FX markets to defend the yen, Japan might be allowing long-term yields to rise as a way to strengthen the currency by making domestic bonds more attractive. •Yen Defense via Rate Differentials: Higher Japanese yields narrow the interest rate gap with the U.S., which helps support the yen and discourages speculative short positions in the currency. •Avoiding FX Reserve Drawdowns: By defending the yen through bond yields rather than selling U.S. dollar reserves, Japan preserves its financial firepower for a more serious crisis. 3. Global Ramifications: This Is Not Contained to Japan •U.S. Treasury Market Impact: Japan remains the largest foreign holder of U.S. Treasuries. If Japanese funds accelerate selling to capture higher domestic yields, it could push U.S. long-term yields even higher, creating a feedback loop of tightening financial conditions. •Global Credit Contraction: Rising global yields tighten financial conditions across the board, putting further stress on over-leveraged corporate balance sheets and fragile sovereign debt markets, especially in emerging markets. •Volatility Surge Ahead: Expect bond volatility (tracked by the MOVE Index) to spike, and equity markets to face increased pressure as risk-free rates climb and equity risk premiums are recalculated. This situation echoes the 1998 Japanese bond market crisis, when a sharp rise in Japanese yields triggered massive losses for global funds like LTCM that were heavily leveraged into carry trades. The difference now? The scale is far larger, and Japan’s economy is even more intertwined with global capital markets.

The Senate’s confirmation of Kevin Warsh as the next Federal Reserve chair marks an important moment for U.S. monetary policy. When I wrote earlier this year about his nomination, I noted that a Warsh-led Fed would likely reflect a thoughtful and, in some respects, distinctive approach to policy. That view holds. Warsh brings a rare combination of experience across markets, policy, and crisis management. He has also been a consistent critic of key elements of the current framework, notably the size and composition of the Fed’s balance sheet and its reliance on forward guidance. As chair, that critique is likely to matter. We should expect a renewed focus on the balance sheet, including a gradual shift toward shorter duration holdings and a clearer framework for its long-run size. We may also see a recalibration of communication, with less emphasis on detailed guidance and more flexibility as data evolve. This transition comes at a complex juncture. Warsh assumes leadership with inflation still above target and the outlook shaped by energy prices and geopolitics. In that environment, the key question is not just the path of rates. It’s the reaction function: How the Fed interprets data, balances risks, and communicates uncertainty. Markets have grown accustomed to a particular policy style. A change in leadership invites a change in that style. Even incremental shifts can have meaningful implications for financial conditions. At the same time, much will endure. Institutional credibility. Committee-based decision-making. And broad support for Federal Reserve independence. For investors, this is best viewed not as a binary shift, but as a recalibration. A Warsh Fed may be more explicit about its concerns and more open to adapting its framework. That could introduce near-term uncertainty, but over time may support greater clarity. It’s a consequential transition – one that will shape not only the path of policy, but how that policy is understood.

This week’s economic data will tell a familiar story: resilience, but growing strain beneath the surface. The good: durable goods orders should be strong, underscoring that business investment remains the economy’s brightest spot. Much of this is tied to AI-related spending and incentives from the corporate tax provisions in the OBBBA. The okay: #GDP, income, and #consumerspending data will likely show the economy continuing to grow at roughly a 2% pace. That’s enough to keep the expansion going, but below the economy’s potential growth rate. The consequence is a labor market that is slowly softening, with unemployment edging higher and participation drifting lower. The bad: housing. New home sales are expected to remain weak as higher mortgage rates following the war and deeply strained affordability continue to weigh on demand. Homebuilders are leaning heavily on incentives, including mortgage rate buydowns, to keep buyers engaged. The ugly: inflation. The #PCE deflator will likely show #inflation running close to 4%, with core inflation still well above 3% — far from the Fed’s target and uncomfortably high. Put it all together, and the economy is still growing. But it is tenuous growth, increasingly dependent on a narrow set of strengths while more sectors weaken around the edges.

Q1, 2024 reports of Canada's Big 6 Banks: Their loans write-offs are at a 2-year high! While the substantial Allowance for Credit Losses (ACL) indicates banks were braced for these write-offs, the trend suggests loans are becoming riskier due to macroeconomic pressures, including: 1. Elevated interest rates 2. Increasing debt levels in Canada The Q1 2024 write-offs are as follows: Scotiabank $BNS: $804M $TD: $759M $BMO: $533M RBC $RY: $454M CIBC $CM: $445M National Bank $NA: $81M Excluding Scotiabank, which already reported a large Provision for Credit Losses (PCL) last quarter, there was an increase in PCL for the other banks from the previous quarter. This suggests that banks are anticipating large write-offs in the upcoming quarters.

When commodity prices slip, the entire agriculture chain takes the hit!! The article opens by emphasizing the inherently cyclical nature of global agriculture, wherein unpredictable factors like weather changes, geopolitical tensions, and international trade disputes have historically caused rapid price swings. It explains that the boom in commodity prices seen in 2022 was partly fueled by disruptions linked to COVID-19 and the Russia-Ukraine conflict, which rattled supply chains and drove up costs for fertilizers and transportation. By 2023 and continuing into 2024, however, the global market shifted, and the FAO Food Price Index recorded a notable downward trend for cereals, vegetable oils, dairy, meat, and sugar—resting significantly below its 2022 peak. This decline was driven by easing supply chain pressures, better harvests in some key regions, and a general cooling of economic growth worldwide. As prices slid, farmers experienced thinner profit margins, complicating decisions about whether to invest in new seeds, fertilizers, or technologies. The ripple effects extend beyond the farm gate: seed companies, fertilizer producers, and farm machinery manufacturers have all confronted weaker demand as growers curb spending. Meanwhile, ag-tech startups—which once attracted robust venture capital investments—now face a more cautious funding environment. Their prospective customers, already squeezed by low commodity prices, often delay or downsize technology adoption in an effort to protect short-term cash flow. Overall, the piece highlights how cyclical downturns in agricultural commodities do not merely affect farmers but reverberate through every layer of the value chain. With production costs still relatively high and climate change concerns looming, stakeholders across the sector must adapt, whether by diversifying crops, refining supply chains, or embracing innovative tools. Despite current headwinds, the article underlines that strategic long-term planning and collaboration can help create a more resilient agriculture sector for future cycles.

🎯 𝗡𝗲𝘄 𝗴𝘂𝗶𝗱𝗮𝗻𝗰𝗲 𝗳𝗿𝗼𝗺 𝘁𝗵𝗲 𝗡𝗚𝗙𝗦 𝘀𝗵𝗼𝘄𝘀 𝗵𝗼𝘄 𝗰𝗹𝗶𝗺𝗮𝘁𝗲 𝗰𝗵𝗮𝗻𝗴𝗲 𝗶𝘀 𝗮𝗳𝗳𝗲𝗰𝘁𝗶𝗻𝗴 𝗰𝗲𝗻𝘁𝗿𝗮𝗹 𝗯𝗮𝗻𝗸 𝗽𝗼𝗹𝗶𝗰𝗶𝗲𝘀 These key NGFS resources cover how climate change and the energy transition impact inflation and growth, and what that means for price stability.  Both reports are useful for anyone navigating the monetary side of the transition, especially looking at how climate risk moves through macroeconomic policy.  👉 𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗰𝗵𝗮𝗻𝗴𝗲 𝗮𝗻𝗱 𝗺𝗼𝗻𝗲𝘁𝗮𝗿𝘆 𝗽𝗼𝗹𝗶𝗰𝘆 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝘆: 𝗮 𝗴𝘂𝗶𝗱𝗲 𝗳𝗼𝗿 𝗰𝗲𝗻𝘁𝗿𝗮𝗹 𝗯𝗮𝗻𝗸𝘀 This is a practical guide that gives central banks:  • A framework for weighing climate-related trade-offs between inflation and output  • New quantitative analysis on how physical and transition impacts hit monetary policy strategy  • A look at how climate change shifts policy transmission and structural variables like the natural rate of interest  • A step-by-step process for responding when a climate shock hits 𝗥𝗲𝗮𝗱 𝘁𝗵𝗲 𝗿𝗲𝗽𝗼𝗿𝘁 𝗵𝗲𝗿𝗲: https://lnkd.in/e_iAmVMa 👉 𝗠𝗮𝗰𝗿𝗼𝗲𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝗲𝗳𝗳𝗲𝗰𝘁𝘀 𝗮𝗻𝗱 𝗺𝗼𝗻𝗲𝘁𝗮𝗿𝘆 𝗽𝗼𝗹𝗶𝗰𝘆 𝗶𝗺𝗽𝗹𝗶𝗰𝗮𝘁𝗶𝗼𝗻𝘀 𝗼𝗳 𝗰𝗹𝗶𝗺𝗮𝘁𝗲 𝗺𝗶𝘁𝗶𝗴𝗮𝘁𝗶𝗼𝗻 𝗽𝗼𝗹𝗶𝗰𝗶𝗲𝘀 Using the IMF's Global Macroeconomic Model for the Energy Transition (GMMET), this report shows:  • Mitigation policies create real trade-offs between stabilizing inflation and output  • The size of that trade-off depends entirely on which transition policies get adopted, and where  • Gradual, orderly transitions minimize the pain. Policy uncertainty makes it worse  • Even so, the costliest outcome by far is no transition at all 𝗥𝗲𝗮𝗱 𝘁𝗵𝗲 𝗿𝗲𝗽𝗼𝗿𝘁 𝗵𝗲𝗿𝗲: https://lnkd.in/eXC4WWmn I really enjoyed these resources given my team's work with central banks on climate risk. NGFS guidance shapes a lot of this work in practice, we drew on their supervisory stress test frameworks in a recent project designing a best-practice stress test for a central bank, and these two reports extend that same rigor into the monetary policy side. Get in touch if you're looking for support on climate risk assessment or stress test design. Network for Greening the Financial System (NGFS) #centralbanks #monetarypolicy #climaterisk #netzero #ngfs #climatefinance #transitionrisk #stresstesting #climatepolicy

There is a lot of pessimism in the business and financial news cycle these days due to the uncertainty related to the administration's moves on trade, immigration, foreign policy, and other matters important to our nation's future. The dreaded "R" word (#recession) is appearing more and more. What I find missing is the discussion of the momentum visible in the US #economy coming into 2025. Take the consumer for example. Although #consumerconfidence has taken a steep dive in recent months, we were out there spending money at a healthy clip through February. Compared to last February, seasonally adjusted Advanced Retail Trade and Food Services were up 3.1% last month. Quarterly growth was even higher at 3.8%. Yet all the headlines talked of a whiff in consumer spending. The B2B economy, as reflected in US #industrialproduction data released this week, was also on the rise (from a business cycle perspective - see chart below) through February. In fact, the annual growth rate entered positive territory for the first time since late 2023, while the quarter-over-quarter #data implies further cyclical rise in the months ahead. Why is no one talking about this? At the very least we must recognize that the economy was accelerating before all the trade-related shenanigans began. Alex's Analysis: Leading indicators like Capacity Utilization (6-month lead), Copper Futures (9-month lead) and ISM's PMI (12-month lead) continue to point to further rise in the US industrial economy into the second half of the year. Most consumers, who account for nearly 70% of our economy in GDP terms, remain employed (outside of DOGE cuts), and thus should be able to continue spending in the near-term future if the trend holds. My current assessment is if the policy volatility and uncertainty can be contained to the first half of the year, with decisions on reciprocal #tariffs and specific product categories made soon after the April 2nd research deadline, we should not see a recession in the US in 2025. However, if we can't get out of our own way and the chaos continues past Q2, then the headwinds may become strong enough to result in a contraction of economic activity this year. I will eagerly await the developments and keep you updated if my expectations change.