The Enhanced Investor Weekly Macro
February 12, 2017
ENHANCED INVESTOR WEEKLY WRAP & UPDATE Market Wrap and Update Hey everyone! Given that the Federal Reserve could rival the White House as a source of volatility in the week ahead, as U.S. central bank chief Janet Yellen testifies before Senate and House committees on the economy and monetary policy, in this week’s education section, we will be reviewing fiscal and monetary policy. These polices impact the price of credit, liquidity, commodities, and major indexes throughout the world. Investors will also keep an eye out on a few U.S. economic reports, with Wednesday's inflation and retail sales data in the spotlight, for further clues on the timing of the next Fed rate hike. Meanwhile, in the U.K., market participants will be looking ahead to reports on consumer prices, employment and retail sales for further indications on the continued effect that the Brexit decision is having on the economy. Elsewhere, Germany is to publish preliminary data on fourth-quarter economic growth on Tuesday for further hints on the strength of the euro zone's economy. Preliminary data on Japanese fourth-quarter growth will also be in focus, amid concerns over recent yen strength and its implication on economic growth prospects. 1.
Fed Chair Yellen Testifies
Federal Reserve Chair Janet Yellen is set to deliver her semi-annual monetary policy testimony on the economy before Senate and House committees in Washington DC. Yellen is scheduled to testify on the economy before the Senate Banking Committee at 10:00AM ET (15:00GMT) Tuesday. On Wednesday, she will appear in front the House Financial Services Committee also at 10AM ET. Her comments will be monitored closely for any new insight on policy and the timing of when it might raise interest rates. The Fed left borrowing costs unchanged earlier this month and gave no firm signal on the timing of its next rate hike.
The Enhanced Investor Weekly Macro
The Federal Reserve has a Dual Mandate: Price stability, full employment, and manage inflation. This provides countervailing opportunities in the macro economy.
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The Enhanced Investor Weekly Macro
February 12, 2017
Fed fund futures are pricing in a less than 15% chance of a rate hike in March. The U.S. central bank has previously projected three rate increases this year. However, traders remained unconvinced, with markets continuing to price in just two rate hikes during the course of this year. 2. U.S. January Inflation & Retail Sales The Commerce Department will publish January inflation figures at 8:30AM ET (13:30GMT) Wednesday. Market analysts expect consumer prices to ease up 0.3%, while core inflation is forecast to increase 0.2%. On a yearly base, core CPI is projected to climb 2.1%. Core prices are viewed by the Federal Reserve as a better gauge of longer-term inflationary pressure because they exclude the volatile food and energy categories. The central bank usually tries to aim for 2% core inflation or less. Rising inflation would be a catalyst to push the Fed toward raising interest rates ONLY if inflation reaches 3% for the entire year. At the same time Wednesday, the Commerce Department will publish data on January retail sales. The consensus forecast is that the report will show retail sales rose 0.1% last month, after gaining 0.6% in December. Core sales are forecast to inch up 0.4%, after rising 0.2% a month earlier. Rising retail sales over time correlate with stronger economic growth, while weaker sales signal a declining economy. Consumer spending accounts for as much as 70% of U.S. economic growth. Besides the inflation and retail sales reports, this week's calendar also features U.S. data on producer prices, industrial production, building permits, housing starts, initial jobless claims, as well as surveys on manufacturing conditions in the Philadelphia and New York regions.
Nominal rate = Inflation Rate + Real Rate
Headlines from Washington will most likely continue to dictate market sentiment in the week ahead, as traders focus on President Donald Regression, SVARs, DFMs, Trump for further details on his promises of tax state-space, HAC/HAR inference, weak identifications reform, infrastructure spending and issues in SVARs. We will be deregulation as well as trade policies. going over this (with graphs) beginning in March!
3. U.K. CPI, Employment & Retail Sales for January
The U.K. Office for National Statistics will release data on consumer price inflation for January at 09:30GMT (4:30AM ET) on Tuesday. Analysts expect consumer prices to rise 1.9%, after increasing 1.6% a month earlier.
The Enhanced Investor Weekly Macro
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The Enhanced Investor Weekly Macro
February 12, 2017
At 09:30GMT (4:30AM ET) Wednesday, the ONS will publish the monthly jobs report. The claimant count change is expected to rise by 1,000 in January, with the jobless rate holding steady at 4.8%. Wage growth including bonuses is forecast to rise 2.8%. On Friday, the ONS will produce a report on January retail sales at 09:30GMT (4:30AM ET), with analysts expecting an increase of 1.0%, following a drop of 1.9% in the preceding month. The Bank of England raised its forecasts for growth and inflation earlier this month, but appeared in no rush to raise interest rates. 4. German, Euro Zone Q4 GDP Germany will publish a preliminary report on fourth-quarter economic growth at 07:00GMT (2:00AM ET) on Tuesday. The euro zone's largest economy is forecast to expand 0.5% in the OctoberDecember period, compared to growth of 0.2% in the preceding quarter. The euro zone will release reside fourth-quarter data shortly afterwards at 10:00GMT (05:00AM ET). An initial estimate published late last month showed that the region's economy grew 0.5% in the three months ended December 31, accelerating from growth of 0.4% in the third quarter. 5. Japan Fourth-Quarter GDP Japan will publish preliminary fourth-quarter economic growth data at 23:50GMT (6:50PM ET) on Sunday. The report is expected to reveal that Japan's economy expanded by just 0.3% in the final three months of 2016, maintaining pressure on policymakers to support the world's third largest economy. Long-Term Stock Ideas I like Morgan Stanley. With a P/E over 16 and strong growth, MS could have a significant leg up.
Education As we know, the modern central bank seeks to manage the activity in the economy by printing money by increasing money in economy and decreasing money (by selling assets such as treasury bonds) less activity. This is called “open market operations”. It also serves as a “Lender of Last Resort” for commercial banks and financial institutions. Examples: Federal Reserve Bank of Canada
The Enhanced Investor Weekly Macro
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The Enhanced Investor Weekly Macro
February 12, 2017
Bank of England (BoE) European Central Bank (ECB) Bank of Japan (BoJ) The impact of interest rates (this year and every year) via central banks traditionally focus on shaping one interest rate. The Open-market-operations seek to make a market interest rate and match a target rate. The Fed Funds Target Rate is a target for the rate banks lend reserves to each other. The Fed Funds Rate is only one interest rate, but many other interest rates are tied to it, such as the LIBOR and various FOREX rates. Lower interest rates mean freer lending and more economic activity. When the economy is struggling, lower rates can stimulate it, but lower rates can also lead to inflation.
The Enhanced Investor Weekly Macro
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The Enhanced Investor Weekly Macro
February 12, 2017
There have been negative nominal interest rates in the past few years. It turns out people value being able to use banks instead of mattresses. It hasn’t caused the chaos many expected - but this might change if they go lower.
The Enhanced Investor Weekly Macro
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The Enhanced Investor Weekly Macro
February 12, 2017
Was QE effective? For a variety of reasons, it is very hard to know how effective QE was. What do we compare it to? However, there are some preliminary estimates: Depending on the channel and interest rates considered, QE1 (~$1.6 trillion had an effect between 0.4% and 1.6% Similarly for QE2 ($820 billion), 0.2 to 0.4% But what about the economy? What do these rate reductions tell us? Source: Krishnamurthy & Vissing-Jorgensen (2011) Next week, we will complete the monetary policy and interest rate discussion, so that you all can prepare for the next decision in March.
Additional Info For any newcomers who don’t know me, I’ve been contributing via the Enhanced Investor Weekly Macro Reports under #WatchList for almost a year. As I noted last week, given the recent market action and my in-depth knowledge of bubbles relative to political shifts and global economics, I’ve decided that it was simply not enough for beginners, or even intermediate traders because in order to have the ability to synthesize what’s truly happening - you need to be operating at the MBA/PhD level. Unfortunately, some PhD’s forget the basics. Anyway, as I said a few weeks ago, it’s not fair for me to assume that all of you have what those at investment banks call “financial sophistication”, but that’s why we’re working together here at Enhanced Investor. Combatting Wall Street and gaining the upper edge is why we do this. Anyway, I am more than happy to help, so if for some reason I don’t receive a tag in the #mainstockchat, or you don’t direct message me on Discord, please feel free to email here adamwood@fas.harvard.edu or you can tag me on StockTwits @ EILeadMacroAnalyst. Don’t fear the bubble. We do not fear bubbles here at Enhanced Investor. Why? Because we’re armed with the strategic, tactical, and historical knowledge of every major bubble that has ever occurred. From the Tulip Mania of 1637 to the Housing Crisis of 2008 and the current market conditions - we’re prepared.
The Enhanced Investor Weekly Macro
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