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Thursday
March 31, 2016
www.bloombergbriefs.com
Fed's Evans, Dudley Speak; Chicago PMI, Claims DataBEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS
WHAT TO WATCH: Chicago Fed President is interviewed by Charles EvansKathleen Hays on Bloomberg Radio. The timing is still to be determined, likely 3 p.m. New York President gives a speech titled "The Role of the Federal William DudleyReserve — Lessons from the Financial Crises" at 5 p.m. at the Virginia Association of Economists’ 43rd Annual Meeting.
ECONOMICS: Initial jobless claims are expected to print at 265,000 in the week ended March 26, the same as the week prior, 8:30 a.m. The Chicago Business
is forecast to rise to a level of 50.7 in March — indicating expansion — from Barometer 47.6 the month before, 9:45 a.m. (see below). International Monetary Fund director of fiscal affairs delivers a presentation at 12:15 p.m. in Washington on Vitor Gaspar “Fiscal Policy, Innovation and Productivity Growth.”
GOVERNMENT: President and the U.S. State Department host the Barack Obama2016 Nuclear Security Summit through April 1 to discuss nuclear terrorism. Obama and Chinese President will meet on the sidelines.Xi Jinping
MARKETS: Stocks slipped, unwinding some of the March rebound that had the MSCI on the brink of erasing its losses for 2016. Crude oil retreated.All-Country World Index
(All times local for New York.)
Click to view a live version of this chart on the Bloomberg terminal.here
COMMENTARY IN THIS ISSUE
The March ADP report employmentunderscores the labor market’s resilience even amid lackluster economic performance, a silver lining, to be sure, to recent low productivity reading: Bloomberg Intelligence Economists.
The Federal Reserve looks to have outsourced monetary policy to the financial — and that may not marketsnecessarily be bad: Rich Miller.
Narayana Kocherlakota poses five questions on the Federal Reserve and monetary policy for the leading U.S. presidential candidates to .address
QUOTE OF THE DAY
"Capital gains and the expectations for future gains will become giant pandas — very rare and sort of inefficient at reproduction. Developed and emerging economies are flying at stall speed and they’ve got to bump up nominal GDP growth rates or else."
— Janus fund manager Bill Gross, in a monthly
outlook note
The U.S. economy will probably be strong enough to justify interest-rate twoincreases in 2016 as it advances despite headwinds from weaker growth abroad, said Federal Reserve Bank of Chicago President .Charles Evans
NUMBER OF THE DAY
—18 The number of years since emerging-market had a month currenciesthis good, as the Federal Reserve adopted a gradual approach to its rate-increase cycle, fueling optimism that capital inflows can be sustained.
JOBS CARL RICCADONNA, YELENA SHULYATYEVA AND RICHARD YAMARONE, BLOOMBERG INTELLIGENCE ECONOMISTS
Chicago PMI Forecast to Return to Expansionary Reading
Manufacturing activity in the Chicago area probably improved in March, given that the New York, Philadelphia and Richmond Fed PMI surveys have posted sizable improvements in their headline measures. Dollar weakness may have also supported conditions. The Fed’s Broad U.S. dollar measure depreciated 0.9 percent in February, which was followed by an additional 1.6 percent decline during the first three weeks of March. Economists polled by Bloomberg anticipate a slight increase in the Chicago PMI to an expansionary 50.7 in March from the 47.6 posting during February. This series is extremely volatile, averaging 50.3 for all of 2015 and posting six expansionary and eight contractionary prints in the last 14 months.
— Carl Riccadonna, Yelena Shulyatyeva and Richard Yamarone, Bloomberg Economists
March 31, 2016 Bloomberg Brief Economics 2
JOBS CARL RICCADONNA, YELENA SHULYATYEVA AND RICHARD YAMARONE, BLOOMBERG INTELLIGENCE ECONOMISTS
Private-Sector Hiring Momentum Steady, ADP Survey ShowsPrivate-sector hiring appears to be on a
steady course, based on the latest ADP employment report. The data, which was in line with its recent trend, suggests that the official employment reading for March, due April 1, should also fall in the vicinity of its moving average. This underscores the labor market’s resilience even amid lackluster economic performance — a silver lining, to be sure, to recent low productivity readings. Hiring gains were broad-based, but remained concentrated in the private service sector.
ADP private payrolls rose 200,000 in March, following a 205,000 increase in February. This was close to the consensus forecast of 195,000, and similarly is close to the six-month moving average of 209,000 and 12-month moving average of 206,000. The ADP figures suggest that there has been no major change to the pace of hiring lately, despite evidence that the economy’s sluggish pace of growth in the fourth quarter has continued into this quarter.
The composition of job growth by industry indicated continued divergence between the goods and services sectors. The service-providing economy continues to thrive, adding 191,000 jobs last month, while the goods sector, still challenged by low oil prices and the strong dollar, added just 9,000 new hires. Manufacturers only added 3,000 workers in March, while the professional/business services industry added a solid 28,000. Healthy gains were also posted in construction (17,000), trade/transport/utilities (42,000) and financial activities (14,000).
The composition of job gains was broad-based by company size. Small businesses (those with 1-49 employees) added 86,000 jobs, above the three-month moving average of 77,000. Medium-sized businesses (50-499 workers) grew by 75,000 employees in March — in line with the three-month moving average of 70,000 — while large businesses (500 employees or more) added 39,000 workers, slightly below the three-month moving average of 53,000. The diffusion of job gains is important,
Read this analysis with live versions of these charts on the Bloomberg terminal . here
particularly in the small business sector where hiring is holding up nicely despite a pullback in sentiment.
The ADP survey takes on heightened significance for payroll forecasters this month, because the manufacturing and service ISM surveys are not released until after the employment report. Importantly, the signals from two important payroll
indicators — jobless claims and ADP — both suggest that hiring has not lost momentum in March. The risk over the medium term is that slow growth and weak corporate profits will ultimately result in a more conservative pace of hiring, but this does not appear to be occurring just yet.
FEDERAL RESERVE RICH MILLER, BLOOMBERG NEWS
ADP Private Payroll Survey by Industry
ADP Net Job Gains by Company Size
March 31, 2016 Bloomberg Brief Economics 3
FEDERAL RESERVE RICH MILLER, BLOOMBERG NEWS
Yellen Outsources U.S. Monetary Policy to the Financial MarketsThe Federal Reserve looks to have
outsourced monetary policy to the financial markets — and that may not necessarily be bad.
Fed Chair Janet Yellen told the Economic Club of New York on Tuesday that policy makers had scaled back the number of interest rate increases they expect to carry out this year after investors did the same.
She argued that the downgrading of rate expectations in the market had led to lower bond yields, providing the economy with needed support in the face of weaker growth overseas. The Fed then followed suit this month by reducing its anticipated rate hikes in 2016 to two from four quarter-percentage point moves projected in December.
“That’s a good thing,” said Lou Crandall, chief economist at Wrightson ICAP commenting on the sequence of actions. “Monetary medicine gets into the blood stream faster if the public can anticipate what the Fed’s response to an economic shock will be.”
There are pitfalls. Investors may become so impressed with their ability to influence Fed policy that they’ll press for more stimulus than the central bank is willing to supply.
“The risk is that markets’ perception of such continued accommodation will embolden them even more to try to force the policy hand of the Fed,” Mohamed El-Erian, chief economic adviser at Allianz SE and a Bloomberg View columnist, said in an e-mail.
Indeed, investors in the federal funds market are betting that the central bank will raise rates just once this year, not the two times policy makers envisage.
Yellen acknowledged that the policy-making FOMC and investors might not always see eye-to-eye. “In such situations, the Committee must do what it believes is appropriate while clearly explaining the rationale for its actions,” she said in a footnote to her speech.
Yellen used her spoken remarks though to extol the symbiotic relationship between the central bank and the financial markets. “This mechanism serves as an important ‘automatic stabilizer’ for the economy,” she said.
Her comments come against the backdrop of continued criticism from
Republican lawmakers and economists that the Fed is following a discretionary monetary policy that investors don’t understand and is hurting the economy as a result. They want the Fed to follow a monetary policy rule, such as the one espoused by Stanford University professor John Taylor. It uses a simple equation to link changes in rates to movements in inflation and the economy.
With her remarks, Yellen was “implicitly defending the Fed’s approach in the rules versus discretion debate as being one that’s systematic” and understood by the markets, Crandall said.
It’s an “ideal world” when central bankers and financial market participants are in an sync on how monetary policy should respond to incoming economic data, said Michael Feroli, chief U.S. economist at JPMorgan Chase. In that case, “the expected path of policy rates should adjust before even the Fed moves.”
Unfortunately, “we haven’t gotten to that point,” Feroli added — in spite of Yellen’s embrace of the market’s latest moves in her speech.
Case in point: The ups and downs of asset prices over the last half year as investors have tried to adjust to what Cornerstone Macro LLC partner Roberto Perli said were seemingly big and frequent changes in the Fed’s stance.
Yellen and her colleagues surprised many investors last September when they
decided not to raise rates from the near zero percent levels that had prevailed since 2008. Policy makers then switched their stance in October by clearly signaling that a rate hike was imminent, before moving in December.
The rate increase at first went off smoothly. The financial markets though turned turbulent in the new year after China allowed a small depreciation of its currency, fanning fears of a bigger devaluation to come. Uncertainty about the Fed’s plans also fueled the turmoil as investors increasingly questioned the interest rate path set out in the central bank’s so-called dot-plot.
One problem: The central bank’s quarterly rate forecasts become stale as new data arrive.
St. Louis Fed President James Bullard, a voting member of the FOMC this year, said in a Bloomberg interview last week that the rate projections contribute to uncertainty among investors. Bullard said the next rate hike “may not be far off,” and other Fed officials have also pointed to the possibility of an April move.
In the end, the Fed chair’s willingness to outsource monetary policy to the markets will probably come down to whether she agrees with how investors are responding to changes in the economy. It might be a case of “validating the market when it’s telling you what you may have been leaning toward anyway,” Feroli said.
DATA & EVENTS
FOMC Rate Projections Close Gap with Market Expectations
March 31, 2016 Bloomberg Brief Economics 4
DATA & EVENTS
TIME COUNTRY EVENT SURVEY PRIOR
7:30 U.S. Challenger Job Cuts YoY — 21.80%
8:00 Brazil PPI Manufacturing MoM — 0.99%
8:00 Brazil PPI Manufacturing YoY — 10.49%
8:30 Canada GDP MoM 0.30% 0.20%
8:30 Canada GDP YoY 1.10% 0.50%
8:30 U.S. Initial Jobless Claims 265k 265k
8:30 U.S. Continuing Claims 2200k 2179k
9:00 U.S. ISM Milwaukee — 55.22
9:45 U.S. Chicago Purchasing Manager 50.7 47.6
9:45 U.S. Bloomberg Consumer Comfort — 43.6
10:00 U.S. Revisions: Wholesale Sales, Inventories — —
11:00 Mexico Net Outstanding Loans -- 3146b
21:00 China Manufacturing PMI 49.4 49
21:00 China Non-manufacturing PMI — 52.7
21:45 China Caixin China PMI Mfg 48.3 48Source: Bloomberg. Surveys updated at 5:35 a.m. New York.
CALENDAR
Click on the to see the full range of economists' forecasts on the terminal. highlighted releases
OVERNIGHT
The British economy ended 2015 with more momentum than previously estimated. Gross domestic productrose 0.6 percent in the fourth quarter instead of the 0.5 percent reported last month, the Office for National Statistics in London said today. There were upward revisions to services, industrial output and construction. GDP rose 0.4 percent in the third quarter.
German joblessness was unchanged in March, snapping a run of five consecutive declines, in a sign that Europe’s largest economy may be struggling to absorb a wave of refugees as companies tackle a global slowdown. The number of people out of work held at a seasonally adjusted 2.73 million, data from the in Federal Labor Agency Nuremberg showed today. Economists surveyed by predicted a Bloombergdecline of 6,000. The jobless rate stayed at a record-low 6.2 percent.
Former investment banker Arul Kanda took a job in Malaysia last year and walked into the crossfire of the country’s biggest political crisis since Prime Minister came to power in Najib Razak2009. Now, even as the finances of
. are being 1Malaysia Development Bhdinvestigated in at least three countries, Kanda, president of the government-linked fund, says his job sorting out the organization is done. "I only signed up for one-third of what I ended up doing,” he said in an interview on March 30 at the fund’s headquarters in Kuala Lumpur. “I did not sign up for the investigations because that happened after I joined, and I definitely didn’t sign up for the extent of the comms-slash-politics that I had to deal with.”
Europe
Asia
MARKET INDICATORS
Loonie's Oil Correlation Seen Steady as CAD Rebounds
The Canadian dollar’s rebound from a 13-year low against the U.S. dollar has mirrored a rise in crude oil, prompting Canadian Finance Minister Bill Morneau to call it an "appropriate" level for the currency. While oil was, until last year, the country’s largest export, Morneau says he expects the loonie to be "heavily influenced" by the commodity, even as the economy’s long awaited shift to manufacturing exports as a replacement for lost crude revenue may finally be taking root. View this chart on the Bloomberg terminal .here
— Sophie Caronello and Ari Altstedter, Bloomberg News
March 31, 2016 Bloomberg Brief Economics 5
MARKET INDICATORS
COMMENTARY NARAYANA KOCHERLAKOTA, BLOOMBERG VIEW COLUMNIST
Source: Bloomberg. Updated 5:40 a.m. New York time.
March 31, 2016 Bloomberg Brief Economics 6
Bloomberg Brief: Economics
COMMENTARY NARAYANA KOCHERLAKOTA, BLOOMBERG VIEW COLUMNIST
Ask the Next President About the FedThe next U.S. president will have the
opportunity to appoint (or re-appoint) someone to one of the most powerful positions in the world: the chair of the U.S. Federal Reserve. Yet voters still know far too little about how the leading presidential candidates would go about choosing.
As far as I can tell, none of the websites of the five leading candidates — Hillary Clinton, Ted Cruz, John Kasich, Bernie Sanders or Donald Trump — offers any commentary on monetary policy or the Federal Reserve. Other clues, such as an oped by Senator Sanders on structural reform of the Fed or Senator Cruz's support for a return to the gold standard, provide only a limited understanding of how they might approach selecting a Fed chair.
Hence, allow me to pose five questions that all of the candidates should address:
The Fed has adopted an annual inflation target of 2 percent per year. Would you seek a chair who would want to change that monetary policy objective? If so, what kind of change?
Neither the Fed nor Congress has quantified the Fed's second monetary policy mandate — maximizing employment. Would you want the next chair to change the central bank's approach to this mandate? If so, how?
The House of Representatives has passed a bill requiring the Fed to employ
a mathematical formula in setting interest rates and to explain any deviations from it. Would you seek a Fed chair who agreed with this approach to monetary policy?
During the 2007-09 global financial crisis, the Fed took many unprecedented steps to provide support to the financial system. Would you be seeking a chair who would take a similarly interventionist
How would your administration react to
a financial crisis?
approach in a crisis? More generally, how would your administration react to a financial crisis?
The Dodd-Frank Act of 2010 requires that the president appoint a vice-chair for supervision and regulation to the Fed's Board of Governors. That position remains unfilled. Would you seek to fill it, or leave its responsibilities to the Chair? In either case, how do you believe this job should be done?
The first three questions might strike some as unduly focused on monetary policy — after all, the Fed is supposed to make its interest-rate decisions independently, with no political pressure
from elected officials such as the president. When it comes to the longer-term goals and strategies of monetary policy, however, I believe it is entirely appropriate — indeed, important — for the voters and their representatives to have a say.
The fourth and fifth questions involve financial stability, which many observers now see as the Fed's third mandate (in addition to price stability and maximum employment). Certainly, the experience of the 2008 crisis has made the importance of financial stability abundantly clear to everyone. Voters need to understand how a new president would attempt to influence the Fed’s pursuit of this objective.
Congress has granted the Fed a great deal of independence to pursue its various missions. But that independence doesn’t come without oversight and accountability, which elected officials exercise primarily by deciding who will chair the Fed. It's thus crucial that those officials — and above all anyone seeking the office of president — let the public know how they plan to do their job.
Narayana Kocherlakota is the Lionel W.
McKenzie professor of economics at the
University of Rochester. He served as president
of the Federal Reserve Bank of Minneapolis from
2009 through 2015. This column does not
necessarily reflect the opinion of the editorial
board or Bloomberg LP and its owners.
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