Farewell to unemployment rate. Dove signs from a larger dataset

Following some influent FOMC members, I believe Janet Yellen will spend a good part of her first press conference trying to explain FOMC´s brand new forward guidance. Last week, New York Fed released a new set of charts measuring various dimensions of the labor market.

The problem here is related to the difficulty to communicate based on 34 series. If FOMC chooses this way, it will come back to some kind of qualitative forward guidance. But the committee also has the option to consolidate all the information contained in the dataset (Bank of England did something likethis, calling this consolidated information output gap).

I´m not sure what option they will choose. But if they decide for consolidation, they might find a very dove sign. At least this is the message passed by the principal component (PC) of this dataset, showed in figure 1. As we can see, PC suggests that there´s much more slack in US labor market than we can conclude focusing only on unemployment rate.

cant believe these russians...

http://www.project-syndicate.org/commentary/sergei-guriev-breaks-down-the-direct-and-indirect-costs-of-russia-s-intervention-in-ukraine

China will not sink

They are taking steps to address the shadow-banking problem.
Concretly, they are moving faster to make capital mkts competitive by letting the private sector in, and also are freeing interest rates from central control.
I admit the S.Run may entail some ups and downs, but these guys are doing reforms!
Whereas here..

Copom Ata II

I’ve also read it. Agree it doesn’t hint at stopping. But I think they will, if nothing surprise. My call is not based on their communication, but on my impression of their dovishness.

European Unicamp

Back from London. I had the chance to talk with many European and UK economists. Fun.

For some reason European economists are very different from US economists. The latter got their PhDs, spent some time at the Fed, think in terms of models. The former are very well read, use great metaphors, but seem not to know the basics of supply and demand (of course I’m not talking about all of them).
I guess Unicamp opened a branch there.

Copom Ata

no news...

my reading: they didn´t signal they finished the task

but..

the Ata is not sufficient to discriminate between one more 25bps raise or a bit more than that -- though i am betting they stop at 11%

Felipe Curve

CORE inflation on unemp and Y/L for the USA:

R2 of 50%. The steep decline in inflation in 2009 (around 60) closely tracks U3 soaring by that time

25 bps

As I had been predicting for a long time. Why 25?
Because now they are quite close to the neutral rate, meaning the risks of accelerating inflation are tiny. If they get to 11% and stop (as I predict), inflation will likely remain in the vicinity of 6% -- pending supply shocks. And that´s good enough -- never mind the 4.5% target

Dilma’s Inflection and Cliff Walking

Good article by Cristiano Romero, Valor newspaper. Economic policy seems in fact to be in an inflection point. First the monetary policy, with the Central Bank surprising the markets with higher rates. Now the fiscal policy, with the budget contingency. My NTNBs are doing great, thanks for asking (figure with the B23). But I don’t buy it.

My theory about Dilma's Government is the “cliff walk” theory. They have all the wrong ideas but react when facing constraints (I mean popularity related constraints). Now they are moving away from the cliff to avoid falling (fiscal mess à FX depreciation, downgrade and inflation à drop in popularity). But as things get better, they will move closer to the cliff again.

BRL or CDI Steepening?

Figure is from BofA, suggesting the relative play of paying the steepening and selling USDBRL. I like both the steepening and the long USDBRL, but what I found interesting is that my intuition was in the other direction. I thought the BRL was more distorted than the CDI

Weather and Inventories on US GDP

Still working on it but, at first sight, these effects together will take only 1pp from 2014Q1 growth.
In the figure the growth contribution of change in inventories, which I used to run a simple ARMA, and got an effect of -0.5pp. The weather effect of -0.5pp is Goldman's estimation, which seems a bit exaggerated. (Perhaps those guys are so used to endogenous variables they get embarrassed when this is not the case).
Weird thing is my GDP tracking is suggesting Q1 could growth be only 1%. This is pretty low, and cannot be explained by weather and inventories. Maybe a reason to tactically reduce risk.

Strange labor mkt

Two posts back, FK said it is explanation 2.

Well, I am not so sure. Employment lost steam last year -- as he himself pointed out in the chart he stole from LCA -- but at the very same time real wages were increasing. This automatically leads us to story 1: participation rate (not sure if it is FIES fault, but anyways...)

Further, the labor demand story cannot possibly be right. I look around and all I see are gloomy entrepreneurs.

R$40bi contingency

The surprise was not the number, or the R$30.5bi discretionary, but the flattening of the di curve (Jan/23 in the picture). It’s OK that the Central Bank will use this number to slow down, but it’s not OK to believe the Gov’t will deliver the primary surplus.

Brazuca Labor Report

Figures (from LCA, no, I didn't ask for permission), show (i) unemployment, (ii) real wage, (iii) inflation, (iv) employment

Two interpretations

1)      Unemployment is falling due to participation rate which, in its turn, can be explained by the FIES (student financing program). Labor market is really getting tighter, and the real wage confirms it.

2)      Employment series indicates labor market got much softer during the last six months (now it is actually beginning to recover). Real wage dropped in mid 2013 because inflation increased, now we are seeing the reverse.

I know you like (1). But (2) is the right answer

BoE implies FED

One idea circulating (Deutsche among others) is to use the Bank of England forward guidance to guess what the Fed will do.
Rather than choosing a new threshold, the Fed would say that (i) will hike later because there are lots of idle capacity, (ii) then will raise rates very gradually, and (iii) the terminal rate will be lower than it used to be. By doing so, it would be able to lower the short, belly and long part of curve, respectively.
My take is that (i) is already happening. (ii) will never happen, as it is contrary to recent Fed thinking, concerned about the bubble making effects of too slow and predictable monetary policy. And (ii) is already in those dots, where they say fed fund in the long run will be 4%.

Fomc minute

They were optimistic about growth, but it happened in January. In the figure the US surprise index (from citi) and a vertical bar showing the date of the meeting. Also, that story about large output gap (focus on long term unemployed and part time due to economic reasons), inflation below target for long time. Didn't change my mind in any sense. Boring.

The BofA View (for the US)

Today I’ve listened to Merrill Lynch (better known as Mario Lanches) US scenario. Growth will be strong (just consensus) and inflation will be low (interesting). They believe there is large output gap, large labor idle capacity. Main data to support their view is “part time workers for economic reasons”, it seems.

Since they were too lazy to do it, I got the data, divided by the labor force and plotted against change in inflation. (I’ve also changed sign and multiplied by the Okun coefficient, to be comparable to an output gap). The result stinks. The measure loses big time against my DSGE outputgap in a Phillips competition.

Tombini´s words

I disagree with my colleagues on Tombini´s talk. I notice two new signs. First, the Governor did not say a word about “inflation persistence”, which was the main reason to keep the pace of 50 bps in Copom´s January meeting. And he hemmed and hawed about the timetable of IPCA convergence to the target of 4.5%, shedding light on an alternative CPI index --- IPC-Fipe, which shows inflation at 3.7% in February, against 5.59% of IPCA). It´s hard to imagine dovisher signs.

That said, in the absence of another adverse inflation surprise (February IPCA-15 will be published this Friday), I expect a hike of 25 bps, and a last movement of the same size at the next meeting. In other words, three alternative diagnoses and only one conclusion!  

Tombini´s talk

The BCB chairman stressed once again the lagged effects of monetary policy -- this is what FK called the usual bla -- but this time aorund he further added that inflation is converging! If it is not 25 bp, I suggest we never pay attention to him anymore and flip a coin instead.

CNT/MDA popularity poll

Government approval rate (excellent or good) dropped from 39.0% to 36.4%. Awesome!