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.