Wednesday April 6, 2016 www.bloombergbriefs.com March FOMC Meeting Minutes; Mester, Bullard Speak BEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS WHAT TO WATCH: The U.S. releases the minutes from its March Federal Reserve Federal Open Market Committee meeting at 2 p.m. Two voting members of the FOMC speak today. Cleveland Fed President discusses the U.S. economic Loretta Mester outlook and monetary policy at a local business event, 12:20 p.m. St. Louis Fed President will make welcoming remarks at 6:30 p.m. at the Homer James Bullard Jones Memorial Lecture, whose speaker is former Treasury Secretary Lawrence Summers. ECONOMICS: MBA for the week ended April 1 are reported mortagage applications at 7 a.m. Applications fell one percent in the week before. Dallas Fed President Robert , who does not vote on policy this year, speaks on a moderated panel at the Kaplan World Affairs Council of Dallas/Fort Worth at 8 p.m. GOVERNMENT: Secretary of State meets with senior officials in John Kerry Manama, Bahrain, on a trip that includes the G-7 ministerial meeting in Japan. Through April 8. MARKETS: rebounded amid optimism a deal will be struck to freeze output, Oil spurring gains in European and Asian energy shares. The held near a 1 1/2-year yen high, while the slid and rose. euro U.S. index futures (All times local for New York.) Click to view a live version of this chart on the Bloomberg terminal. here Follow for our blog on the TOPLive release of the Federal Open Market Committee's March meeting minutes starting at 2 p.m. EDT on the . terminal COMMENTARY IN THIS ISSUE Both the manufacturing and non-manufacturing ISM logged gains surveys in March, providing hope that an otherwise tepid quarter will end on a firmer note: Carl Riccadonna and Yelena Shulyatyeva. The report showed a pickup in JOLTS the hiring rate in February, in-line with improving job availability, confirming the labor market is on the right track: Bloomberg Intelligence Economists. Currency markets increasingly correlated to benchmark are making it bond rates challenging for traders to exploit any small differentials among nations' rates: and Lisa Abramowicz Rani Molla. NUMBER OF THE DAY — $430,000 The average discrepancy in between men and women over the pay course of their careers, according to an analysis by the National Women’s Law Center, a non-profit advocacy group. QUOTE OF THE DAY "We know from painful experience how excessive borrowing, or leverage, contributes to episodes of financial instability. Yet the federal government seems to be doing everything it can to encourage leverage." — Narayana Kocherlakota, in a for column Bloomberg View SERVICES SECTOR The Dollar Flexes Muscle on U.S. Trade U.S. exports climbed a modest 1 percent to $178.1 billion in February as the strong dollar propelled a wider-than-expected trade deficit of $47.1 billion, a six-month high. American exporters have had a rough go of it for more than a year as the dollar appreciated and global demand weakened. However, some relief may be at hand as the greenback has depreciated about 5 percent since a peak in early January. — Vince Golle, Bloomberg News
Transcript
Wednesday
April 6, 2016
www.bloombergbriefs.com
March FOMC Meeting Minutes; Mester, Bullard SpeakBEN BARIS AND JAMES BATTY, BLOOMBERG BRIEF EDITORS
WHAT TO WATCH: The U.S. releases the minutes from its March Federal ReserveFederal Open Market Committee meeting at 2 p.m. Two voting members of the FOMC speak today. Cleveland Fed President discusses the U.S. economic Loretta Mesteroutlook and monetary policy at a local business event, 12:20 p.m. St. Louis Fed President will make welcoming remarks at 6:30 p.m. at the Homer James BullardJones Memorial Lecture, whose speaker is former Treasury Secretary Lawrence Summers.
ECONOMICS: MBA for the week ended April 1 are reported mortagage applications at 7 a.m. Applications fell one percent in the week before. Dallas Fed President Robert
, who does not vote on policy this year, speaks on a moderated panel at the KaplanWorld Affairs Council of Dallas/Fort Worth at 8 p.m.
GOVERNMENT: Secretary of State meets with senior officials in John KerryManama, Bahrain, on a trip that includes the G-7 ministerial meeting in Japan. Through April 8.
MARKETS: rebounded amid optimism a deal will be struck to freeze output, Oil spurring gains in European and Asian energy shares. The held near a 1 1/2-year yenhigh, while the slid and rose.euro U.S. index futures
(All times local for New York.)
Click to view a live version of this chart on the Bloomberg terminal.here
Follow for our blog on the TOPLiverelease of the Federal Open Market Committee's March meeting minutes starting at 2 p.m. EDT on the .terminal
COMMENTARY IN THIS ISSUE
Both the manufacturing and non-manufacturing ISM logged gains surveysin March, providing hope that an otherwise tepid quarter will end on a firmer note: Carl Riccadonnaand Yelena Shulyatyeva.
The report showed a pickup in JOLTSthe hiring rate in February, in-line with improving job availability, confirming the labor market is on the right track: Bloomberg Intelligence Economists.
Currency markets increasingly correlated to benchmark are making it bond rateschallenging for traders to exploit any small differentials among nations' rates:
and Lisa Abramowicz Rani Molla.
NUMBER OF THE DAY
—$430,000 The average discrepancy in between men and women over the paycourse of their careers, according to an analysis by the National Women’s Law Center, a non-profit advocacy group.
QUOTE OF THE DAY
"We know from painful experience how excessive borrowing, or leverage, contributes to episodes of financial instability. Yet the federal government seems to be doing everything it can to encourage leverage."
— Narayana Kocherlakota, in a for column
Bloomberg View
SERVICES SECTOR CARL RICCADONNA AND YELENA SHULYATYEVA, BLOOMBERG INTELLIGENCE ECONOMISTS
The Dollar Flexes Muscle on U.S. Trade
U.S. exports climbed a modest 1 percent to $178.1 billion in February as the strong dollar propelled a wider-than-expected trade deficit of $47.1 billion, a six-month high. American exporters have had a rough go of it for more than a year as the dollar appreciated and global demand weakened. However, some relief may be at hand as the greenback has depreciated about 5 percent since a peak in early January.
SERVICES SECTOR CARL RICCADONNA AND YELENA SHULYATYEVA, BLOOMBERG INTELLIGENCE ECONOMISTS
Non-Manufacturing ISM Suggests Firmer End to First QuarterBoth the manufacturing and non-
manufacturing ISM surveys logged gains in March, providing hope that an otherwise tepid quarter will end on a firmer note. The non-manufacturing ISM showed a less vigorous rebound from its February level but stands at a higher outright level — consistent with firmer activity in the service sector compared with manufacturing.
The major industry subcategories showed broad-based gains, pointing to resilience in the service sector. While the manufacturing sector has shown some signs of improvement lately, aside from sizable layoffs reported in the last two jobs reports, economic gains in the near-to-medium term are likely to be more concentrated in the service sector. The improvement in this survey — if sustained — will be an important leading indication that the economy is recovering from its soft patch around the turn of the year.
The non-manufacturing ISM mildly topped expectations (54.5 versus 54.2 projected) after approaching a two-year low in February (53.4). Bloomberg Intelligence Economics is carefully monitoring activity in the non-manufacturing sector because sustained manufacturing weakness has historically dragged down services activity as well — a significant share of service sector activity is tied to activity in the factory sector. At four points, the gap between the manufacturing and non-manufacturing ISM surveys is now less than half of what it was in the fourth quarter.
The underlying details showed broad-based gains, with only the non-seasonally adjusted import subcomponent deteriorating (53.0 versus 55.5). The most notable improvements among the subcomponents were arguably new orders (56.7 versus 55.5) and business activity (59.8 versus 57.8), because they cast compelling signals that the firming of the headline could extend into the current quarter. Business activity is now the highest since last October.
The employment component rose to 50.3 from 49.7, which is a step in the right direction, albeit still inconsistent with the robust pace of non-farm payroll gains.
The firming in both of the ISM surveys in March is an encouraging signal that the economy is regaining momentum after
sputtering in late 2015 and the first two months of the year. If this trend continues, and the output data follow suit, the Fed should be able to hew to its plan for two rate increases this year — with the next move likely coming in either June or July.
JOBS YELENA SHULYATYEVA AND CARL RICCADONNA, BLOOMBERG INTELLIGENCE ECONOMISTS
JOBS YELENA SHULYATYEVA AND CARL RICCADONNA, BLOOMBERG INTELLIGENCE ECONOMISTS
JOLTS Data Suggest Labor Market on the Right TrackThe Job Openings and Labor Turnover
Survey showed a pickup in the hiring rate in February, in-line with improving job availability, confirming the labor market is on the right track. A rebound in the quit rate would help to convince policy makers that full employment is approaching.
The number of job openings declined 2.8 percent in February to 5.445 million. The level of job openings have increased appreciably in the current economic cycle, and the elevated level presents an important signal that the pace of hiring will not decelerate materially in 2016. The job opening rate fell to 3.7 percent, but remains above 3.6 percent 2015 average.
The level of hiring jumped to 5.422 million. This was the highest level of hires since November 2006. The hiring rate rose to 3.8 percent from 3.6 percentprior, returning to its year-end 2015 level.
The level of quits rose by 3.5 percent in February to 2.950 million. The quit rate, which adjusts the number of quits by total employment, increased to 2.1 percent, above the average level of 2.0 percent
Read the full analysis with live charts on the Bloomberg terminal .here
that prevailed during 2015. Slow but steady improvement in the quit rate should be comforting for the Fed, as it has signaled only a gradual removal of policy
accommodation in part because workers’ lack of confidence in the economic outlook was preventing them from seeking alternative employment.
Who's Responsible for the Next CrisisCritics of the U.S. Federal Reserve
often argue that its monetary stimulus efforts are creating the possibility of dangerous instability in financial and housing markets. They should focus their concerns on Congress instead.
Despite a long period of extremely low interest rates, it's hard to see any signs of impending financial instability in the U.S. True, price-to-earnings ratios in the stock market are somewhat high by historical standards. But, as the economists Olivier Blanchard and Joseph Gagnon have noted, the stock prices are a logical resultof the very low yields in the bond market, rather than a signal that investors are unduly willing to take on risk.
Could instability arise later? History offers a great deal of comfort. The Fed held short-term yields very low during the 1930s without incident. The Bank of Japan has kept rates extraordinarily low for the past two decades without inflating a bubble. As I document , even the herehousing boom that preceded the Great Recession began in the 1990s, during a period of relatively high interest rates. So there's little evidence to support the view that current low-interest-rate policies will trigger a major bout of instability.
That said, there is reason for concern — about the plethora of ways in which
Congress subsidizes debt. We know from painful experience how excessive borrowing, or leverage, contributes to episodes of financial instability. Yet the federal government seems to be doing everything it can to encourage leverage. It has made interest payments on corporate and mortgage debt tax-deductible. It
There is reason for concern — about the plethora of ways in
which Congress subsidizes debt.
makes 30-year mortgages possible by absorbing most of the risk. It provides student loans at below-market rates. It subsidizes bank leverage by providing explicit guarantees to depositors and (at least arguably) providing implicit guarantees to other bank creditors.
All of these examples illustrate a broader problem. If the government thinks the private market is failing to provide
enough of something, such as college education, the right response is to subsidize it directly. Instead, Congress invariably chooses to subsidize borrowing for that activity. As a result, the U.S. has become an over-leveraged nation, and an over-leveraged nation is more prone to financial instability.
To be clear: In today's global economy, where inadequate demand for goods and services has left too many people out of work and underpaid, governments should subsidize private consumption and investment. My point is that those subsidies should not run through debt finance.
We saw in 2008 what a financial crisis can do. We should want our government to reduce the likelihood of a repeat. There is little theory or evidence to suggest that raising interest rates now would help. Instead, our government needs to stop encouraging excessive borrowing.
10:00 Canada Ivey Purchasing Managers Index SA 54.8 53.4
10:20 Brazil Vehicle Production Anfavea — 131313
10:20 Brazil Vehicle Sales Anfavea — 146809
10:20 Brazil Vehicle Exports Anfavea — 36484
11:30 Brazil Currency Flows Weekly — —
14:00 U.S. U.S. Fed Releases Minutes from March 15-16 FOMC Meeting — —
18:00 New Zealand ANZ Truckometer Heavy MoM — 1.60%
19:30 Australia AiG Perf of Construction Index — 46.1
19:50 Japan Official Reserve Assets — $1254.1b
20:30 Taiwan CPI YoY 1.40% 2.40%
20:30 Taiwan WPI YoY -4.57% -4.79%
22:00 Japan Tokyo Avg Office Vacancies — 4.04Source: Bloomberg. Surveys updated at 5:50 a.m. New York.
CALENDAR
OVERNIGHT
German industrial production declined less than forecast in February as flagging global trade forced factories in Europe’s largest economy to curb output despite strong domestic demand. Production, adjusted for seasonal swings, fell 0.5 percent from the prior month after advancing a revised 2.3 percent in January, data from the
in Berlin showed Economy Ministrytoday. The reading, which is typically volatile, compares with a median estimate for 1.8 percent decline in a Bloomberg survey of economists. The gauge rose 1.3 percent from a year earlier.
The unveiled its Swiss National Bank new 50-franc ($52) note today, the first in a series that features nature rather than portraits of famous men and women. The 50-franc bill, which will begin to be issued on April 12, was designed with the theme of wind and depicts a dandelion, mountains and a para-glider. Other notes in the series have butterflies, clocks, a tunnel and sets of hands.
India’s central bank governor renewed his criticism of unorthodox monetary policy in the developed world a week before global finance chiefs gather in Washington. "I don’t think this is a stable situation," Reserve Bank of India Governor said in an Raghuram Rajaninterview with Bloomberg TV India today. "Either we need stronger growth or we need to recognize we’ve reached the limits of monetary policy, and slowly,
— I don’t say abruptly — slowly slowly we get back to normalcy across the world."
Europe
Asia
COMMENTARY LISA ABRAMOWICZ AND RANI MOLLA, BLOOMBERG GADFLY COLUMNISTS
Trump Wants Border Wall Cost to Fall on 7 Million Workers
More than 98 percent of the estimated $24.5 billion in annual remittances to Mexico are sent from immigrants who work in the United States, actions that would be blocked by presidential candidate President Donald Trump if Mexico didn’t pay for a border wall. Ten more countries had remittance levels of more than $10 million, while the World Bank estimates that an additional $116.7 million is remitted from another 67 countries. Over the past three years, payments from the U.S. have averaged a bit less than $300 per month from just under 7 million workers.
COMMENTARY LISA ABRAMOWICZ AND RANI MOLLA, BLOOMBERG GADFLY COLUMNISTS
Low-Yield Debt Traders Are Imprisoned by Currency WallsIt’s understandable why some
sovereign-debt investors fret about living in a world that's devoid of yield. If they live in Japan or Europe, they're increasingly being forced to pay for the privilege of owning government bonds.
But if investors turned their attention to the rest of the globe, there’s tons of yield to be had, or so it may seem at first blush.
Just look at India, where yields on 10-year government notes are a fat 7.4 percent, or Colombia, where rates on such debt are 8 percent. That's real yield compared with the ridiculous negative yields that are invading many developed nations.
So why wouldn't investors in some yield-starved nations, such as Japan and Switzerland, race to lend to these countries? Sure, these nations are riskier in many ways, but how likely is it that they're going to default within the next 10 years?
It seems logical for developed-market investors to simply buy the higher-yielding government bonds and enjoy their hefty
interest payments for as long as possible.There is a catch, of course, and it's a
big one. Investors can't transfer their money out of a place like Japan or Europe and into one of these higher-yielding nations without converting their money into the local currency or entering into a currency-swap wager. At that point, they're either making a risky currency bet or else they're forced to enter into an expensive currency hedge that may render the bet uneconomical.
Currency markets are incrediblyefficient and they're increasingly correlated to benchmark bond rates in some developing nations. In other words, the generous 5.5 percent gain on South African government bonds this year would have been largely offset for Japanese investors by the 3.1 percent drop in the rand versus the yen. This is making it challenging for traders to exploit any small differentials among nations' rates.
Foreign investors could have won big by wagering on Japanese government bonds, for example, simply because of
the yen's drastic appreciation over the past year. And even if foreign buyers of South African bonds had ended up with a positive return because of generous interest payments, they could have easily lost it all when they sought to cash out back into their own currencies.
Moving away from emerging markets, it's interesting that more money isn't flooding into the U.S. from Japanese and European investors. After all, yields on 10-year Treasuries are a massive 1.8 percent compared with the seemingly impossible negative 0.08 percent rate on similar-maturity Japanese debt.
But many foreigners are apparently deciding it isn't worth the effort of investing in U.S. debt after hedging out for currency moves. And some are wary of how much the dollar can rally.
So is it a low-yield world? It depends on where you live. And if you reside in a nation mired in record low rates, good luck trying to escape them.
Q: Do we just need to get used to this lower growth cycle, that will be here to stay for the next five, six years?A: I think that's one part of it. Also we really have to think about what having all these policies in place all the time has actually done to us. So it really is a matter of psychology. And the way out of it, of course, is to normalize more quickly, not to actually continue along the path that actually hasn't worked that's created this lower growth environment. You need to move forward. When the U.S. economy is showing rapid declines in unemployment and stabilizing inflation, rates should be moving higher. We shouldn't be talking about risks, because the only risk is that we're doing something wrong because we're acting abnormally.
Q: What would happen if we raised rates once, or twice? I doubt that the world would come to an end.A: No the world wouldn't come to an end. What you would see is a pickup in consumer spending in the United States. Consumers would respond favorably to a normalizing interest rate environment. Some of that consumption response would be exported overseas which would
help global growth. And then because our interest rates were moving higher — the interest-rate differential that all these othercountries are trying to maintain — it would mean that they would have to cut rates less into negative territory. So you would actually begin to normalize global interest rates while maintaining the differential.
Q: Away from inflation, is the dollar the number one concern for Chair Yellen?A: I think she worries about it. I think the number one concern for her is the labor market after inflation. I think she has a very different view of the labor market than I do, than most economists do. I think she spends a lot of time thinking about people who are part-time but want full-time work. But the only problem with that is that we don't know exactly how many people are part-time for economic reasons that wouldn't have been in the absence of the Affordable Care Act.
Q: When do we get the benefit of oil prices versus the increased savings we've clearly seen?A: The benefit of the lower oil prices has been the increased savings. It's not flowing into consumption right? So there's still a benefit. We're saving more as a country. That can be a good thing. It's just happening at an awkward time. We'd rather have people spend it. So there's always something an economist would rather have you do than what you're doing. If you want people to spend more money they need to think that they can
spend more money. And that means a higher interest rate environment that allows them to think about their retirement in much more normal terms than they currently are able to.
Q: Where's normal — 1 percent, 1.5 percent, six rate hikes away?A: I think currently the U.S. could tolerate easily a 1 percent rate. And what that would do is encourage people to think that, because the vast majority of the work force is moving towards retirement very quickly, that when they get to retirement, interest rates will be positive and anything they put into fixed-income assets will actually have a positive return. If you want to get people to save more money, tax their savings by putting negative rates on interest rates.
Q: What is the indicator you have that we'll have a better economy?A: I'll give you three. Claims, no one's being laid off. I find it odd that we're having GDP numbers like this and adding hundreds of thousands of jobs a quarter. So I'll take the jobs because I think they're easier to measure. Banking lending, which is accelerating. Very good measure, also weekly, and pretty easy to calculate. And then the ISM surveys, which have almost as long of a history of the GDP. And they've stayed buoyant. ISM manufacturing, ISM services, both in positive territory. Why is GDP so weak? Probably because it's not measured right.
