Submitted by Michael Every of Rabobank
An offer he can’t refuse
More than a few news agencies are now reporting that President Trump intends to nominate former CEO of Godfather’s Pizza, Herman Cain, for a seat on the Federal Reserve Board of Governors. Mr. Cain did serve for one year as Chairman to the Federal Reserve Bank of Kansas City. Other than that he has a proven track record in food, restaurants, retail and, more recently also being a contributor to Fox News. In 2011/12 Mr. Cain even made a bid for becoming President of the United States, calling for a much simplified US tax-code, where a flat tax rate of 9% would be the key feature in corporate, income and sales taxes. Although he did well during the campaign, he was forced to abandon his bid following allegations of sexual harassment.
According the NY Times, Mr. Cain used to be a proponent of a return to the gold standard (which would actually suggest he is an inflation hawk), but that he has changed his mind and has now embraced the notion that the risk of deflation outstrips that of inflation. So whether Mr. Cain is truly the best candidate out there remains to be seen (and the Senate has to confirm Mr. Trump’s nominees), but President Trump clearly appreciates Mr. Cain’s qualities (pizza, Fox News and a proponent of low interest rates). Indeed, Mr. Trump has already called Mr. Cain “a truly outstanding individual”. Did Trump make him an offer he cannot refuse?
So picture this: everyday could be “pizza day”! Surely equities are trading as if Mr. Cain has already been appointed – everybody wants a slice! The S&P500 made a y-t-d high yesterday, although bond investors, again, showed their more bearish nature with a flattening of the German curve (3m Bills +3bp, 30y -4bp) as well as the US Treasury curve.
In addition to Trump’s dovish nominees, the conviction of sitting hawks is also slowly fading. While Ms. Mester reiterated that she doesn’t see rate cuts yet, she did admit that “it is possible” that the hiking cycle may be over. So on balance, the FOMC is starting to get more dovish, as also radiated from the March meeting.
And as we’ve noted before, the Fed isn’t alone in that respect. Yesterday’s accounts of the March ECB meeting showed no urgent concerns, but whichever way they slice or dice it, there is clearly increasing unease among the Council members. Against this background, there was support for the broad measures announced in March. In fact, some had called for a longer extension of forward guidance, into 2020Q1. This suggests that the Council isn’t yet very convinced that it will be able to hike rates early in 2020, and adds to the risk that the ECB may need to postpone its guidance at a later date.
Additionally the accounts note that “concerns were voiced” over the potential effects of persistent low rates. No conclusions were drawn, however, and thus no policy measures to address any potential effects were discussed either. As we concluded in our earlier note on tiered rates, these concerns and potential measures suggest that the Council sees rates on hold for a longer period than their guidance suggests. This also chimes with the abovementioned calls for a longer extension of guidance.
In other words, risks are clearly skewed to low(er) rates for longer, and notwithstanding the implications this may have for the economic outlook, equities are enjoying this prospect.
Day ahead
Data from Germany this morning seemingly contradicted the downside risks highlighted above, but when you dig deeper, a different picture emerges. In contrast to yesterday’s astonishingly weak German factory orders for February, industrial output for that same month actually rose 0.7%, largely offsetting the drop in production in the first month of the year. At least this takes the sharp edges of yesterday’s numbers, although we need to bear in mind that whilst the orders data tend to be more volatile, the causality usually runs from orders to output rather than the other way around. Moreover, digging deeper into the details shows that it was the construction sector that saved the day, reporting a 6.8% m/m increase in output. Since the average daily temperature in Germany was 5.8 degrees higher than in the same month last year, this probably goes quite some way in explaining the boost in construction output. Excluding the construction sector, output fell by 0.4% m/m and this seems to be a better fit with the recent data on orders as well as purchasing managers’ indices. In other words, don’t get too excited yet.
Today’s Non-Farm Payrolls in the US for March is one of the key reports to watch. The ADP figures released earlier this week surprised to the downside, but given the recent distortions due to the partial government shutdown, there is additional uncertainty surrounding the March figures. Following a slow 20K jobs gain in February, the consensus is looking for a 177K gain in March, basically re-establishing monthly jobs growth at the lower end of the range of previous years. More important perhaps are the average hourly earnings data. Last month, earnings growth reached 3.4% y/y, its highest level since April 2009 and – given the tightening labour market – providing some support for the view that the tightening labour markets is slowly but surely starting to exert upward pressure on wages. Although it would require a fairly strong monthly 0.3% gain to maintain the annual growth rate at its February rate, one can only assume that – against the backdrop of the Fed’s recent U-turn – it is the assumption among policy makers that the labour market recovery is in its final stages and will soon reverse. If not, expect an interesting debate to develop at some point.
Happy – Pizza – Friday!
via ZeroHedge News http://bit.ly/2Kbp3Rd Tyler Durden