Output Gap

The Central Bankers’ Malodorous War On Savers

The private economy and its millions of savers exist for the convenience of the apparatchiks who run the central bank. In their palpable fear and unrelieved arrogance, would they now throw millions of already ruined retirees and savers completely under the bus? Yes they would.

 

FOMC Minutes Leaked Early After Embargo Broken, Fed Warns Risk To GDP Forecast "Tilted To The Downside"

Seconds ago, someone accidentally (we hope) pulled a Janet Yellen as the following just came across the wires

FOMC MINUTES: MEMB 'GENERALLY AGREED' MORE INFO NEEDED TO HIKE
FOMC MINUTES: NO TIP TOWARDS SEPT LIFTOFF, DOESN'T RULE IT OUT

But the bottom line is that the Fed just admitted things are going from bad to worse: "The risks to the forecast for real GDP and inflation were seen as tilted to the downside." The question now is what comes first: QE4 or the first rate hike in nearly a decade.

Japan's Dire Message To Yellen: "Don't Raise Rates Soon"

There are so many parallels between the current period since 2007 in the U.S. (The Great Recession), the period since 1990 in Japan (Japan’s 2+ lost decades), and the period after 1929 in the US (The Great Depression) because they are all periods of a ‘balance-sheet recession’ (or similarly, ‘secular stagnation'; that it is next to impossible to dismiss the comparison. Using this, there is an important lesson for the Fed to consider now in weighing whether to raise rates.

Chinese Stocks Drop, End Worst Month Since August 2009; US Equity Futures Flat

In a repeat of Thursday's action, Chinese stocks which had opened about 1% lower, remained underwater for most of the session before attempting a feeble bounce which took the Shanghai Composite fractionally into the green, before the now traditional last hour action which this time failed to maintain the upward momentum and the last day of the month saw a surge in volume which dragged the market to its lows before closing roughly where it opened, -1.13% lower.  This caps the worst month for Chinese stocks since since August 2009, as the government struggles to rekindle investor interest amid a $3.5 trillion rout, one which has sent the Shanghai market lower by 15% - the biggest loss among 93 global benchmark gauges tracked by Bloomberg.

Chinese Stocks Tumble In Close Of Trading "Causing Panic", US GDP To Be Revised Higher On Seasonal Adjustments

We start off the overnight wrap up with the usual place, China, where in a mirror image of Wednesday's action, stocks once again started off uneventful, then gradually rose in the afternoon session and meandered near unchanged territory until the last half hour, when out of the blue they tumbled to close near the day's low, some 2.2% below yesterday's closing level.  What caused it?  One possible catalyst came from Reuters which reported that that Chinese banks were investigating their exposure to the stock market via wealth management products and loans backed by stock as collateral. 

USDCAD Surges To 6 Year Highs As Bank Of Canada Slashes GDP Forecasts, Unexpectedly Cuts Rates

In what seems to have surprised FX trader, Bank of Canada has taken an ax to growth forecasts and rates...

*BOC CUTS CANADA 2015 GDP FORECAST TO 1.1% FROM 1.9%
*BANK OF CANADA CUTS 2Q GDP ESTIMATE TO -0.5% FROM 1.8%
*BANK OF CANADA CUTS BENCHMARK INTEREST RATE TO 0.5%

Furthermore, it warns that "consumer debt vulnerabilities are edging higher" and export weakness is "puzzling."

Old Economic Thinking Is The Problem, BIS Warns

Notwithstanding everything that has been done since the Great Financial Crisis, it is not at all safe to go back in the water. Indeed danger of financial fragility is greater now than a year ago. The danger this time comes, interestingly, not so much from the banks as from the policymakers, who persist in using empirically discredited pre-crisis thinking as a guide to macroeconomic policy. The problem, in a nutshell, is that “a monetary policy focused on managing near-term inflation and output may do so at the cost of higher fluctuations in credit and asset prices than in the past.”

Why Ronald Reagan Is Rolling In His Grave: The Keynesian Putsch At The Fed

Ronald Reagan is surely rolling in his grave. He is credited for much that he didn’t actually accomplish on the economic front, but his most singular real victory - decisive repudiation of the Keynesian macro-economic policy model that had produced stagflationary havoc for more than a decade - overshadows all his fiscal failures and the urban legend that he actually tamed Big Government. Needless to say, however, that 35-years ago repudiation has now been itself completely repudiated by the keynesian apparatchiks who presently rule the Eccles Building. This week Janet Yellen was at it again, displaying outright contempt for the Gipper’s crowning achievement.

Dollar Tumbles After Fed Whiffs Again; More Cracks Appear In Chinese Stock Bubble

All those saying the Fed will never be able to raise rate are looking particularly smug this morning, because if the market needed a green light that despite all the constant posturing, pomp and rhetoric, the US economy is simply (never) ready for a rate hike, it got it late last night when Goldman is pushing back its forecast for the first Fed rate hike from  September to December 2015 saying that "in large part this reflects the fact that seven FOMC participants are now projecting zero or one rate hike this year, a group that we believe includes Fed Chair Janet Yellen. We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition for the FOMC to actually hike in September, but the committee did not lay that groundwork today."

This Is The Fed's "Second Biggest Nightmare" According To Citigroup

Two weeks ago, Citigroup presented what it thinks is the biggest nightmare for the Fed: it said that the FOMC’s "biggest worry is not lift off and its market and economic implications, but what happens if the economic recovery dies of old age without the Fed having done anything to tighten." And, according to Citi's FX strategists, "if this were to occur, the USD would probably fall faster than it rose from July-March." A precursor to loss of faith in the Dollar's reserve currency status perhaps. Today, Citi's Steven Englander lays out what is the Fed's second biggest nightmare: a rebound which is so fast, the Fed's entire carefully planned renormalization schedule collapses.

The Fed's Computer Model Of The US Economy "Sees Little Slack" (And A Big Clue From Gartman)

Even without a double seasonal adjustment, the Fed may very well surprise with not only a September, but even a June hike. After all recall that to Yellen stocks are now clearly overvalued, and the cornered Fed Chairwoman is between a rock and a hard place - keep failing to rase rates and risk another bond tantrum as all the shorts are squeezed leading to even more illiquidity and volatility, or slowly take the air out of the stock bubble (good luck with that).

Despite Weak Economic Data Overnight, Futures Slide On Rate Hike Concerns

The big news overnight was neither the Chinese manufacturing PMI miss nor the just as unpleasant (and important) German manufacturing and service PMI misses, but that speculation about a rate hike continues to grow louder despite the abysmal economic data lately, with the latest vote of support of a 25 bps rate increase coming from Goldman which overnight updated its "Fed staff model" and found surprisingly little slack in the economy suggesting that the recent push to blame reality for not complying with economist models (and hence the need for double seasonal adjustments) is gaining steam, and as we first suggested earlier this week, it may just happen that the Fed completely ignores recent data, and pushes on to tighten conditions, if only to rerun the great Trichet experiment of the summer of 2011 when the smallest of rate hikes resulted in a double dip recession.