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Jackson Hole Will Signal Hawkish Tone for Financial Markets

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By EconMatters  

 

Jackson Hole Agenda

 

The annual Jackson Hole economic symposium, a three-day conference in Wyoming begins on Aug. 21 with the official topic of “Re-evaluating Labor Market Dynamics.” Sure, there will be debates from the Bullard camp who views that there isn`t near as much labor slack in the economy versus  the Yellen camp who believes that the long-term unemployed will eventually come back to the economy once the job market tightens further. There will be interesting thoughts regarding the structural changes in the economy and how this effects full employment, and the mismatch between job requirements and candidate skillsets. There will be talk about wage inflation in the context of the largest addition of jobs since 1997 to the economy where even a bad employment number these days lands over the 200k a month level. 

 

2nd QTR GDP 4%

 

But make no mistake the data this week finally has pushed the Fed`s hand, and they are going to have to raise rates by the first quarter of 2015. Even the employment bears, you know those Wall Street types who want more free money from their favorite central bank so they can continue this charade that is borrow everything you can and invest with anything that has a yield pulse, can no longer play the GDP and Inflation card. I know we are producing record jobs this year, but we had a negative 2.9% GDP in the first quarter and it was more than bad weather and an inventory overhang issue from robust 3rd and 4th quarters of 2013.

 

Well this week we finally put that argument to rest as the first look at second quarter GDP came in at a robust 4%, with the first quarter being revised up from a negative 2.9% to 2.1%, so the economy basically grew at a 2% rate for the first half of the year with one of the worst winters on record, and the working off of 2013 inventories. This bodes well since the US economy, being a highly consumer driven economy, really kicks into high gear the second half of the year. A lot of this is based upon the Fall Back to School Spending cycle, companies needing to spend budgeted money or lose it, Tax Spending, the Holiday Shopping Season, the ramp up of college and pro sports football season, and milder weather conditions in the bulk of the country. In short, 2014 will grow at a faster pace than 2013 when all is said and done!

 

Employment Cost Index 0.7% 

 

The other interesting note this week in terms of data was on inflation where on Thursday The employment cost index (ECI) came out and showed a surge of 0.7 percent in the second quarter where pressure is evident in both the wages & salaries component, which jumped 0.6 percent in the quarter, and the benefits component which surged 1.0 percent. Furthermore, year-on-year rates all show significant acceleration and are near or above the general 2.0 percent policy threshold cited by the Federal Reserve. The total employment cost index is up 2.0 percent year-on-year vs 1.8 percent in the first quarter with wages & salaries at 1.8 percent, vs the first quarter's 1.6 percent, and benefits at 2.5 percent vs 2.1 percent. 

 

So the CPI, PPI, and other inflation metrics in the various manufacturing and services reports are all signaling higher inflation it should be no surprise given a Fed Funds Rate between zero and 25 basis points since 2008, and now that the economy is actually producing jobs, and the labor market is tightening fast, that wage inflation is starting to perk up, and this is the next shoe to drop in the economic cycle.

 

The Fed is Behind the Curve

 

The Federal Reserve is already behind the curve, this is obvious as at no time in our history has the economy performed on this level with rates basically being held at ‘end of the world’ total meltdown levels! Sure Wall Street wants free money from Central Banks, this has been the easiest money making era of their lifetimes; now that rates will rise, they actually have to learn to differentiate between asset classes, companies, and investment strategies. This was what changed this week, these two important data points on GDP and Inflation put the nail in the ‘Free Money for Life’ coffin, and this sent shivers up the spine of financial markets! 


Market Turmoil 

 

The musical chairs game has already started in the high yield credit markets, the primary dealers are already signaling to the bond market that they don`t want to hold this paper, expect bond funds to finally get the message like the stampeding elephants that they are, and equity markets to start modeling valuations with a normalized borrowing cost for capital as interest rates rise early in 2015.

 

Hawkish Speech Outlining Turn in Monetary Policy

 

Look for a speech on Friday August 22nd by Janet Yellen where she officially signals the end of the ‘recession era’ ultra-dovish monetary malaise of the last 7 years with a more hawkish tone to signal to financial markets that they better start finding their respective chairs before the low interest rate music stops playing entirely. 

 

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Sun, 08/03/2014 - 11:21 | 5040220 viahj
viahj's picture

"Look for a speech on Friday August 22nd by Janet Yellen where she officially signals the end of the ‘recession era’ ultra-dovish monetary malaise of the last 7 years with a more hawkish tone to signal to financial markets that they better start finding their respective chairs before the low interest rate music stops playing entirely. "

sure, let's see how Uncle Sam deals with the rollover of his short term payday loans with rising rates.

Sun, 08/03/2014 - 09:13 | 5039988 weburke
weburke's picture

we have a full good year left.

 

Sun, 08/03/2014 - 06:47 | 5039838 Bossman1967
Bossman1967's picture

Very confusing to read this analysis of where this economy is? You know you read all the negative articles about how bad things really are then you walk out you door and get in your car head down the street you think nobody walking, traffic is a bitch and wow the gas price is under 3$a gallon. Th restaurants are full and the movies are packed. Mall parking lot full. Things look good as always. I am not delusional I realize a lot of people dependent on the government but they cant be getting enough to make them happy. So is it just that I live in Oklahoma and is safe guarded against what I read or is there a certain sect that enjoy scaring the shit out of us as they always have and will. I really wish I knew the truth and what the future will hold. Until then ill be thankful not being effected by what is said to be the calm before the storm.

Sun, 08/03/2014 - 03:30 | 5039732 hedgiex
hedgiex's picture

This BS is based on a self contained economy where global markets  and BRICS do not exist.

BRICS want out and in their exits do not want to cause any inflation that wipes down the value of their $ debts. You can pull it off if they particulary China implodes before you.

WS wants low interest rate because there are till juices left in the pension funds and mutual funds that they can raid. Heard about their nervousness in lobbying for these funds to be gated under the guise of systemic risk. 

Everything else that comes out of Jackson A**hole is theatrics.

 

Sat, 08/02/2014 - 21:13 | 5039160 Lin S
Lin S's picture

They've come to the mountain to worship Remphan.

Sun, 08/03/2014 - 01:39 | 5039665 7.62x54r
7.62x54r's picture

Save us, Animal Spirits!

Sat, 08/02/2014 - 20:19 | 5039030 ebworthen
ebworthen's picture

Too bad main street won't be paying attention to this.

Looks like TPTB are going to pop the bubble and rake more of the sheeple's chips off the green felt - again.

Enjoy the looks of the 401K/IRA/Pension statements while you can; Wall Street and their FED lackeys are going to make you see red - again.

Lather, rinse, repeat (you sell twice the amount of shampoo that way).

"Chipotle and Amazon look like a buy here."

*cough*

Sun, 08/03/2014 - 01:08 | 5039628 Sorry_about_Dresden
Sorry_about_Dresden's picture

What man!......You think they go short and ride this back down to 666?.......They are tricky!!!....I've been short snp since oct 2010!......I've held my position; at a considerable lose.........maybe I be vidicated ?????????......They be making me whole now?

Sat, 08/02/2014 - 19:52 | 5038983 RaceToTheBottom
RaceToTheBottom's picture

Reading this article I decided I would like to live in that world, cause I am not familiar with the world the author describes.

Sat, 08/02/2014 - 18:21 | 5038778 foxmuldar
foxmuldar's picture

Let me see how this works. First they expect a 3% gain in the first quarter and change it to a negative 2.9%. Now they change it back to a plus 2.1% WTF are we supposed to believe?  I guess all the talk about the hard winter causing the minus 2.9% suddenly vanishes. Who's actually coming up with these numbers? I'll predict the 2nd half comes out at 2%. Thats only if enough pencils are bought at wallmart. lol

Sat, 08/02/2014 - 16:30 | 5038440 kaiserhoff
kaiserhoff's picture

So, doing the right thing for the wrong reasons.

These arrogant idiots still think they can control the economy by pushing on a string.

Sat, 08/02/2014 - 16:16 | 5038397 NOZZLE
NOZZLE's picture

There was an addition of over 350,000 jobs in a single month anytime in this puke's presidency?  " There will be talk about wage inflation in the context of the largest addition of jobs since 1997 "  When the hell was that?

 

http://static5.businessinsider.com/image/4bc46a9b7f8b9a8c77550000/monthl...

Sat, 08/02/2014 - 15:17 | 5038228 falak pema
falak pema's picture

there are two peak parameters : peak oil - rising oil price and peak cheap money-increasing interest rates, that can bring the fiat hegemony down. 

This and the political tug of war between Brics and US now hotting up. 

If both conditions are met no way this US construct doesn't hit the asymptote; sooner than later depending when the law of diminishing returns starts to get the ball rolling.

On the Oil front : with Libya down, potential 2 mm B/D, with Iraq-Iran muzzled : 6 mm B/d potential in check, with Nigeria looking ragged 2 mm B/D potential, this means CONVENTIOnaL easy oil fields are in jeopardy in the MENA patch. Algeria is also showing signs of aging like Russia... 

The current attrition in conventional oil is 5%/year, aka 3.5 million (mm) B/D less per yr  that has to be filled up by non conventional discoveries; aka Shale oil, Canada/Venezuela Tar sands and NGL (condensate from gas fields) to enhance and balance attrition along with bio fuels and new discoveries of deep sea oil (think Angola/Brazil/ Mozambique/ Australia).

It don't look good if China/India/ Brics continue to pull on the oil pump along with Africa rising. We are talking about world demand reaching 100 mm B/D from curent 85/90 level. 

So by 2020 we should be in big trouble on oil front. Its not far away; even if US shale alleviates somewhat current situation. 

On the financial front the eurozone banking construct is a huge question mark and that could hit the coral reef faster than you could sing "Land ahoy". 

The $ construct is now in the eye of the cyclone due to past hubris as well as due to BRIC conviction that its time to scuttle the US Titanic. 

Tipping times as no alternative viable solution to either conundrum is in sight which means dancing in the dark for another decade or two.

Maybe more, unless BOOM ! 

Sat, 08/02/2014 - 16:40 | 5038480 max2205
max2205's picture

PE reset?  Maybe

Sat, 08/02/2014 - 20:24 | 5039049 disabledvet
disabledvet's picture

BALLDERDASH!

seriously tho...can't speak to "world demand" but certainly the key to the dollar regime is HIGHER prices not lower ones. (Keeps the debt rollover working...debt that is priced in dollar terms!)

This is why right now is tough as in my view we are in the midst of an epic energy transition away from oil period....and I think people as a consequence are confused...they cannot believe an order that has existed for over a century is being swept away.

How this Novus Ordo Seclorum shakes out is indeed the what it means to speak what to what is in fact going on.

Sat, 08/02/2014 - 14:58 | 5038172 Jack Sheet
Jack Sheet's picture

"as the first look at second quarter GDP came in at a robust 4%, with the first quarter being revised up from a negative 2.9% to 2.1%, so the economy basically grew at a 2% rate for the first half of the year with one of the worst winters on record, and the working off of 2013 inventories. This bodes well since the US economy, being a highly consumer driven economy, really kicks into high gear the second half of the year"

SHIT ON TOAST, which mainstream TV network did this joker crawl out of?
Tell me this is satire, ....puleez.

Sun, 08/03/2014 - 11:36 | 5040280 Captain Willard
Captain Willard's picture

Four months after a negative GDP report and a few weeks after "headline" unemployment rising, Auntie Janet will give a speech scaring the shit out of everyone ?!!

Perhaps the author will be ready to book our bets on where the 10-yr yield will be after Jackson Hole. 

 

Sat, 08/02/2014 - 17:40 | 5038661 JerseyJoe
JerseyJoe's picture

Another thought...when you average -2.1 with 4 - you get 1.9/2 which is average of less than 1%.   Or is there some magic math I miss here?  

Sun, 08/03/2014 - 10:36 | 5040114 The Most Intere...
The Most Interesting Frog in the World's picture

The GDP is reported quarterly but the number is annualized. The author's math is correct, the rest is complete BS.

Sat, 08/02/2014 - 17:25 | 5038616 JerseyJoe
JerseyJoe's picture

BTW - I am sure there are many waiting the 2Q revisions - like the 1Q before it.  They come out while these clowns are up in the Hole.  They will have to re-script their BS in real time. 

Sat, 08/02/2014 - 17:21 | 5038604 JerseyJoe
JerseyJoe's picture

Thank you - I knew someone had to had their head explode on the BULLSHIT.   Good one.  

Last week I was driving around and on the radio some guy was claiming we had a "tight labor market".  I laughed so hard I nearly drove off the road.   What the hell is wrong with these idiots!!? 

Gee, who was it who said - A lie told often enough becomes truth?  Wasn't it John Lennon's crazy Russian uncle Vladimir?  

Sat, 08/02/2014 - 14:40 | 5038120 oddjob
oddjob's picture

USD repudiation will be the cause of rising interest rates, regurgitated MSM claptrap like  'long-term unemployed will eventually come back to the economy once the job market tightens further' is nothing more than delusional thinking from ardent paperbugz.

'based upon the Fall Back to School Spending cycle'..another gem, excuse me if I don't believe that the economic benefit of children buying school supplies is going to fund multiple wars, more bailouts for Wall street and ever growing promised entitlements.

Sat, 08/02/2014 - 14:31 | 5038083 Colonel Klink
Colonel Klink's picture

Should be renamed Jackson Asshole for all the rich scumbags who hang out there.  For example, Dick "Darth Vader" Cheney.

Sat, 08/02/2014 - 20:37 | 5039086 TabakLover
TabakLover's picture

My old man's favorite invection for someone he thought was a real "jag-off" (Pittsburgher's here will know that term) was "Jack-ass-hole".  A term he generally applied to bankers.  

Sat, 08/02/2014 - 22:41 | 5039360 philipat
philipat's picture

I call BS on this one. The 2Q growth was AGAIN on the back of inventory build. Given that CEO's of major retailers such as WM are NOT optimistic, it is unlikely that inventory growth was in anticipation of higher growth and much more likely a result of over-production in the face of lower retail sales. Thus, 3Q will be 1Q all over again. But we can again blame the Weather (Drought, hot summer temperatures etc.)

This really isn't rocket science. The US economy comprises 70% consumtion so, realistically, for the economy to grow requires an increase in consumption, which is unlikely with declining net real disposable income and the higher cost of essentials.

Those who live by the consequences of the Printing press, die by the same in reverse.

Sun, 08/03/2014 - 12:03 | 5040368 All Risk No Reward
All Risk No Reward's picture

They have to lie big right at the end of the bubble to get the last few suckers set up for shearing.

Sun, 08/03/2014 - 07:58 | 5039907 odatruf
odatruf's picture

I agree. I don't know why this space gives credence to the absurd weather slump BS in the 1st QTR or the pick a number data from the 2nd or elsewise.

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