This page has been archived and commenting is disabled.

3 Things - The Fed, Rig Counts And Employment, ECB

Tyler Durden's picture




 

Submitted by Lance Roberts via STA Wealth Management,

The Fed Might Not Raise Rates This Year

Yesterday, I wrote a fairly lengthy discussion on the biggest fear of the Fed is deflation. As I stated:

"The biggest worry of the Federal Reserve, and frankly every Central Banker on the planet, is deflation. The reason is that deflation, as an economic pressure, is dangerous and once entrenched becomes difficult to break."

Another point can be seen more clearly in the chart below of 5- and 10-year breakeven inflation rates versus GDP. While the consensus of economists expect GDP to accelerate in the months ahead, there are many data points (oil, copper, lumber, shipping rates, etc.) that suggest real economic activity is actually slowing down. The current trend and level of interest rates confirm the same as money continues to seek safety over risk.

Inflation-Breakeven-GDP-012215

This potentially puts the Federal Reserve in a box given that they are laying the verbal groundwork that they will begin raising interest rates in 2015. However, the inflationary data is suggesting that this will likely not be the case. As I wrote previously:

"During the past 25 years, there has never been a period when the Fed has initiated a tightening cycle with inflation below its 2% target as it is currently. Furthermore, the decline in the breakeven inflation rates suggests that inflation will decline further in the months ahead which puts the Fed at risk of exacerbating economic weakness if they move forward with interest rate hikes."

This is the risk to investors the in domestic markets. The news and data flows have been deteriorating post the "rebound" from the first quarter slump. With the Fed leaving the "party" the realization that a world without liquidity driven support could turn "bad news" into "bad news." This is particularly the case when economic growth is running on razor thin margins and an exogenous event, such as plunging oil prices, leaves a very low margin of error.

As shown in the chart below, the markets have historically had a fairly tight correlation to breakeven inflation rates. This makes perfect sense as inflation should be related to economic growth and better profitability. However, since the onset of the Fed's massive monetary intervention at the end of 2012, the markets deviated far away from that correlation. The risk now is a reversion back to historical trends as deflationary pressures continue to build in the months ahead.

Inflation-Breakeven-SP500-012215

The real concern for investors and individuals is the actual economy. There is clearly something amiss within the economic landscape, and the ongoing decline of inflationary pressures longer term is likely telling us just that. The big question for the Fed is how to get themselves out of the potential trap they have gotten themselves into without cratering the economy, and the financial markets, in the process.

It is my expectation, unless these deflationary trends reverse course in very short order, the Fed will likely postpone raising interest rates until at least the end of the year if not potentially longer.  However, the Fed understands clearly that we are closer to the next economic recession than not and that they can not be caught with rates at the "zero bound" when that occurs.

 

Effects Of Oil Price Plunge Showing Up In Jobless Claims

Economists were taken by surprise last week when jobless claims shot above 300,000. However, the recent plunge in oil prices is the culprit and is now taking its toll on energy based employment with Haliburton, Schlumberger, Baker Hughes, Suncor and many other companies now shutting in wells and reducing employment.

Unfortunately, we are only in the very early innings of what is shaping up to be a long game. The longer that oil prices remain suppressed, the lower that rig counts are likely to go reducing employment along with it. As I discussed earlier this month:

"This is a very important point as oil prices continue to fall towards the $40/bbl range. As oil prices rise and fall so does the number of rigs being utilized to drill for oil which ultimately also impacts employment. This is shown in the two charts below.  The first is oil prices versus rig count, and the second is rig count versus employment in the oil and gas sector of the economy."

Oil-3mo-Chg-Rig-Oil-012215

Oil-RigCount-Employment-012215

Not surprisingly, with rig counts being rapidly "shut-in" the rise in jobless claims are likely to continue in the near term. However, more importantly will be to watch the ancillary effects to employment elsewhere in the economy. As discussed previously, given the high-wage paying status of energy related jobs there has been a "multiplier effect" throughout the economy of 2.8 jobs elsewhere. Of course, this multiplier effect also runs in reverse.

As I stated, we are very early in this process, and the plunge in oil prices is already being readily dismissed. This could be a mistake given the importance of the energy sector across the broad economy from employment to capital expenditures. 

 

ECB Attempts QE

Yesterday, the ECB announced that they will engage in a "QE" type program buying €60 Billion (Euros, not Dollars) a month of investment grade sovereign bonds.

While the markets may welcome another source of liquidity to replace the vacancy left by the Federal Reserve, the are several problems that the ECB will still have to hurdle. The first, and arguably the most important, was identified by Axel Merk in his recent newsletter:

"It should be clear, though, that the negative deposit rate at the ECB makes comparing today’s balance sheet to that of 2012 akin to comparing apples to oranges.

 

Let’s keep in mind that anyone selling bonds to the ECB must do something with the cash. QE programs in other countries allowed banks to earn some interest on their excess cash. At the ECB, sellers will have to pay the ECB to in order to hold excess cash. As a result, sellers will think twice before selling. Having said that, at the right price, there will be sellers. However, we are now moving from apples and oranges to bananas – pardon the pun: any amount of buying by the ECB will be more potent with negative interest rates on cash deposits at the ECB, casting serious doubts over whether it is appropriate to state that the 2012 size of the balance sheet is the appropriate size."

This is crucially important. With the ECB leaving interest rates unchanged, the negative interest rate carry makes this QE program much less attractive to sellers.

Secondly, given the fact that "QE" programs have failed to spark "inflation" anywhere else on the planet, the question really becomes "what is the point?" The deflationary pressures in Europe are Draghi's real concern, and since QE suppresses interest rates and inflation, the whole process seems to contradict the stated goals. 

Lastly, the issue of "risk sharing" has yet to be fully addressed. It appears that the ECB has bowed to Germany's demands that taxpayers are not liable for any losses incurred on other countries' debt. Such restrictions may reduce the overall scale of the program over time and render it less effective.

The problem for the Eurozone remains quite simple.  Economic strength is not achieved by "rearranging the deck chairs on the Titanic" but by instituting policies that allow countries to reverse course and begin to create employment and prosperity for its citizens. Only then can the wheels of economic growth begin to turn.

Of course, only time will tell.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 01/23/2015 - 12:39 | 5697015 Zidane1998
Zidane1998's picture

Why don't they ever ask themselves if the "deflation" they are fighting simply is the natural readjustment of the market.... The concepts of inflation and deflation is so grossly misunderstood by the central planners

Fri, 01/23/2015 - 13:36 | 5697257 LawsofPhysics
LawsofPhysics's picture

...by design.  What you are hinting at is the real business cycle, where bad business and banking models are actually allowed to fail and bad actors go bankrupt and to PRISON.

Today's bankers and financiers do not want that, so they keep giving themselves more free money (QE and ZIRP).

Fri, 01/23/2015 - 14:06 | 5697366 Newsboy
Newsboy's picture

This sets the stage for national central banks to hold national bonded debt, and then expunge it when the time is right. Of course central bankers will have (even more) concentrated leverage on politicians, by the holding of that debt.

Fri, 01/23/2015 - 14:17 | 5697400 KnuckleDragger-X
KnuckleDragger-X's picture

Yep, bad business practices are allowed to flourish and good practices are demeaned. The unfortunate thing is things can't change because the bad practices have become ingrained in law and revolution is becoming the only way out. Of course the little people will be the ones who pay the price for change.

Fri, 01/23/2015 - 19:52 | 5698437 daveO
daveO's picture

The unfortunate thing is things can't change because the bad practices have become ingrained in law and revolution is becoming the only way out.

A Soviet style collapse, IMO. The Corruptocrats will eventually run out of other people's money.

Fri, 01/23/2015 - 13:53 | 5697330 duo
duo's picture

Take the equivalent of a car payment out of every household for Obamacare, sit back, and wait for the economy to grind to a halt.

In the history books it will be called the "Obamacare recession", but for now it's all good.

Fri, 01/23/2015 - 12:44 | 5697026 Tsar Pointless
Tsar Pointless's picture

Wait. Isn't the very thing these creatures are supposedly fighting - deflation - the very thing their policies are exascerbating?

Aren't deflation and recession being created by their actions? I know we've had prices go up, but not in such a hyper way that even I thought may occur when the first QE was unleashed all those years ago.

Hmm?

Fri, 01/23/2015 - 13:11 | 5697111 new game
new game's picture

initialy they got the intended buzz. after repeatedly hammering the needle into the vein the buzz is gone. deflation is the downer coming. so they take a break and return to earth for another round of injections. hmmm, buzz not so good-eh! so here we are, millions of co-dependents of the feds policies, which will continue.

and as far as their knowledge goes: they know exactly what they are doing-enriching their coffers GREATLY as we the plebs are helpless to anything meaningfull.

and not for one second do i think they are not prepping too...

Fri, 01/23/2015 - 20:04 | 5698480 daveO
daveO's picture

See Japan for how to counterfeit. Considering consumers are completely saturated with debt, all that matters now is how fast the gov. creates more. $1 Trillion is only 5.55% of $18T. while it is 10% of $10T. So, the next round will be $1.5 - $2 T per year (around $150B per month), at least.

Fri, 01/23/2015 - 12:44 | 5697028 Mrmojorisin515
Mrmojorisin515's picture

They know its the natural readjustment of the market, they don't give a shit.  Hence why they change the rules, no inflated assets, no power.  Its power they are worried about.

Fri, 01/23/2015 - 12:44 | 5697030 TuPhat
TuPhat's picture

Another article that has as a premise that the Fed is actually in control of anything and that what they do is what is best for the real economy.  The control they do have is used to enrich the rich and destroy the rest.  The results from that can be bad but the Fed does not care what pain that causes most people.

Fri, 01/23/2015 - 12:45 | 5697035 disabledvet
disabledvet's picture

OMG!

AN ECONOMIST!

RUN AWAY! RUN AWAY!

Fri, 01/23/2015 - 12:54 | 5697079 NoDebt
NoDebt's picture

They'll just follow you whereever you run.

Fri, 01/23/2015 - 12:55 | 5697080 NoDebt
NoDebt's picture

Dup.

Fri, 01/23/2015 - 20:08 | 5698489 daveO
daveO's picture

Economist=High Priest of Economic Fraud. 

Their mantra = 'Salvation through Debasement'

Fri, 01/23/2015 - 12:46 | 5697037 yogibear
yogibear's picture

They can't. 

The central bank PhD's will just round-robin devaule their currencies

QE Loop until collaspes with short pauses in between.

EU - QE x, 

US - QE x

Japan - QE x

UK - QE x

 

 

Fri, 01/23/2015 - 12:47 | 5697040 insanelysane
insanelysane's picture

DEFLATION HAPPENS!

Fri, 01/23/2015 - 13:38 | 5697264 TrumpXVI
TrumpXVI's picture

Yup, this.

 

Just ask the New England Patriots.

Fri, 01/23/2015 - 20:17 | 5698500 daveO
Fri, 01/23/2015 - 12:48 | 5697044 I Write Code
I Write Code's picture

Well, QECB has knocked 10% off the Euro in just two weeks (figure it includes the SNB move).

So *ending* US's QE should strengthen the dollar, and arguably has already done so over the past sixty days.

So *more* normalization of rates should be good for the economy, not bad.

The expected Fed behavior is to sneak up rates at less than the overall economic recovery rate over the next several years, maybe 10 basis points per year, maybe 20, where the *real* economic growth rate is maybe 1% per year.

Now, the IED in all of this is of course the f'ing federal debt.

And who knows what passes for mentation over there at the Fed.

But so far, I don't see a reason they should not or can not start these little moves and announce how and why they expect them to continue long term.

I will note that this could take TEN YEARS or longer to return to a normal rate regime, and that includes somehow getting over the federal debt problem. 

Fri, 01/23/2015 - 13:07 | 5697125 PoorMan429
PoorMan429's picture

There will NEVER be normal rate regime without a significat debt elimination through war, massive default, or the discovery of some new technolgy that changes the world like the computer did the last time. The system only functions with perpetual growth in demand, demand that only exists becuase of credit. Without additional credit, consumers cant consume, thus no more demand. KABOOM! printing moey is just to keep the banks experiencing defaults on asset backed loans in the black. Its all about protecting the asset backed debt. If deflation set into housing, or equities, or other financial assets the system goes boom overnight. 

Fri, 01/23/2015 - 13:42 | 5697278 LawsofPhysics
LawsofPhysics's picture

"Without additional credit, consumers cant consume"  --  Bullshit. A fucking shark can be thought of as a consumer that would like nothing better than to consume your ass.  Your statement is about as far away from the real world and the law of the jungle as you can get.  Humanity has really turned into an arrogant pile of shit.

The lwas of Nature and physics always bat last motherfucker. 

Fri, 01/23/2015 - 14:03 | 5697360 hendrik1730
hendrik1730's picture

Poorman429 is right, though. Starting mid 70-ies, wages no longer tracked productivity and in order to keep consumption growing, all was financed by credit. In 2006, the bubble did burst - "everyone" was maxed-out on his creditworthyness and was already given subprime mortgages. Today? Subprime car loans, student loans, sinking pension funds, dropping consumption, expensive food, hamburger jobs, delocalisation of your industry, cheap oil torpedoing the shale oil business .... and "everyone" at the FED is asking themselves "how come?" .... 

Fri, 01/23/2015 - 14:30 | 5697445 PoorMan429
PoorMan429's picture

I was going to retort, but why bother. It will all end with a guillotine reference. 

Fri, 01/23/2015 - 20:23 | 5698526 daveO
daveO's picture

Consumers started paring back their debt in '07 or '08. That's when the FED started counterfeiting, and buying newly printed Treasuries to fill the credit gap. US taxpayers are being screwed to keep the credit casino running. Tax rates would need to rise by 1/3 just to fill the deficit! 

Fri, 01/23/2015 - 12:50 | 5697057 wmbz
wmbz's picture

Deflation is the reason the un-fed, once pushed all the way into the cornor will unleash one hell of a flood. Trillions to the left of us, trillions to the right!

Brace up, because it will happen!

Fri, 01/23/2015 - 13:33 | 5697240 the not so migh...
the not so mighty maximiza's picture

they are doing that now with shit to show for it

Fri, 01/23/2015 - 12:52 | 5697069 NoWayJose
NoWayJose's picture

Rig Counts Down, Oil Hammered by Saudi Comments -- yet Oil Services and Oil Majors stocks have bounced nicely off last week's lows.  Is that not a 'hint' at what the TBTF's are doing?  And is that not a 'hint' where oil prices will be going this summer?

Fri, 01/23/2015 - 12:53 | 5697070 NoDebt
NoDebt's picture

It's really going to suck looking back on this, years from now, knowing that all the debt went bad anyway and that it could all have been handled in 2008-2009 but instead failed policies were tried for years to save the unsavable.

Fri, 01/23/2015 - 13:37 | 5697263 Mike Honcho
Mike Honcho's picture

intentional policies were tried for years to take the money and run, causing an endgame scenario that was planned a century or so ago.

Fri, 01/23/2015 - 13:43 | 5697282 LawsofPhysics
LawsofPhysics's picture

Nothing changes unless retribution is actually paid.  You really are quite the optimist.

Fri, 01/23/2015 - 12:56 | 5697087 AynRandFan
AynRandFan's picture

Lumber is still expensive.  Here's a 30-year chart of soft sawn wood, or basically framing lumber:  http://www.indexmundi.com/commodities/?commodity=plywood&months=360

What I don't get is that new home construction fell off a cliff and never bounced.  The number of new homes being sold is still way below the rate of sales for 99% of the last 50 years.

Fri, 01/23/2015 - 13:29 | 5697211 firstdivision
firstdivision's picture

Let’s keep in mind that anyone selling bonds to the ECB must do something with the cash. QE programs in other countries allowed banks to earn some interest on their excess cash. At the ECB, sellers will have to pay the ECB to in order to hold excess cash. As a result, sellers will think twice before selling

Yeah, cause the banks are to take said cash and buy stawks and short gold/silver.

Fri, 01/23/2015 - 13:54 | 5697337 hendrik1730
hendrik1730's picture

"Economic strength is not achieved by "rearranging the deck chairs on the Titanic" but by instituting policies that allow countries to reverse course and begin to create employment and prosperity for its citizens"

 

Yep, right. And what do those EU governments actually do? Raise taxes ( which are already very high ), impose stupid restrictions for doing business ( environmental rules, energy consumption rules, mountains of paperwork, ever changing fiscal legislation, very complex social legislation, high compensations for unemployed people, immigration of "refugees" and the like by the tens of thousands who do not speak any local language, have no education whatsoever and need social aid for everything and nothing ), all this accompanied by union actions, strikes, an ever expanding government and a poor transport infrastructure which crumbles by the year ( example : Belgian government uses now 54% of the GDP and RISING just for "functioning" while stuill running a 3.3% deficit - how do they think the remaining 46% will ever be able to pay for all this shit ? Austerity? My ass : 2007 Belgian government spent 162 billion euro, 2013 they burned 213.5 billion or 20.000 euros per head of the population - that is MORE than what an average 4 head-household earns per year !)

Electrical power is now also a big issue there : 3 out of 6 nuclear power plants are down, 1 will be stopped because some lunatic "forgot" to order uranium, gaspowered plants are being shut down because they are no longer economically viable due to windpower ( until the wind sets ), solar is expensive and unreliable given the climate. We face black-outs this winter if temperatures drop below freezing for a week or so.

And those numbers are not only applicable to Belgium : France, Italy, Spain are the same or worse.

Policy shift by those government assholes? Not in a thousand years.

Fri, 01/23/2015 - 23:42 | 5698992 Westcoastliberal
Westcoastliberal's picture

If the Fed really wants a solution why not force the banksters to give up the 29% interest on credit cards and lower it to reflect reality?  A drop of 10% or a bit more would put more cash in the sheeple's hands and they would spend more, resulting in the desired inflation.  As my Momma used to say, you can't get blood from a turnip, whatever that means.

Do NOT follow this link or you will be banned from the site!