Heeeeere's Goldman... With Renewed Calls For A June QE Announcement
Update - And sure enough, as of seconds ago:
Gross: Risk markets need more ammo if they are to stay up. QE3 getting closer.
— PIMCO (@PIMCO) May 8, 2012
The only relevant section from a just released note by Jan Hatzius titled "Still Dreary" (guess what he is referring to), is the following: "we have stuck with our forecast of some additional monetary easing at the June 19-20 FOMC meeting for now, despite the less-than-encouraging noises from Fed officials in recent weeks. However, it is a close call, and we worry about a re-run of the 2010 and 2011 experience—the last two times Fed officials decided to let a purchase program lapse without having put a successor program in place. In both cases, the economy slowed and financial conditions tightened to a degree that pulled them back into the market before long. It is easy to see how this could happen again, given the renewed turmoil in Europe and the possibility that US markets will ratchet up their concerns about the impending fiscal cliff in the run up to the election. In such an uncertain environment, taking out a bit more insurance still looks like the sensible choice for US monetary policymakers." Replace "US monetary policymakers" with "banker bonuses" and you get the picture. And here is our free tip to Goldman: the Fed has finally understood that in order to surprise the market with more easing it has to, gasp, surprise the market with more easing (and banks obviously have to play along and all act like they don't expect more easing, wink wink). Don't worry Jan - Bernanke knows the game plan and will not leave you hanging. However, as has been constantly repeated, there first has to be a deflationary scare before any announcement: such as oil crumbling, gold plunging, and stocks tumbling. Kinda like today. Who whouda think that Greece would serve the role of Lehman... over and over and over. In the meantime keep an eye on Bill Gross holdings of MBS securities when the April update is announced shortly- we fully expect a new all time record high, not to mention an imminent Hilsenrath Op-Ed suddenly hinting that, forget Twist, the Fed is now outright contemplating full blown MBS and UST LSAPs all over again. Because this time it will be different.
Full GS note:
1. After a few months of stronger numbers, the US economy has slowed back to the dreary pace that has characterized most of the recovery so far. Our current activity indicator (CAI) provides a good summary. It averaged 2% in 2011, picked up to 3% in January/February, but is tracking at only 1.8% for April after Friday’s employment numbers. The main factors accounting for the deterioration are the slowdown in payroll employment (+115k in April vs. an average of +267k in Jan/Feb), the reversal in household employment (-169k in April vs. an average of +530k), and the drop in the nonmanufacturing ISM and Philly Fed. There have been some offsets, including a net increase in the manufacturing ISM, but they have generally been small. The Q1 GDP gain of 2.2%—which does not enter the CAI as GDP is available only quarterly—tells a similar story of sluggish growth.
2. What lies behind the slowdown? Much of it is probably payback for strength earlier in the year that was “borrowed” from future quarters. First, the turn in the inventory cycle is likely weighing on manufacturing, although the pop in the ISM is admittedly a bit of a puzzle in that regard. Second, there may be some seasonal adjustment distortions due to the “Lehman echo” effect (see Andrew Tilton’s piece earlier this year, US Economics Analyst: 12/02-‘Tis the Season for Seasonal Adjustment). And third, the weather is probably responsible for part of the weakness in the employment numbers. We will have a better sense when the state-level payroll numbers become available next week, but at this point our best guess is that the return to more normal weather subtracted 20k-40k from the April payroll numbers, a bit less than the 50k we expected prior to the report. This means that there is probably still some payback “in the pipeline” for May.
3. Beyond these short-term factors, the economy looks sluggish but basically stable. The housing adjustment is making good progress, with another decline in the homeowner vacancy rate in Q1 to 2.2%, the lowest since early 2006. Residential investment is unlikely to repeat the nearly 20% growth pace of Q1 (which probably benefited from weather) but should continue to recover. While consumer spending looks set to slow from the 2.9% pace seen in the first quarter, we expect growth to remain around 2% in coming quarters as the recent decline in seasonally adjusted energy prices boosts real income growth a bit from the current year-on-year pace of just ½%. And we expect business investment to rebound from its 2% dip in Q1 to a moderate positive growth pace.
4. The message from the markets is also consistent with sluggish growth. On Friday, Jari Stehn and I released our new Goldman Sachs Financial Conditions Index. It is built from detailed simulations with a modified version of FRB/US, the Fed’s large-scale econometric model of the US economy. This allows us to include not only risk-free interest rates, equity prices, and the dollar, as in the previous version of the GSFCI, but also credit spreads and house prices. The new GSFCI currently sends an incrementally more negative message than the previous version, mainly because the credit markets have underperformed the equity markets.
5. The most important question about Friday’s employment report is "what is the reason for the continued decline in labor force participation?" In principle, there are three possible explanations, each with different implications for monetary policy. First, the decline might be due to structural factors such as the aging of the population and the increase in school enrollment rates. If so, we should take the unemployment rate at face value as a measure of slack. However, this explanation does not look right; even among 35-54 year olds—where these factors should matter much less—participation is down 0.6 percentage points over the past 12 months, which is actually slightly more than in the population at large. Second, more people might have temporarily given up their job search due to a lack of opportunities. This would mean that they are really “discouraged workers” who will come back into the job market once labor demand improves. In this case, the unemployment rate would understate the overall amount of slack. However, this is only part of the story, as the number of people who say they want a job but aren’t actively looking has not risen by nearly enough to explain the drop in the participation rate. And third, people might be losing their skills and attachment to the labor force on a more permanent basis, which would mean that they will not be available to work even after labor demand comes back. In this case, the unemployment rate would still be an accurate measure of slack at each point in time, but there would be an incentive to run a more accommodative monetary policy to prevent a future decline in potential output (see Chairman Bernanke’s speech at the 2011 Jackson Hole symposium). We suspect that this last explanation is an increasingly important part of the story.
6. Partly for this reason, we have stuck with our forecast of some additional monetary easing at the June 19-20 FOMC meeting for now, despite the less-than-encouraging noises from Fed officials in recent weeks. However, it is a close call, and we worry about a re-run of the 2010 and 2011 experience—the last two times Fed officials decided to let a purchase program lapse without having put a successor program in place. In both cases, the economy slowed and financial conditions tightened to a degree that pulled them back into the market before long. It is easy to see how this could happen again, given the renewed turmoil in Europe and the possibility that US markets will ratchet up their concerns about the impending fiscal cliff in the runup to the election. In such an uncertain environment, taking out a bit more insurance still looks like the sensible choice for US monetary policymakers.
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