jatuh hat1 : RESESI amrik v. STRONG $ 2016 (210116)

After some minor, but quite important changes to the Fed’s post meeting statement, the market is increasingly of the view that a December rate hike is back in play. Perhaps markets had got slightly ahead of themselves in pricing out a December hike, as the official Fed line had always been that every meeting was “live”. That said, there was justification for expecting the Fed to delay further. The data has generally been soft (and the Fed have told us they are data dependent) and two board governors declared two weeks ago that they were against a December hike.

The problem is that the Fed simply has its policy on the wrong setting. With real growth of 2% and nominal growth of nearly 3%, interest rates should not be near zero (along with a bloated balance sheet from past QE). The Fed have been far too easy for too long, petrified of what may happen when they begin to normalise. In our opinion, they should never have embarked on QE2 and QE3, and having allowed markets to become addicted to stimulus, they are having a real tough time beginning the normalisation process, never mind getting interest rates to where they should be, which is somewhere in the 2% range.

That said, we all have to deal in the here and now, and as noted above, the majority now seem to think a December hike is on the cards. We can see the sense in starting the process, however evidence is building that the economic cycle is now very mature. Indeed, there are a number of indicators that not only show a real deceleration in the economy, but are positioned as they have been near the start of a recession. In isolation, it seems strange that the Fed would want to start hiking rates now given how mature the post crisis recovery appears to be. Let’s have a look at a few indicators.

Chart 1 below shows the year on year growth in US Nominal GDP along with the Federal Funds Rate. There are a few points to make. First, growth post the financial crisis is the lowest it’s been in post WWII history despite unprecedented stimulus. Second, there is a loose connection between nominal growth and interest rates. Historically, the Fed have allowed nominal growth to track some way above interest rates after the end of recessions to allow the recovery to gain traction. The disparity between the two has never been this wide for this long, indicating that rates need to be higher already. Third, nominal growth has already slowed from 4.7% to 2.9% in the last 12 months. Although this is not recessionary, the Fed usually starts raising rates when growth is accelerating.

Chart 1 – U.S. nominal GDP growth versus the Federal Funds Rate

The second chart below shows the year on year per cent change in US Non-Farm Payrolls plotted with the Federal Funds Rate. The rate of jobs growth has already begun to slow (from a high of +2.34% in February this year to 1.97% in September) and is likely to slow further into year end. For example, the average monthly jobs gain so far this year is nearly +200k. If the US can generate 200k jobs each month in the fourth quarter, then the year on year rate drops to +1.70% in December. However, the last three months has seen an average of only +167k new jobs per month. If this lower pace is sustained in Q4, then the year on year rate of jobs growth drops to +1.6% by year end.

As with the broad economy, although the deceleration in jobs growth is not necessarily indicative of a pending recessionary, the Fed usually cuts interest rates as this metric declines, and usually only raises rates when jobs growth is accelerating.

Chart 2 – Year on Year % growth in U. S. Non Farm Payrolls versus the Federal Funds Rate

The message is similar in wages for non-supervisory workers as shown in chart 3 below. Although we have no doubt that there are pockets of wage pressure, the fact is that, for the vast majority of workers, wages never recovered to normal levels during the post crisis recovery. Wage growth peaked at 2.5% last year and has since declined to 1.9%. Typically, the Fed only raises interest rates when wage growth is accelerating. We suspect that both jobs growth and employment growth have peaked for this cycle already and we are not expecting any meaningful improvement in the months ahead.

Chart 3 – Growth in average earnings (for production and non-supervisory jobs) versus the Federal Funds Rate

Let’s look at one more chart. Below, we show industrial production and the year on year growth (lower panel). The main point to make here is that industrial production is already declining (having peaked last December)  and the year on year rate is on the verge of moving into negative territory. This is recession territory for this particular part of the US economy, and clearly not something associated with the Fed raising rates.

Chart 4 – U.S. Industrial Production is indicative of a recession

We could show more charts, but we think our point is made. The indicators above, along with modest growth in retail sales, falling corporate profits and revenues and declining core capex (exc’l aircraft) are more indicative of a Federal Reserve about to ease policy rather than tighten policy. So what happens if they do raise rates in December, perhaps followed up with another rise in March?

We believe that this would risk a policy error. We think that the Fed have been right to worry about the global economy slowing and the strength of the US Dollar. If the Fed are going to raise rates, especially at a time when most other major central banks are looking to ease policy, then the Dollar probably strengthens further. Assuming this is the case, then we believe that Emerging Markets will struggle further, and the whole cocktail could be enough to push a sluggish and slowing US economy into recession next year. This is clearly not consensus, and is still a lowish probability. However, we believe that recession risks do increase quite a bit if the Fed raises rates two or three times by next Spring/Summer.

As for a December rate rise, despite the market moving quickly to price in a December hike, we would still point out that they claim to be data dependent, and there are clearly divisions on the committee. We do not believe a hike is inevitable given data that is indicative of a slow/slowing economy.

In terms of our current market views, we remain neutral on equities overall (having bought European equities post ECB), we are long the Dollar and we also believe that bonds and interest rates markets are offering some value here, despite a tough week last week. Clearly, the last five weeks have been “risk on”, however developed equities have outperformed EM equities and US equities have been strong relative to many developed markets. As well as EM underperforming, credit spreads remain relatively wide and advance/decline data has been much more pedestrian than headline indices. This all signals that the rally is not on the most solid of foundations, and we need economic growth to accelerate again to support risky assets across the board.

Without an acceleration in growth (likely in our view), the risk on rally is at risk of petering out quite quickly. At best, gains are likely to be harder to come by in the weeks ahead. Although we had to become more constructive post ECB, we are on the lookout for market signals to get more bearish of risk assets in the near future. We have to say that a U.S. recession next year would be a disaster for risk assets, and Fed rate hikes increase recession odds.

Stewart Richardson
Chief Investment Officer

– See more at: https://www.marketviews.com/the-fed-may-raise-interest-rates-out-of-desperation/#sthash.6jzZPWvG.dpuf

bloomberg: We just had the jobs report of the year, exceeding all estimates in a Bloomberg survey of economists. The blockbuster edition of U.S. nonfarm payrolls left some on Wall Street feeling even more confident that the Federal Reserve’s tightening phase would start in December, and sent others scrambling to bring forward their calls for liftoff.

Here’s a wrapup of who is and isn’t changing their call on Friday.

Barclays economists Michael Gapen and Rob Martin move their call to December from March:

The October payroll report was very solid and exhibited broad-based strength. It suggests that labor markets have fully rebounded after slowing in August and September. When we moved our rate hike assumption to March 2016, we assumed that the volatility in financial markets would be longer lasting and the Fed would have trouble resolving their differences about the viability of rate hikes before year-end. The October FOMC statement and Chair Yellen’s testimony to Congress were more hawkish than expected, suggesting the committee saw downside risks from global developments as having diminished and activity pointing to a “live possibility” of a rate hike in December.

BNP Paribas’s U.S. economics team shifts to December from March:

The upside surprise in nonfarm payrolls gave a clear signal that the disappointing August-September employment gains were likely just a blip. We think this significantly increases the odds of a December rate hike and have shifted our expectations for the timing of liftoff to December (previously March).

TD Securities Head of Global Macro Strategy David Tulk and Deputy Chief U.S. Macro Strategist Millan Mulraine also moved their call from March to December:

On the whole, this is a very impressive report and it checks all the boxes that the Fed will need to feel comfortable about raising rates in December. In conjunction with fading [emerging-market] growth fears and a sufficient amount of momentum in the domestic economy reflected in this report and other data, there is a higher likelihood that underlying inflation will return to the 2 percent objective over the medium term. As a result, we have pulled forward our call for the first hike to the December meeting.

UBS Deputy Chief U.S. Economist Drew Matus reiterates that it’s time to cancel any Dec. 16 vacation plans, as he sticks with his call:

Although there is still some time (and much data) to go before the December meeting, this report raises the odds of a move by the Fed at that FOMC meeting, in line with our outlook. Wages are accelerating, unemployment is falling and, in all likelihood, headline inflation should pop higher as base effects push the overall rate of inflation higher.

Goldman Sachs is also sticking with December:

The October employment report was solidly better than expected, and we now see a rate increase from the FOMC at the December meeting as very likely.

RBC Capital Markets Senior U.S. Economist Jacob Oubina has increased confidence that liftoff is coming in December:

The bottom line for me is that in an environment where the Fed is now promoting slower job growth as the cyclical norm (i.e., NFPs in the low 100,000 zone are “good enough”), prints in the mid-200,000 vicinity help them to pitch a December rate hike (our base case) even more convincingly. After this stellar payroll report December seems as close to a lock as you are going to get. In addition to that, the uptick in y/y average hourly earnings is really going to diminish the doves’ argument that slack remains in the labor backdrop.

Société Générale Chief U.S. Economist Aneta Markowska and Senior U.S. Economist Brian Jones think liftoff in December is a done deal:

Prior to today’s employment report, we viewed the probability of a December liftoff as essentially a coin toss. Following an even-stronger report than our above-consensus forecasts, the probability has moved substantially higher and we now peg it at 70 percent. The 271,000 gain in payrolls in October has entirely reversed the recent soft patch, erasing any concerns about an underlying slowdown in the pace of hiring. More importantly, the acceleration in wage growth to a new cyclical high suggests that the Phillips curve is beginning to reassert itself after being dormant for a number of years.

Mizuho economist Steven Ricchiuto, however, is sticking to his call for a hike in the second quarter of next year:

Risks of waiting for the first rate hike are much smaller than the risks of moving too soon.

Deutsche Bank Chief U.S. Economist Joe LaVorgna also maintains that we won’t see a rate rise until March:

It’s a really strong jobs report, but I’ve learned over the years that reacting to the number isn’t prudent and what matters is the totality of data. To me there is a lot of time left and I’m not convinced the next batch of data will be good enough or that the financial markets will make the Fed confident enough to move next month. … If the meeting was tomorrow, I’d say they were going, but since it’s in December, I don’t want to say they are for sure going this year.

Macquarie North America Analyst David Doyle says his call for a December hike has been bolstered:

The report strongly supports the case for December liftoff, which has been our base case since August… The most expansive measure of labour slack fell to a new cycle low of 9.8% (prev. 10.0%). This continues to recede at more than twice the pace of the headline measure of unemployment, having now fallen 1.7 percentage points in the last 12 months. If its current trend continues, it is likely to reach 9.6% by December, the same level it was when the Fed first hiked in June 2004.

Bank of Montreal Chief Economist Douglas Porter is also more convinced that a Yuletide hike is in the cards:

Thankfully, today’s rock-solid U.S. jobs report has all but sealed the deal, especially in the wake of October’s strong financial market bounceback and recent not-bad economic outcomes in the global economy (i.e., China). The employment report was as close to a no-doubter as they come, replete with an impressive headline reading (+271,000), net upward revisions to prior months, a dip in the jobless rate (to 5.0%), solid earnings (+0.4%, and 2.5% y/y, the best in six years), and solid hours worked (+0.3%). Any questions?…We are now more comfortable than ever calling for a Fed rate hike in December, with a follow-up move not much further down the line. Above and beyond the strong jobs data, U.S. spending and housing remain robust, and financial markets are healthy, leaving low inflation as the only possible justification for holding steady.

Citigroup Economist Peter Dantonio said their economists are continuing to forecast that liftoff will occur in March:

October employment gains of 271 thousand and an apparent pick up in wage growth—what a great employment report. It would take a “bunker-buster” offset to deter the FOMC from raising rates in December, in our view. This sounds like September all over again. And all it took then was the markets to react badly to events in China (so said Chair Yellen). Were they not apparently so fickle, we would change our Fed call right now to a December hike. But the recent actions of the FOMC imply it is possible sentiment may switch even from current lofty levels of near-certainty about December.

Scotiabank Chief Economist Derek Holt said the report has paved the way for raising rates in December, in line with his projection:

The three month nonfarm payroll average is 181k (+12k were added on net to Sept. and Aug. via revisions), not the highest number seen in recent years, but easily strong enough to meet the Fed’s criteria for an improving labor market and thus raising the Fed Funds rate in December. Coupled with already observed readings on inflation and GDP, and barring a major revision to domestic economic data to the downside or a major international economic crisis materializing in the next month, today’s nonfarm number means that the odds have to favor a Fed hike in December.

Meanwhile, market-based probability of the first hike coming in December has moved sharply higher in the past week, with much of the rise coming after the meeting.

Emerging market resilience

Tatiana Didier, Constantino Hevia, Sergio Schmukler 09 August 2011

According to popular perception, emerging economies fared substantially better than advanced countries during the Great Recession. For example, studies show that advanced countries attained lower rates of GDP growth during the crisis even after taking account of the usual controls (e.g. Frankel and Saravelos 2010; Rose and Spiegel 2010).

However when we look at collapses in GDP growth, the evidence suggests that, on impact, the crisis hit emerging and advanced countries equally hard. This approach has been taken by several influential studies (Blanchard et al. 2010; Claessens et al. 2010; Lane and Milesi-Ferretti 2010),

In a recent paper (Didier et al. 2011), we argue that emerging countries suffered declines in real GDP growth comparable to, or even larger than, those in advanced countries. Moreover countries rebounded in the aftermath mostly according to how deep their collapse had been. In particular, we identify a non-linearity between the collapse in GDP growth and GDP per capita. The largest growth collapses tended to occur in the wealthier emerging countries and poorer high-income economies.

In an important sense, this is good news. Unlike earlier crises, where emerging nations often fared much worse than developed nations, this time the shock had similar effects. Moreover, emerging nations were able to use a larger set of policy tools. There is, of course, heterogeneity among emerging nations. Eastern Europe and Central Asia fared the worst. In the case of low-income countries, their relatively lower degree of trade and financial openness helped shelter them from the worst declines in output growth.

GDP growth performances compared

The length of the recession and the post-crisis performance is one area where emerging economies did fare better, partly because of structural reasons and partly because their policies worked in their favour this time around.

Based on relatively high-frequency industrial production data, Figure 1 shows that the number of months that emerging economies were under recessionary pressures was smaller than that of advanced countries. For example, by September 2009, emerging countries, as a group, achieved their pre-crisis levels of industrial production, while advanced countries were still well below their pre-crisis level, even by the end of 2010. Moreover, while advanced countries were able to return to their pre-crisis growth rates by January 2010, emerging economies enjoyed by then even higher growth rates than before the crisis, allowing them to return faster to their trend output level. For example, while industrial production in advanced economies was over 16 percentage points below trend in November 2010, it was only 7 percentage points below trend in emerging economies at that time.

Figure 1. Industrial production

Notes: This figure shows industrial production (IP) during the 2008-2009 crisis across income levels. Panel A, B, and C show the IP level, indexed to 100 in April 2008, and the IP level pre-crisis trend for the three income levels. The pre-crisis trend for each income level is constructed by calculating the pre-crisis compounded annual growth rate between January 2005 and April 2008, and extrapolating it until the end of the sample. Panel D shows the evolution of year-on-year (YOY) IP growth relative to the pre-crisis average YOY IP growth. Pre-crisis average YOY IP growth is calculated across the January 2005-April 2008 period. IP data come from the World Bank’s Global Economic Monitor. Income level averages are weighted by 2007 nominal GDP in U.S. dollars from the World Economic Outlook (October 2010). Advanced economies are economies classified as “High Income” under the World Bank July 2010 classification (both OECD and non-OECD). Economies are classified as emerging if they have access to IBRD financing, and as low income if they only have access to IDA financing.

Four factors seem to be behind the differentiated post-crisis behaviour of emerging-market countries, relative to their past and to advanced economies.

  • The first and most obvious one is that the root of the problem was in the financial markets of advanced countries and that developing countries had a low exposure to these markets relative to other developed countries. At the same time, the financial collapse hit highly leveraged consumers in some developed countries, while consumption was posed to continue growing at a high rate in emerging countries.
  • The second reason is that one of the main crisis transmission channels seems to have been international trade. As the US economy came to a standstill in the fourth quarter of 2008, firms stopped their international orders anticipating an accumulation of inventories (due to the orders already being processed and shipped). This generated an immediate collapse in production in several emerging economies focused on supplying manufactures to the world economy. As inventories started to decrease and it became more likely that global demand would stabilise and the crisis would not be transmitted in full to emerging economies, firms reignited the production process and overall economic activity in emerging markets picked up. Thus emerging economies were able to generate a faster recovery than developed countries (for which manufacturing accounts for a smaller share of total activity).
  • The third reason is that, to the extent that emerging economies grow at a higher pace in their path to become richer nations, a recovery of their growth trajectory would make their output converge sooner to the pre-crisis level.
  • The fourth reason for the better post-crisis performance of emerging economies, at least relative to their previous history, is a fundamental change in the way these countries have conducted their policies in the recent past. In effect, the behaviour of emerging countries during the global crisis might come as a surprise given previous experiences during turmoil periods, when foreign shocks tended to end up as full-blown domestic crises. But a change in the policy stance seems to have taken place in the late 2000s (Gourinchas and Obstfeld 2011; Kose and Prasad 2011). More countercyclical policies were pursued before and during the global crisis. Furthermore, as opposed to previous crises, the resilience of countries to the 2008-09 crisis might be partly attributed to a combination of sounder macroeconomic and financial policy frameworks and a shift towards safer domestic and international financial stances. The global crisis found many emerging countries with more fiscal space, better balance sheets, and the required credibility to conduct expansionary fiscal and monetary policies.

In sum, given the scale of the global crisis, it was difficult for emerging countries to decouple from the world economy at the same time that they were part of the global production system, used foreign funds to finance investments, and held assets abroad. Any significant collapse of global demand and in the financial centres was likely to get transmitted to all countries linked to them. Emerging economies fell in this category.

The continuing integration to global trade and global financial markets poses trade-offs to developing countries. While integration tends to be associated with higher growth and other positive traits, it also makes countries vulnerable to foreign shocks and contagion effects. Given these risks, emerging countries would probably try to keep improving their external positions, saving more, accumulating reserves, expanding their fiscal space, reducing credit mismatches, building buffers in the financial system, and gaining confidence and credibility in their monetary and financial policies, among other things. These policies seemed to have been helpful during the global downturn and the incentives for emerging countries to stay in the same path only became more obvious. Unfortunately, some of these policies entail pecuniary and opportunity costs, like the costs of hoarding reserves, those related to developing local currency and long-term debt markets, and those implied by a slowdown in the growth rate of credit and consumption. Moreover, the actions by some countries have some negative spillover effects on other countries. For example, by limiting foreign capital inflows some countries might push capital to neighboring countries, exerting more pressure on their currencies. In a world where goods and capital continue to flow increasingly across nations, future research might help us understand the general equilibrium effects of the policies adopted to deal with globalisation.


Blanchard, O, H Faruqee, and M Das (2010), “The Initial Impact of the Crisis on Emerging Market Countries”, Brookings Papers on Economic Activity,Spring:263-307.

Claessens, S, G Dell’Ariccia, D Igan, and L Laeven (2010), “Cross‐Country Experiences and Policy Implications from the Global Financial Crisis”, Economic Policy,62:267-293.

Didier, T, C Hevia, and S Schmukler (2011), “How Resilient Were Emerging Economies to the Global Economic Crisis?”, World Bank Policy Research Working Paper 5637.

Frankel, J, and G Saravelos (2010), “Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008–09 Global Crisis”, NBER Working Paper 16047, June.

Gourinchas, PO, and M Obstfeld (2011), “Stories of the Twentieth Century for the Twenty-First”, American Economic Association Annual Meeting, Denver, CO.

Kose, A, and E Prasad (2010), Emerging Markets: Resilience and Growth amid Global Turmoil,Washington, DC: Brookings.

Lane, P, and GM Milesi-Ferretti (2010), “The Cross-Country Incidence of the Global Crisis”, IMF Working Paper 10/171, July.

Rose, A and M Spiegel (2010), “Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure”, Pacific Economic Review, 15(3):340-363.

The Most Surprising Thing About Today’s Jobs Report

After several months of weak and deteriorating payrolls prints, perhaps the biggest tell today’s job number would surprise massively to the upside came yesterday from Goldman, which as we noted earlier, just yesterday hiked its forecast from 175K to 190K. And while as Brown Brothers said after the reported that it is “difficult to find the cloud in the silver lining” one clear cloud emerges when looking just a little deeper below the surface.

That cloud emerges when looking at the age breakdown of the October job gains as released by the BLS’ Household Survey. What it shows is that while total jobs soared, that was certainly not the case in the most important for wage growth purposes age group, those aged 25-54.

As the chart below shows, in October the age group that accounted for virtually all total job gains was workers aged 55 and over. They added some 378K jobs in the past month, representing virtually the entire increase in payrolls. And more troubling: workers aged 25-54 actually declined by 35,000, with males in this age group tumbling by 119,000!


Little wonder then why there is no wage growth as employers continue hiring mostly those toward the twilight of their careers: the workers who have little leverage to demand wage hikes now and in the future, something employers are well aware of.

The next chart shows the break down the cumulative job gains since December 2007 and while workers aged 55 and older have gained over 7.5 million jobs in the past 8 years, workers aged 55 and under, have lost a cumulative total of 4.6 million jobs.


The same chart as above showing the full breakdown by age group – once again the 25-54 age group sticks out.


But young workers’ loss is old workers’ gain, as the following chart of total jobs held by those aged 55 and over shows. As of October, there was a record 33.8 million workers in the oldest age group tracked by the BLS – the same workers who, as noted above, also have the poorest wage negotiating leverage.


Finally, the most disappointing data point in today’s report is that while overall labor growth was solid, the participation rate for workers 25-54, was 80.7%, far below is peak of just under 85%, and below the 80.8% at the end of 2014.


Time for a rate hike?

JULY 17, 2015

The Effect of the Strong Dollar on U.S. Growth

Correction: This post was updated on July 17 to replace the term “export volumes” with “real export values.” Although the terms are often used interchangeably, the term “real export values” is deemed more precise. We have updated the post accordingly.

The recent strengthening of the U.S. dollar has raised concerns about its impact on U.S. GDP growth. The U.S. dollar has appreciated around 12 percent since mid-2014, rising against almost all of our trading partners, with the largest gains against Japan, Mexico, Canada, and the euro area. There was far less movement against newly industrial Asian economies and hardly any change against China. In this blog, we ask how the strength of the dollar affects U.S. GDP growth. Although the dollar can impact the U.S. growth through a number of different channels, we focus on the direct impact through the U.S. trade balance. Our analysis shows that a 10 percent appreciation in one quarter shaves 0.5 percentage point off GDP growth over one year and an additional 0.2 percentage point in the following year if the strength of the dollar persists.

Exchange Rates (Foreign/US Dollars)

Exchange rate movements affect the trade balance by changing the prices of domestically produced goods relative to goods produced abroad, an outcome that in turn affects relative demand. A stronger dollar makes U.S. imports relatively cheaper than domestically produced goods, which pushes consumers to substitute towards imported goods and provides firms with relatively cheaper inputs from abroad. Though both consumers and importing firms benefit from lower import prices, the data show that the extent of the benefit is limited because exchange rate movements are not fully passed through into prices seen by U.S. buyers. We estimate that a 10 percent rise in the dollar results in a 3.8 percent decline in nonoil import prices. Instead of adjusting prices charged to U.S. consumers by the full exchange rate change, firms exporting to the United States adjust their profit margins. Because import prices do not adjust by the full extent of the appreciation, the increase in demand for import quantities in response to the appreciation is moderated. The New York Fed trade model suggests a 10 percent appreciation of the U.S. dollar in one quarter (which then persists) results in 0.9 percent increase in real import values, as shown in the table below.

On the export side, a stronger dollar makes the price of U.S. exports more expensive when converted into foreign currency terms, reducing U.S. export growth. In order to try to maintain competitiveness, U.S. firms adjust their markups rather than pass on the full exchange rate appreciation into foreign prices. That is, U.S. exporters take a hit on their profit margins in order to maintain market shares. The New York Fed trade model suggests that a 10 percent appreciation of the U.S. dollar is associated with a 2.6 percent drop in real export values over the year. Consequently, the net export contribution to GDP growth over the year is 0.5 percentage point lower than it would have been without the appreciation and a cumulative 0.7 percentage point lower after two years.

The Effect of a Ten-Percent Dollar Appreciation

There are many factors that determine how big of an impact exchange rate movements have on local prices, and hence on real import and exports values. Some studies have shown that firms tend to set different prices in different markets for the same goods. Their prices depend on the demand conditions in each market, the exporting firm’s market power, and its import intensity. An additional, related, factor contributing to low exchange rate pass-through is what is referred to as “local currency pricing,” where firms choose to invoice their exports in foreign currency, making their prices “sticky” in that currency. For example, if U.S. imports are priced in dollars, then a dollar appreciation would not change the import price at all in U.S. dollars for existing orders and would mechanically translate into higher markups of firms exporting to the U.S. market. Although the prices for new orders can change, there is evidence of some rigidity in price setting.

What is special about the U.S. case is that its export prices (and import prices) are mostly denominated in U.S. dollars whereas other countries tend to set prices in the currency of the destination market. This pattern of invoicing combined with price stickiness can help explain the much bigger impact on exports than imports shown in the table. This is consistent withprevious literature that has found that pass-through into U.S. import prices is much lower than pass-through into U.S. export prices in local currency terms.

The New York Fed trade model does not include other channels through which the exchange rate can also affect U.S. growth. For example, the decline in U.S. exporters’ profitability could reduce their domestic investment spending on plant and equipment. On the upside, lower prices of imported inputs reduce firms’ marginal costs, which increase firms’ profitability. Moreover, lower import prices increase consumers’ disposable income, boosting consumption of both imports and domestically produced goods and services. Such indirect effects are potentially important, but they are a lot more difficult to quantify.

JAKARTA okezone – Perdagangan bursa saham Amerika Serikat (AS) pada penutupan minggu ini sedikit menguat. Hal tersebut disebabkan asumsi pasar bahwa The Fed akan menaikan suku bunga.

Pasalnya laporan angka pekerjaan di AS menunjukan semakin membaik. Sementara tingkat pengangguran di AS juga turun menjadi 5 persen. Alhasil tidak The Fed akan semakin yakin untuk menaikan suku bungamnya. Demikian dilansir dari Reuters (7/11/2015).

Tiga indeks utama membukukan kinerja mingguan lebih tinggi untuk minggu keenam berturut-turut, setelah membukukan hasil bulanan terbaik mereka dalam empat tahun pada bulan Oktober.

“keseluruhan pasar pada hari jumat itu bertahan dengan baik,” ujar pejabat investasi co-chief di Oakbrook Investasi di Lisle, Illinois, Peter Jankovskis.

“Sementara suku bunga yang lebih tinggi sendiri bukan hal yang baik, mosi percaya dalam kekuatan ekonomi saya pikir akan membayangi bahwa dari waktu ke waktu,” kata Jankovskis.

Pada penutupan perdagangan mingguan pada Jumat waktu setempat, ketiga indeks utama Wall Street berhasil menguat. Indeks Dow Jones Industrial Average naik 46,9 poin atau 0,26 persen ke 17.910,33, S&P 500 turun 0,73 poin atau 0,03 persen ke 2.099,2 dan NAsdaq Composite naik 19,38 poin atau 0,38 persen 5.147,12.

Beberapa saham emiten juga terlihat bergerak terbatas, saham Alibaba (BABA.N) tercatat turun 2,1 persen menjadi USD83,61. sementara Saham Disney (DIS.N) naik 2,4 persen menjadi USD115,67 setelah, laporan laba yang meningkat yang dikerluarkan kinerja.


3 Ways a Strong Dollar Impacts the Global Economy

November 27, 2014
In recent months, the rising dollar has become a key theme in financial markets. Currency movements have always been complicated both in their causes and consequences. However, there are relatively straightforward explanations for the dollar surge in 2014. Moreover, while a higher dollar presents challenges for both investors and U.S. corporations, at this time it appears to be a positive force in the global economy and, in the long run, for global investors.The dollar’s rise, while not extraordinary, is certainly significant. As this is being written, on a year-to-date basis, the dollar is up 8.8% versus the euro, 3.2% against the British pound and 2.4% against the Yen, with almost all of the gains coming since May. A number of factors have likely contributed to the dollar’s ascent.• First, compared to other major economies, the U.S. is currently displaying the best momentum relative to its trend growth pace. Following a 4.6% real GDP surge in the second quarter, the U.S. appears to have grown by a healthy 3% in the third. This is in contrast to the eurozone, China and Japan which, while not in recession, have shown signs of relative stagnation over the summer. Traditionally, fast-growing economies have rising currencies due to capital inflows.• Second, the Federal Reserve looks set to increase interest rates in 2015, unlike either the European Central Bank or the Bank of Japan. All other things being equal, investors like to hold their assets in whatever currency pays the highest short-term rates. While short-term rates are close to zero across the developed world today, expected rate hikes from the Federal Reserve should change this over the course of 2015. If investors expect the dollar to be in favor then because of higher rates, it makes sense to buy dollars today to take advantage of the expected appreciation.• Third, the shale energy revolution is having a major impact in reducing the U.S. trade deficit. To put this in perspective, in 2005, the U.S. consumed 20.8 million barrels of petroleum products a day, of which 12.5 million or 60% had to be imported. In 2013, we consumed 19.0 million barrels, of which 6.6 million or 35% were imported. By 2015, according to Energy Department estimates, we will consume 19.1 million barrels, of which just 4.1 million barrels or 21% will be imported. In other words, while the long-term trend is startling, even the increase in domestic production between 2013 and 2015 could save 2.5 million barrels per day which, at $90 a barrel, would cut roughly $80 billion from a $480 billion trade deficit—this is a clear positive for the U.S. dollar.It is very important to note that all of these factors should, by now, be imbedded in exchange rates. In theory, U.S. dollar movement from here depends not on these trends but rather on any further surprises in growth, central bank policy or trade numbers. We may well get such a surprise from more aggressive Fed tightening than the market expects. However, it would be unwise to make too big a bet on further dollar appreciation on the tenuous assumption that the Fed turns more hawkish.Having said this, the dollar move so far has and will have some important impacts on the global economy and investment environment.The most obvious effect, so far, is a negative impact on international investment returns. For example, on a year-to-date basis, by the end of September, while the MSCI EAFE index of developed country international stocks was up 4.5% in local currency terms, it was down 1% measured in U.S. dollars.A second problem is the impact of a rising dollar on the earnings of U.S. companies with large foreign operations. In 2012, of the S&P 500 companies that provided details on foreign sales, almost 47% of total sales came from abroad. While this probably overstates the importance of foreign sales for the S&P 500 overall, clearly a higher dollar, which cuts the dollar value of international revenues, is a drag on earnings. On average in the third quarter, the major currency U.S. dollar index was up just 1.8% year-over-year, so the impact of a higher dollar on third-quarter earnings should not be too significant. However, even if the dollar were flat for the rest of the current quarter, the dollar index would still be up 6.7% year-over-year for the fourth, suggesting a more significant drag on profits. Nevertheless, even with this, solid GDP growth combined with only slowly rising interest rates and wage growth should deliver mid-single-digit profit gains for the rest of this year and next.

On the positive side, a rising dollar is cutting import prices in general, which should help hold inflation in check. In addition, as is often the case, oil prices seem to be reacting more than would seem logical to the dollar movement. Over the past year, while the dollar index has risen by 7.2%, WTI crude oil prices have fallen by 16.8%. By feeding through to lower gasoline prices, this boosts the real disposable income of the average American household, a long-overdue bonus in what has been a very unequal economic recovery. In addition, while markets fear the advent of Fed rate hikes in 2015, the reduced inflation pressure from a rising dollar may allow the Fed to start later and raise rates more slowly than would have otherwise been the case.

Most importantly, however, a higher dollar effectively transfers demand from the U.S. economy to economies around the world. At this stage of the global business cycle, this is a welcome development. The U.S. unemployment rate is now below its 50-year average and falling fast, highlighting the limited remaining capacity for the U.S. economy to absorb extra demand without generating inflation. By contrast, other economies such as Japan, emerging Asia and Europe could do with a boost to their exports, which should be the result of a higher dollar. In the long run this should lead to a healthier, more balanced global economy.

Investment decisions should always be made with an eye to the future and it is, as always, very difficult to forecast the direction of the dollar from here. However, the rise in the dollar so far in 2014 will have impacts well into 2015, and those impacts should be generally positive for the global economy and risk assets in both the U.S. and around the world.

More insight on how to guide clients in today’s environment at jpmorganfunds.com

Emerging Markets ‘Resilience Indicator’ Reveals Which Countries Are Prepared For Financial Crisis

Argentina, Brazil and Chile are setting themselves up for disaster. So says an economist who has devised a way to gauge an emerging country’s ability to survive a global financial crisis.

“Conditions in the period before the eruption of an adverse external shock are central in determining the resilience of an emerging market economy to the shock,” writes Liliana Rojas-Suarez, a researcher at the Center for Global Development, in a recent paper on the subject. “In 2007, an analyst studying a few variables in emerging markets would have been able to predict, with high accuracy, the relative economic and financial resilience of these countries to the global financial crisis.”

Rojas-Suarez ranks 21 countries on a “resilience indicator,” according to how each one is likely to fare in the event of a worldwide economic downturn.

In her most recent ranking, India and Malaysia have moved downward, but Argentina holds the lowest rank. The country has lost access to international capital markets, due to its debt dispute with the United States, and it continues to be fraught with domestic problems. It doesn’t help that it’s also part of a region that doesn’t fare well.

“The ranking does not deliver good news for Latin America,” Rojas-Suarez wrote, noting that four of the six Latin American countries have fallen in the overall ranking, due to “some bad luck in unfavorable terms of trade, but also the squandering of opportunity to implement needed reforms in the good post-crisis years are the main reasons behind this outcome.”

On Rojas-Suarez’s diagram, countries whose rankings are marked in green are those that have improved their status since the last crisis, while red countries have gone down by two or more positions. Looking at indicators such as inflation, government debt and current account balance, Rojas-Suarez noticed that a few patterns emerged. Some countries are better prepared than others.

Resilience indicatorEconomists at the Center for Global Development have created a “resilience indicator” to show which countries are best prepared for a financial crisis.  Center for Global Development


According to the data, emerging Europe is the most improved region, mainly because “the region displayed huge economic imbalances in the pre-crisis period that are now being corrected.”

Though the indications sound dire, the author warns that the study is not about predicting a crisis, but helping countries better prepare themselves.

“My goal in this paper has been to emphasize that the lessons from the global financial crisis should not be forgotten,” she wrote. “Time is still on the side of emerging markets.”

cnbc: Economics is known as an imprecise science and one might need look no further than the business of calling recessions to see that.

Unlike the weather, recessions arrive before you know it and depart under the same circumstances.

The National Bureau of Economic Research, or NBER, is considered the official arbiter of recessions, but it doesn’t define a recessions by the school book measure of two or more consecutive quarters of economic contraction as measured by GDP. It states that “a recession is a significant decline in economic activity spread across the economy, lasting more than a few months.

The last recession ran from March 2001 through November 2001, according to the NBER. (See chart)

When 9/11 hit, many economists feared the event would throw the U.S. economy into recession. In fact, it already was. Then Fed Chairman Alan Greenspan’s enormous efforts to stoke the economy — including interest rate cuts — were later determined to have made the recession shallower and shorter. History later showed that the recession officially ended in December of 2001.

Indeed, until the last 25 years, recessions were a common economic event, often occurring every few years. Three of the last four recessions have been unusually short by historical stands, averaging seven months. The other (1981-1982) lasted 16 months and was the longest since WWII. Two of them were caused by so-called “oil shocks”.

“I think the economy itself has changed,” says Richard Sylla, a professor at New York University’s Stern School of Business, who specializes in economic and financial history.” We’re much more of a service economy. It used to be easier to forecast when we were more manufacturing based.”

If at this point you are doubting the credentials of the NBER, it is worth noting that 16 of the 31 American Nobel Prize winners in economics and half a dozen former heads of the Council of Economic Advisers have been researchers at the NBER. The later category includes none other than Fed Chairman Ben Bernanke, who chaired the CEA in 2005-2006 and was one director of the monetary economics program at the NBER.

Recessions of the 20th Century

Sept. 1902-Aug. 1904 23
May 1907-June 1908 13
Jan. 1910-Jan. 1912 24
Jan. 1913-Dec. 1914 23
Aug. 1918-March 1919 7
Jan. 1920-July 1921 18
May 1923-July 1924 14
Oct. 1926-Nov. 1927 13
Aug. 1929-March 1933 43
May 1937-June 1938 13
Feb. 1945-Oct. 1945 8
Nov. 1948-Oct. 1949 11
July 1953-May 1954 10
Aug. 1957-April 1958 8
April 1960-Feb. 1961 10
Dec. 1969-Nov. 1970 11
Nov. 1973-March 1975 16
Jan. 1980-July 1980 6
July 1981-Nov. 1982 16
July 1990-March 1991 8
March 2001-Nov. 2001 8
source: NBER

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