American Economic Outlook 2018-2020: Bad news?

[Neu Leonstein]

Quick glance at the yen shows the market isn't really pricing in safe haven last resort just yet. The alternative, of course, is that this is just a minor price correction, and we're back on track next week. Because honestly, no macroeconomic indicator would suggest that we're on the cusp. I don't know, and to be honest I don't really care, but I see no reason why anyone should be 'worried' about anything.

It is what one might call a shake-out of a crowded trade (long SPX, short VIX). And while it stays in equities, there's not that much else to say about it I don't think. And if you look elsewhere, corporate credit spreads have barely moved, FX markets don't seem too fussed as you said, and VIX futures trading volumes after 4pm EST have been coming down, so it looks like the stuff-up in that market seems to be on the mend too. Only thing that seems a tad odd is the sharp increase in Deutsche CDS, but that might turn out to be nothing.

[Hayo]

The DJIA is down over 10% since its peak. How much more do you guys think it will slide?

[Great Minarchistan]

The DJIA is down over 10% since its peak. How much more do you guys think it will slide?

Depends on how treasuries behave. They are around the tipping point where it's unsure as if it's more worthy to go to stocks or T-Bonds. If it jumps to 3% or more then we can talk about a yuge slide.

[Major-Tom]

The DJIA is down over 10% since its peak. How much more do you guys think it will slide?

Depends on how treasuries behave. They are around the tipping point where it's unsure as if it's more worthy to go to stocks or T-Bonds. If it jumps to 3% or more then we can talk about a yuge slide.

Pretty much summed it up.

Edit: Of course, another factor that is perhaps also somewhat significant is whether or not investors continue to see economic expansion, if so, we may be in for a few more weeks of falling which would really just be a slight market correction in the grand scheme of things.

[Neu Leonstein]

Depends on how treasuries behave. They are around the tipping point where it's unsure as if it's more worthy to go to stocks or T-Bonds. If it jumps to 3% or more then we can talk about a yuge slide.

It's almost a little surprising how, despite being in a relatively late stage of a business cycle, with a Fed looking like it'll accelerate hikes and the government about to go all fiscal stimulus at what you might call more or less exactly the wrong part of that cycle, there is still as much demand for USTs as there is. Equities sell off? Buy bonds! And it's the same in Europe too.

Just goes to show that you wouldn't really want to impute changed views about big picture macro questions from these sorts of daily moves in bonds.

[Great Minarchistan]

Depends on how treasuries behave. They are around the tipping point where it's unsure as if it's more worthy to go to stocks or T-Bonds. If it jumps to 3% or more then we can talk about a yuge slide.

It's almost a little surprising how, despite being in a relatively late stage of a business cycle, with a Fed looking like it'll accelerate hikes and the government about to go all fiscal stimulus at what you might call more or less exactly the wrong part of that cycle, there is still as much demand for USTs as there is. Equities sell off? Buy bonds! And it's the same in Europe too.

Just goes to show that you wouldn't really want to impute changed views about big picture macro questions from these sorts of daily moves in bonds.

It's sorta behind why treasuries fell around 10bps on the first crash although apparently the bond market built some resistance to the pullback on Thursday. If it ever gets consolidated and with added push through higher wage growth or Fed hikes in March then we will get the stock market likely stagnant or going through a painful correction.

[Great Minarchistan]

Aaaaaand that's it fellas. Stocks tumbled twice + no good recovery, add that up with a TED spread spiking at 56bps and a LIBOR-OIS spread widening up to its largest since the last financial crisis and we can be finally foreseeing a market crash. Plus the macroeconomic outlook that doesn't look as rosy as it was (or how it was supposed to be) and recession can be showing up on the start of the next year already.
P.S.: If the market does crash over the next six months or so, QE may finally leak into the economy which will raise inflation later on.

[Trumptonium]

we can be finally foreseeing a market crash

not really

[Great Minarchistan]

we can be finally foreseeing a market crash

not really

Hmmmm?

[Trumptonium]

not really

Hmmmm?

Well first of all, the macroeconomic outlook is just about how it was forecasted to be. ADP Employment was +235k against a forecast of +195k last month. The market is still sinking in March news of 313k nonfarms versus 200k forecast. Inflation is still stubbornly low. Bankruptcies are at their lowest level since 2009 (they started rising Q4 2006, preceding the crisis), and the US is still below its 10-year peak capacity in 2015. Optimism is still generally high by all three survey measurements, and all growth-related forecasts turned out to be just about real.

The drop in the stock market can be fully associated with base rate rises and future expectations of more frequent rises in 2019. There's loads of space for a market correction away from current stock prices without dragging back growth. That is overdue anyway, not necessarily a recession. Plus now with these sorts of rates, savings may finally kick in as they become more attractive. That will pull back debt.

[Neu Leonstein]

...add that up with a TED spread spiking at 56bps and a LIBOR-OIS spread widening up to its largest since the last financial crisis ...

That one's interesting for the money market nerds, but it's got nothing to do with any crises.

[Great Minarchistan]

...add that up with a TED spread spiking at 56bps and a LIBOR-OIS spread widening up to its largest since the last financial crisis ...

That one's interesting for the money market nerds, but it's got nothing to do with any crises.

Those were for the stock market overview, which I separated from macroeconomic outlook on my post.

[Great Minarchistan]

I hate to be this sort of guy that posts small changes on economic indicators on the space of a week or two, but this is actually important. TED spread increased further into 64bps and it's almost on its highest point since GFC (gotta need a lil bit to break the record settled in 2016). While not rising as steeply as in 2007 -- likely due to the liquidity mattress offered by QE -- it has escalated definitely faster than in 2016. Given the worse credit environment than two years ago, this may be the actual time.

[Neu Leonstein]

I hate to be this sort of guy that posts small changes on economic indicators on the space of a week or two, but this is actually important. TED spread increased further into 64bps and it's almost on its highest point since GFC (gotta need a lil bit to break the record settled in 2016). While not rising as steeply as in 2007 -- likely due to the liquidity mattress offered by QE -- it has escalated definitely faster than in 2016. Given the worse credit environment than two years ago, this may be the actual time.

The actual time for what?

What is going on is that the Treasury is flooding the market with T-bills. I can't show it in charts because inexplicably FRED doesn't have a 3-month OIS series, but what you'd see is the bills looking unusually cheap relative to OIS as a result.

But if the same (or maybe less, depending on your beliefs about the mechanics of post-tax cut repatriation) money is now going into T-bills, then it's not going into unsecured lending of the Libor variety. That's the biggest single thing driving the increase in Libor-OIS and Libor-T-bills, i.e. the TED spread.

[Great Minarchistan]

Dollar has been appreciating heavily across the world (national currencies of many developing countries have fell by >10%, and even EUR and CNY are melting), while 10Y US treasury has remained by 3%. Likely causes are QE unwinding and Trump deficits that by the end of the year will be sucking more than a trillion extra dollars yearly -- no biggie, huh. Hindsight is that although the American economy may hold on for some time, USD strengthening is probably going to drag down the rest of the world, especially the developing one, as many of them are beginning tightening cycles all over again while burning forex reserves (or just an intensified shot of one of those).

[Mike the Progressive]

I think we'll be fine.

[Great Minarchistan]

I think we'll be fine.

Not really, given that loan growth has stagnated and M2 is flattening. To be fair I'm quite surprised that US growth is still floating despite so weak indicators and proxies, could be the tech sector warding off a recession but this is a really sketchy guess.

[Painisia]

Well, we are currently not expecting a dollar crisis

[Mike the Progressive]

I think we'll be fine.

Not really, given that loan growth has stagnated and M2 is flattening. To be fair I'm quite surprised that US growth is still floating despite so weak indicators and proxies, could be the tech sector warding off a recession but this is a really sketchy guess.

It's a gut feeling. But you're correct. Tech has been pulling everything forward the last couple of years at least. But we'll see. The problem is economists tend to tell us one thing and another, which makes me realize the lot forecasts the economy about as well as the weather man does weather.

As long as I'm making money playing the markets, I'm OK. And at the end of the day, that's what really matters.

[Great Minarchistan]

Not really, given that loan growth has stagnated and M2 is flattening. To be fair I'm quite surprised that US growth is still floating despite so weak indicators and proxies, could be the tech sector warding off a recession but this is a really sketchy guess.

It's a gut feeling. But you're correct. Tech has been pulling everything forward the last couple of years at least. But we'll see. The problem is economists tend to tell us one thing and another, which makes me realize the lot forecasts the economy about as well as the weather man does weather.

As long as I'm making money playing the markets, I'm OK. And at the end of the day, that's what really matters.

Guess you could start to reverse your bets and start to short on it

[Mike the Progressive]

It's a gut feeling. But you're correct. Tech has been pulling everything forward the last couple of years at least. But we'll see. The problem is economists tend to tell us one thing and another, which makes me realize the lot forecasts the economy about as well as the weather man does weather.

As long as I'm making money playing the markets, I'm OK. And at the end of the day, that's what really matters.

Guess you could start to reverse your bets and start to short on it

Of course been doing that anyway, especially on Tesla. Thank god Musk is such a fucking man child who seems unable to handle critiques from his own investors and burns money like I do on hookers, blow and iphones

[Trumptonium1]

The US is on track for the first 4% annual GDP growth since 2003.

The U.S. economy is likely growing faster than expected, according to an economic model from Goldman Sachs.

The firm raised its second-quarter GDP tracking model growth forecast to 4 percent from 3.9 percent on Friday, citing strong manufacturing economic data. The model incorporates the latest monthly economic releases to produce a GDP growth estimate.

"The Empire State manufacturing index unexpectedly strengthened in June, and the underlying composition similarly firmed with strength in all three key components," Goldman's chief economist, Jan Hatzius, said in a note to clients Friday. "In fact, given the firmer pace of utilities output, we boosted our Q2 GDP tracking estimate."

Hatzius noted the Empire State manufacturing index rose by 4.9 points to 25 in June versus expectations for a "moderate decline." The tracking number is different from the firm's official economic forecast.

The CNBC/Moody's Analytics Rapid GDP Update reported economists' estimates of tracking GDP show average growth of 3.8 percent after Thursday's retail sales report.

Jobless claims also surprised economists Thursday, falling 4,000 to a near 44½-year low of 218,000, signaling an economy at full employment.

https://www.cnbc.com/2018/06/15/goldman ... rowth.html
https://www.cnbc.com/2018/06/14/trumps- ... ceeds.html

I'd even go as far as to say that Powell will chip in one extra rate rise this year, or have a 50bps boost.

"So we're at 3.3 percent GDP. I see no reason why we don't go to 4 percent, 5 percent, and even 6 percent."

... well ... the first hurdle is about to be passed.

[Great Minarchistan]

The US is on track for the first 4% annual GDP growth since 2003.

The U.S. economy is likely growing faster than expected, according to an economic model from Goldman Sachs.

The firm raised its second-quarter GDP tracking model growth forecast to 4 percent from 3.9 percent on Friday, citing strong manufacturing economic data. The model incorporates the latest monthly economic releases to produce a GDP growth estimate.

"The Empire State manufacturing index unexpectedly strengthened in June, and the underlying composition similarly firmed with strength in all three key components," Goldman's chief economist, Jan Hatzius, said in a note to clients Friday. "In fact, given the firmer pace of utilities output, we boosted our Q2 GDP tracking estimate."

Hatzius noted the Empire State manufacturing index rose by 4.9 points to 25 in June versus expectations for a "moderate decline." The tracking number is different from the firm's official economic forecast.

The CNBC/Moody's Analytics Rapid GDP Update reported economists' estimates of tracking GDP show average growth of 3.8 percent after Thursday's retail sales report.

Jobless claims also surprised economists Thursday, falling 4,000 to a near 44½-year low of 218,000, signaling an economy at full employment.

https://www.cnbc.com/2018/06/15/goldman ... rowth.html
https://www.cnbc.com/2018/06/14/trumps- ... ceeds.html

I'd even go as far as to say that Powell will chip in one extra rate rise this year, or have a 50bps boost.

"So we're at 3.3 percent GDP. I see no reason why we don't go to 4 percent, 5 percent, and even 6 percent."

... well ... the first hurdle is about to be passed.

If this much of growth is to be expected then sure as hell Powell will hike 50bps. Combined with QE unwinding I can see some ultra-appreciation of the USD. Rip third world and associates

[Great Minarchistan]

Somewhat related but it's worth to remember that the ECB announced the end of their QE in December, taper off is soon happening and their NIRP policy on deposit funds might end as well by the middle of 2019.