Mish's Global Economic Trend Analysis

Draghi Warns ECB Economic Policies May Lead to Financial Instability and Worsen Income Inequality; Stupidity Index at New High
Steel Consumption in China Declines First Time in Three Decades; Painful Rebalancing
Producer Prices, Import/Export Prices Decline Again; Still Think the Fed Will Hike?
Second Quarter GDP Forecast: Blue Chip vs. GDPNow; Where Might the Fed be Wrong?

Draghi Warns ECB Economic Policies May Lead to Financial Instability and Worsen Income Inequality; Stupidity Index at New High

Posted: 14 May 2015 10:17 PM PDT

Here's a new one. ECB president Mario Draghi cautions that ECB policies may "lead to financial instability and worsen income inequality."

Place that warning in the "duh" category.

For duh details, please consider Draghi Warns Central Banks Against 'Blind' Risk-Taking.

Mario Draghi has warned central banks to beware of the risk that aggressive monetary easing, including mass bond buying, could lead to financial instability and worsen income inequality.

The European Central Bank president said the apparent success of policies such as the ECB's landmark €1.1trn quantitative easing package should not "blind" policy makers to the potential consequences of their actions on risk-taking in financial markets and in exacerbating wealth disparities.

"Because the use of these new instruments can have different consequences than conventional monetary policy, in particular with respect to the distribution of wealth and the allocation of resources, it has become more important that those consequences are identified, weighed and where necessary mitigated," Mr Draghi said at the International Monetary Fund.

Central banks around the world have faced criticism that their response to the financial crisis is stoking asset-price bubbles and increasing inequality.

In Spite of "Duh"

In spite of the blatantly obvious, and in an attempt to play down talk that the ECB could slow the pace of its €60bn per month asset purchase plan before the planned cut-off point of September 2016, Mr Draghi said: "To that effect, we will implement in full our purchase programme as announced and, in any case, until we see a sustained adjustment in the path of inflation."

Reader Mailbag

The above article is all the more amusing because Thursday morning I received this email from "PW" who said:

Hello Mish

One of my finance colleagues who is quite respected says "QE is working in Europe - as I've repeatedly said QE makes rates go up not down, despite what most in the market think"

This seems quite counter-intuitive and different to understood based on your blog.

Is QE Working?

If QE made rates go up why have rates in Japan been near zero for decades? Why did rates fall in the US?

And as for the ridiculousness of "QE is working" I responded ...

Working how?
And at whose expense?
And what about asset bubbles?
Negative bonds?
What about Spanish and French Unemployment?

To top it off, even Mario Draghi has concerns, so much so he warns banks not to take risks.

Apparently Draghi wants banks to lend without taking risks, in spite of the obvious asset bubbles and in spite of central bank sponsored income inequality.

New High in Stupidity Index

Pursuing policies that self-admittedly may "lead to financial instability and worsen income inequality" is a new high in stupidity.

Yet, I am confident this high will be broken many times.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Steel Consumption in China Declines First Time in Three Decades; Painful Rebalancing

Posted: 14 May 2015 09:04 PM PDT

Looking for signs of a global recovery that will lead export growth? If so don't look at China. Reuters reports China's Annual Steel Consumption Drops for First Time in Three Decades.

China's apparent crude steel consumption fell for the first time in three decades in 2014, data from an industry association showed, a further indication of how the country's economic slowdown is hurting industrial demand.

A decline in the use of steel in China, which is both the top consumer and producer of the alloy, will dent iron ore prices that have already been roiled by a global oversupply.

Spot rates of the steelmaking ingredient are currently mired near a 5-1/2 year low $65.60 per tonne.

China's apparent crude steel consumption fell 3.4 percent from a year ago to 738.3 million tonnes in 2014, according to calculations published by the China Iron and Steel Association (CISA) on Thursday.

Official data shows China's power output growth fell to a 16-year low last year, while coal output likely dropped for the first time in more than a decade.

China's 2014 steel output rose 0.9 percent to a record 822.7 million tonnes over the year, data showed.

"Affected by overcapacity, it is unlikely there will be any turnaround in oversupply in the steel product market or any big recovery in prices," CISA said.

Painful Rebalancing

This is all part of China's painful rebalancing process that is really just getting started. Commodity exporters like Australia and Canada are in the cross hairs.

Prices may or may not stabilize here, but they are highly unlikely to shoot higher and stay higher. China's transition from infrastructure and housing to consumer consumption will take many years. And China's GDP will slowly sink (far more than most believe possible) until the process is complete. Two percent growth, down from seven is along the lines of what I have in mind. Of course, that presumes one believes China is really growing at seven percent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Producer Prices, Import/Export Prices Decline Again; Still Think the Fed Will Hike?

Posted: 14 May 2015 09:38 AM PDT

The Fed is struggling like mad to produce inflation, with little success on some fronts. Of course the Fed ignores asset bubbles in its measures.

Import/Export Prices

The Bloomberg Consensus range for export prices was 0.1%. The range for import prices was 0.4%.

Economists were wildly off the mark on both estimates. Both prices declined. Export prices declined more than any economist's guess.

Here are some Import/Export charts from the BLS.

Import Prices M/M and Y/Y

Thanks to a strong dollar, import prices declined for ten consecutive months. Year-over-year, import prices are down nine consecutive months.

Export Prices M/M and Y/Y

Export prices are down eight of the last nine months. Year-over-year, export prices are down eight consecutive months.

Effect on GDP

Imports subtract from GDP and exports add to GDP. Import prices down and export prices up is a good thing from that perspective.

Fuel Imports

The price index for import fuel increased 0.7 percent in April, after rising 1.2 percent the previous month. The March advance was the first monthly increase in fuel prices since the index rose 1.6 percent in June 2014. In April, a 1.0-percent advance in petroleum prices more than offset a 7.0-percent drop in natural gas prices. Despite the recent increases, fuel prices declined 46.1 percent for the year ended in April. Both a 47.0-percent decrease in petroleum prices and a 45.2-percent drop in natural gas prices contributed to the overall year-over-year decline in fuel prices.

Agricultural Exports

Agricultural export prices decreased 0.8 percent in April, after falling 1.7 percent in March. The April drop was driven by a 2.4-percent decline in meat prices, a 1.7-percent decrease in soybean prices, and a 2.7-percent fall in fruit prices. The price index for agricultural exports has not recorded a monthly advance since the index ticked up 0.1 percent in November 2014. The index decreased 15.6 percent for the year ended in April, the largest 12-month decline since the index fell 16.7 percent between September 2008 and September 2009.

The price index for nonagricultural exports declined 0.7 percent in April following advances of 0.2-percent and 0.1-percent the previous 2 months. The April decline was led by declining prices for nonagricultural industrial supplies and materials, capital goods, and consumer goods. In contrast, prices for automotive vehicles ticked up 0.1 percent in April. Nonagricultural export prices decreased 5.3 percent over the past 12 months.

Producer Prices

The Bloomberg Consensus Estimate for producer prices was 0.2%. Once again economists were wildly off the mark. The Producer Price Index came in at -0.4%, outside the range of any economist's prediction.

PPI for Finished Goods Percent Change

Does that look recessionary?

PPI for Finished Goods Less Food and Energy Percent Change

Strip out food and energy and prices still going up.

PPI Final Demand Index

This is a relatively new series that only dates back to November of 2009.

PPI Final Demand Percent Change

Fed Hike in 2015?

The timeline for Fed hikes went from June to September to December. I did not think they would hike this year, and expectations are finally leaning that way. If the Fed does hike bond yields will spike. But when does the Fed disappoint the markets?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Second Quarter GDP Forecast: Blue Chip vs. GDPNow; Where Might the Fed be Wrong?

Posted: 14 May 2015 08:11 AM PDT

Following yesterday's dismal retail sales report, inquiring minds may be interested in the Atlanta Fed GDPNow Forecast.

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 0.7 percent on May 13, down slightly from 0.8 percent on May 5. The nowcast for second-quarter real consumer spending growth ticked down 0.1 percentage point to 2.6 percent following this morning's retail sales report from the U.S. Census Bureau.

GDPNow vs. Blue Chip

GDPNow Factors

GDPNow Contributions to Growth

Where Might the Fed be Wrong?

The Blue Chip estimators appear to be in some other alternate universe, especially that 4% forecast. Instead, let's focus on the Atlanta Fed model.

In light of retail sales, I suspect PCE of +1.76 is on the high side. If so, and if inventories and exports are worse than shown (which I also expect), we are in or close to negative territory, and in recession.

Note that the NBER does not require two consecutive quarters of negative GDP to call a recession. Rather, two consecutive quarters of declining GDP is a sufficient but not necessary condition.

For further discussion please see Dismal Retail Sales Numbers Suggest Recession Likely Underway: Overall +0.0%, YoY +0.9%, Department Stores -2.2%

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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