Category: Economy

Analysis of the global economy

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Gold, inflation and the Dollar

The (5-year) inflation breakeven (Treasury yield – TIPS) recovered from the oil price fall to post 1.66% on May 8.

5-Year Inflation Breakeven

Growth in average hourly earnings (manufacturing – production and non-supervisory employees) also recovered to 1.49% at the end of April.

Average Hourly Earnings

The stronger inflation outlook lifted the yield on 10-year Treasury notes above resistance at 2.25%. Recovery of 13-week Twiggs Momentum above zero also signals an up-trend. Target for the breakout is 2.65%*. This is a bearish sign for bonds, but only breakout above long-term resistance at 3.00% would signal that the secular bull market is over.

10-Year Treasury Yields

* Target calculation: 2.25 + ( 2.25 – 1.85 ) = 2.65

The Dollar Index found support at 94 in response to rising yields. 13-Week Twiggs Momentum is declining, but recovery above 96 would suggest that the correction is over and another test of 100 likely. Otherwise, expect strong support at the primary trendline around 92.

Dollar Index

Gold

Gold is testing medium-term support at $1180/ounce. Breach would test the primary level at $1140. 13-Week Twiggs Momentum holding below zero suggests continuation of the primary down-trend. Failure of $1140 would test the long-term target of $1000*.

Spot Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

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GDP, the Dollar and Treasury yields

Interesting to see how Treasury yields and the Dollar reacted — or failed to react — to the sharp fall in first quarter GDP growth. But first a great summary by Matt Phillips at Quartz:

Move along. There’s nothing to see here.

Well, if you must know, US GDP growth fell to a 0.2% annualized rate, which looks pretty bad.

GDP

We told you it would be bad. How did we know? Windows. If you looked out any of them between January and March you were treated to a slush-bound hellscape of icy misery. Thankfully, spring has sprung. And there are all sorts of indications that US growth is bouncing back.

…interpreting the numbers rather than simply informing readers of the latest “bad news”. Good journalism.

Ten-year Treasury Note yields broke resistance at 2.00%. Not what one would expect if the economy was slowing and the Fed planned to sit on its hands rather than raise interest rates. Breakout above resistance indicates an advance to 2.25%. Recovery of long-term yields, however, is likely to be gradual, with much testing of support before we see a breakout above long-term resistance at 3.00%.

10-Year Treasury Yields

The Dollar Index surprised in the opposite direction, breaking support at 96. Not what one would expect if yields are rising. Breach of support suggests a test of the primary trendline at 92.

Dollar Index

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Inflation and Dollar stable

March CPI readings were much as expected, with the annual rate at zero but core CPI (excluding food and energy) close to the Fed target of 2 percent.

Core CPI

Ten-year Treasury Note yields continue to consolidate in a narrow band between 1.85% and 2.00%. Breakout above resistance is more likely and would offer a target of 2.25%. 13-Week Twiggs Momentum below zero continues to indicate a primary down-trend. Recovery of long-term yields is likely to be gradual for two reasons:

  1. The Fed is adopting a cautious stance towards lifting short-term rates; and
  2. Downward pressure exerted on long-term yields by offshore (Chinese & Japanese) purchases of Treasury securities (with the intent of suppressing appreciation of their exchange rates).

10-Year Treasury Yields

A stable inflation rate and low interest rate outlook have kept the Dollar Index range-bound between 96 and 100. Rising 13-week Twiggs Momentum continues to indicate a strong primary up-trend. Breakout above 100 would signal an advance to 110*. Failure of support at 96 is unlikely.

Dollar Index

* Target calculation: 100 + ( 100 – 90 ) = 110

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Inflation outlook

March consumer price index (CPI) is due for release on Friday. Producer prices, released Tuesday, ticked upwards after a sharp December/January fall on the back of plunging crude oil prices.

PPI Finished Goods

Average hourly earnings growth (non-supervisory manufacturing jobs), however, retreated below 1.0%.

Average Hourly Earnings

CPI is likely to remain heavily affected by oil prices, but core CPI (excluding food and energy) is expected to remain close to the Fed’s target of 2.0%.

CPI and Core CPI

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Light vehicle sales

US light vehicles sales are back in the range of 16 to 18 million vehicles a year experienced during the (halcyon?) days of 1998 to 2007. An important indicator of consumer confidence.

US Light Vehicle Sales

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Jobs growth slows (slightly)

The Wall Street Journal reports:

U.S. employers sharply slowed their hiring in March…….. Nonfarm payrolls rose by a seasonally adjusted 126,000 jobs in March, the Labor Department said Friday. That was the smallest gain since December 2013.

If we take a step back and look at US non-farm payrolls over the last 12 months, growth remains surprisingly strong. The economy added 2.9 million jobs in the year ending 31st March; down from 3.2 at the end of February, but still a robust recovery.

US non-farm payrolls

We haven’t seen this level of job growth since the Dotcom era.

US non-farm payrolls

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The Catch-22 of energy storage | On Line Opinion

John Morgan questions whether wind and solar are viable energy sources when one considers energy returned on energy invested (EROEI).

There is a minimum EROEI, greater than 1, that is required for an energy source to be able to run society. An energy system must produce a surplus large enough to sustain things like food production, hospitals, and universities to train the engineers to build the plant, transport, construction, and all the elements of the civilization in which it is embedded. For countries like the US and Germany, Weißbach et al. estimate this minimum viable EROEI to be about 7……

The fossil fuel power sources we’re most accustomed to have a high EROEI of about 30, well above the minimum requirement. Wind power at 16, and concentrating solar power (CSP, or solar thermal power) at 19, are lower, but the energy surplus is still sufficient, in principle, to sustain a developed industrial society. Biomass, and solar photovoltaic (at least in Germany), however, cannot. With an EROEI of only 3.9 and 3.5 respectively, these power sources cannot support with their energy alone both their own fabrication and the societal services we use energy for in a first world country.

EROEI with and without storage

Energy Returned on Invested, from Weißbach et al.,1 with and without energy storage (buffering). CCGT is closed-cycle gas turbine. PWR is a Pressurized Water (conventional nuclear) Reactor. Energy sources must exceed the “economic threshold”, of about 7, to yield the surplus energy required to support an OECD level society.

These EROEI values are for energy directly delivered (the “unbuffered” values in the figure). But things change if we need to store energy. If we were to store energy in, say, batteries, we must invest energy in mining the materials and manufacturing those batteries. So a larger energy investment is required, and the EROEI consequently drops…[to the buffered level].

Read more at The Catch-22 of energy storage – On Line Opinion – 10/3/2015.

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Deflation in Australia?

The Eurozone experienced negative CPI growth over December/January.

CPI EU

Australia shows consumer price growth declining at the end of 2014. The next CPI update (Q1 2015), at end of April, is likely to reflect further slowing.

CPI Australia

Declining inflation expectations reported by Westpac (in the 0 to 5% range) tend to support this.

CPI expectations Australia (0 - 5% range)

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CPI unwinds as the Fed runs out of “patience”

From Seeking Alpha:

The euro fell to a fresh 12-year low on Wednesday, extending a broad decline just days after the ECB launched its €1T bond-buying program, while the dollar index soared to its highest in more than 11 years at 98.95, buoyed by expectations that the Fed could soon lift U.S. interest rates. Nearly all now believe the FOMC will remove the word “patient” from its policy statement after its March 17-18 meeting, opening the door for a rate increase in June.

Not so fast. US consumer price growth (annual % change) to end of January 2015 fell below zero.

US CPI

Core CPI is slowing at a far gentler rate because it excludes energy prices (as well as food).

CPI Core

Wage pressures in the manufacturing sector are declining, despite solid job numbers, indicating there is still plenty of slack.

Manufacturing Hourly Earnings

With inflationary pressures easing, why the haste to raise interest rates? I believe that Janet Yellen will move when the time is right. And not before.

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