Saturday , June 15 2019
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Tag Archives: financial markets

How Trade Uncertainty Is Crushing Economic Optimism

Or, Trumpian Winning, edition 3,010,524. From Torsten Sløk/Deutsche Bank today: And here is the Baker, Bloom and Davis categorical policy uncertainty index for the US, plotted against the 5yr-3mo Treasury spread highlighted by Campbell Harvey. The EPU-trade index jumps as the spread accelerates its decline. Figure 1: Trade policy uncertainty categorical index (blue, left scale) and 5yr-3mo Treasury spread, % (red, right scale). Source: policyuncertainty.com and Fed via FRED.  For more...

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Seven (Business) Days in May

Undervalued currencies as countervailable subsidies, tariffs on Mexico, flash mfg PMI drops, Drumpf again insists China pays US tariffs…so the yield curve inverts! Figure 1: Treasury 10yr-3mo spread (blue, left scale), 10yr-2yr (red, left scale), 5yr-3mo (teal, left scale), in %; and Economic Policy Uncertainty index (black, right scale). Source: Fed via FRED, US Treasury, and policyuncertainty.com, accessed 5/31/2019. Update 6/1: Longer span of data for all these series at monthly...

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Yield curve inversion

The gap between long-term and short-term interest rates has narrowed sharply over the last year and is now dipping into negative territory. Historically that’s often been a signal that slower economic growth or even an economic recession could lie ahead. Gap between average interest rate on 10-year Treasury bond and 3-month Treasury bill during the last month of the quarter (1953:Q2 to 2019:Q1) and May 1-24 for 2019:Q2. NBER dates for U.S. recessions shown as shaded regions. This relation is...

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Inversion! Close-of-Trading 5/13/2019

According to constant maturity rates reported by US Treasury, the 10 year-3 month yield curve was inverted as of today’s close (-0.01%). The 10 year-2 year spread is -0.22%, and the 5 year-3 month spread favored by Cam Harvey is -0.23%. On the run yields are depicted below: Source: BondSuperMart. For discussion of inversions and recessions, see empirical evidence in Chinn and Kucko (2015), recounted in The Economist (July 2018). I suspect that, if Mr. trump is betting on a strong US...

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“White House Considers Economist Judy Shelton for Fed Board”

That’s the title of an article in Bloomberg: Shelton, who’s served as an informal adviser to Trump, holds a Ph.D. in business administration with an emphasis on finance and international economics from the University of Utah. Here is a recent writing advocating return to “sound money”  in Cato Journal: The United States is the world’s largest holder of official gold reserves. Comprising 8,311.5 tonnes or 261 million troy ounces, those reserves are carried at a book value of roughly $11...

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If Campbell Harvey’s Specification Is Right, We’re (Still) in Trouble

Robust GDP growth, employment rising on pace, perceived recession risk declining… as in this headline. The latest issue of the Economist has an article entitled Fears of recession have faded. But I’m reminded that Campbell Harvey, who wrote early papers on the subject of yield curve predictors, relies on the 5yr-3mo spread (for growth, not recession). And that implied specification signals 44% probability of recession in 2020M04. From Bloomberg: “My economic model is not just predicting...

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The Risk Adjusted Real Long Term Real Rate

One argument against the secular stagnation thesis is that the risk-adjusted real rate is not particularly low. I’m dubious. In Figure 1, I depict the real ten year Treasury yield, adjusted by survey-based inflation expectations (from the Cleveland Fed, Survey of Professional Forecasters), and the TIPS yield. Figure 1: Ten year constant maturity Treasury yield adjusted Cleveland Fed ten year expected inflation and Kim-Wright term spread (dark blue), adjusted by Survey of Professional...

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Thoughts on the Next Recession

CEA Chair Kevin Hassett has stated a recession by next summer is impossible. I’m wary of such definitive statements. From a May 2008 WSJ article: “The data are pretty clear that we are not in a recession,” Council of Economic Advisers Chairman Edward Lazear told a meeting of editors and reporters from the Wall Street Journal and Dow Jones Newswires. … “I would be very surprised if the NBER, looking back at this period, would date this as a recession,” Mr. Lazear said. There are even...

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COMMERCIAL BANK MONEY AND SEIGNIORAGE POWER

Don’t banks extract seigniorage (as governments and central banks do) when they create money via lending? COMMERCIAL BANK MONEY AND SEIGNIORAGE POWER by Biagio Bossone and Massimo Costa What is "seigniorage"? Derived from the old French for "seigneur", which stands for "feudal lord" (the lord of a manor), the word "seigniorage" according to the Oxford Dictionary etymologically means the "right of the lord to mint money" and economically denotes the difference between the value of money and...

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DIGITAL CASH AND THE MACROECONOMY

The macroeconomic implications of digital cash would depend on the public‘s preferences for it. The recent contributions from Brunnermeier and Niepelt (2019) and Andolfatto (2019) offer useful analytical frameworks to organise one’s thinking on how the introduction of a central bank digital currency (CBDC) is likely to impact the macroeconomy. The former derives an equivalence result whereby the CBDC need not alter resource allocation and the price system, while the latter shows that the...

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