Recently, the inflation expectations in the Treasury market have returned to levels not seen since the collapse of Lehman Brothers in September 2008, an event that ignited a financial crisis and sparked concerns about a deflationary spiral. By analyzing the yield spread between nominal and inflation-protected 10-year Treasuries, it becomes evident that the market’s sentiment has significantly shifted since the bleak months of late 2008.
Blogging may be sparse over the next day or so as I will be traveling to Boston, where I’ll discuss asset allocation at the World Series of ETFs and Indexing.
According to the U.S. Bureau of Economic Analysis, personal income and consumer spending increased once again last month. However, the inflation rate also saw a slight uptick, which complicates the interpretation of these figures.
Current sentiments regarding the housing market represent a stark contrast to the peak years of five years ago. “Housing is dead,” declares MarketWatch’s Rex Nutting, asserting that the sector is no longer capable of significantly impacting the economy. The glimmer of hope, however, is that its diminished size means it’s unlikely to inflict further harm. Yet, it seems the housing market is unlikely to contribute positively in the near future.
● Future Babble: Why Expert Predictions Are Next to Worthless, and You Can Do Better
By Dan Gardner
Review via New York Times Book Review
Throughout history, humanity has sought to foresee the future through various means—astrology, dreams, card reading, mathematical models, and even the insights of prominent economists. Driven by an innate desire to understand what lies ahead, we often overlook the reality that the future remains fundamentally unknowable. This conundrum is the central theme of Dan Gardner’s “Future Babble.”
The U.S. economy recorded a 3.1% annual growth rate in the fourth quarter of the previous year, as reported by the government in its third and final assessment of Q4 GDP. This figure reflects an increase from the previously stated 2.8% growth rate. For the entire year, the economy expanded by 2.9%.
Another year of living dangerously
The Economist | Mar 24
Despite rising oil prices and disrupted production in Japan that hinder economic growth, inflation risks continue to escalate (with the UK now facing inflation at 4.4%). Nevertheless, many advanced economies still have significant economic slack. In several nations, fiscal tightening may be detrimental to recovery efforts. The U.K. coalition government has reaffirmed its commitment to austerity, as evidenced by this week’s budget. Meanwhile, America has also began to cut expenditures. Both the Bank of England and the Federal Reserve should resist the urge to tighten monetary policy too soon. In contrast, the European Central Bank seems poised to increase interest rates shortly, a move that could be misguided. In the euro zone, inflation and wage growth remain subdued, and expectations around inflation are stable. An interest rate hike by the ECB could strengthen the euro and complicate the recovery for nations like Greece, Ireland, and the soon-to-be-bailed-out Portugal. Economic policymakers can only do so much to address crises arising from conflict or natural events; priority should focus on avoiding exacerbation of current issues.
The Census Bureau has reported a 0.9% decline in orders for durable goods last month, seasonally adjusted. This drop follows a robust 3.6% increase in January. Although economists anticipated an uptick, the volatile nature of monthly data makes it challenging to decipher if this downturn signifies a looming issue.
Last week, new jobless claims experienced another decline, decreasing by a seasonally adjusted 5,000 to 382,000, as reported by the Labor Department. The four-week moving average also fell, reaching its lowest point in two-and-a-half years. It’s evident that new claims are trending downward once again, albeit slowly. However, the persistent strength of the oil market raises concerns about the potential impact of rising energy prices.
Portugal in crisis after prime minister resigns over austerity measures
Guardian | Mar 23
The Portuguese Prime Minister, José Sócrates, has submitted his resignation to the president following his government’s failure to pass new austerity measures in parliament. He noted that the loss of the vote has eliminated the government’s ability to lead, bringing the nation closer to requiring a bailout.
Portugal bailout ‘could cost UK £3bn’
Guardian | Mar 23
According to Raoul Ruparel of Open Europe, “Portugal will inevitably ask for a bailout.” He emphasizes that, unlike Ireland and Greece, it would be beneficial for Portugal to restructure its debt now, rather than merely accepting a bailout.
Merkel Says Socrates Was ‘Right’ to Push for More Portugal Cuts
Bloomberg | Mar 24
German Chancellor Angela Merkel commended Portuguese Prime Minister José Sócrates for his courageous decision to present substantial austerity measures to parliament, stating that he was “right” and expressing gratitude for his commitment to the country’s financial responsibility.
In conclusion, these articles highlight various aspects of the economy, from inflation rates and personal spending to housing market woes and jobless claims. The interplay of these factors underscores the complexities and challenges faced by policymakers as they navigate through uncertain economic waters.
