Spring has come to Denmark, but a bit of jitters overnight in the global stock markets. Is it inflation fears? See my comments here.
Posted by Lars Christensen on March 22, 2017
Have a look at my comments on yesterday’s Fed hike.
And see our “country page” on the Fed, which will also feature in our soon-to-be-published Global Monetary Conditions Monitor. (In PDF here)
Posted by Lars Christensen on March 16, 2017
The Federal Reserve is widely expected to hike the Fed funds target rate by 25bp today. The real question is how much more the Fed will deliver going forward.
To get an idea about we are happy to give you a sneak preview on the “country page” for the US monetary policy from our soon to be launched Global Monetary Conditions Monitor (GMCM).
See here (in PDF here):
Just to explain what we are doing in GMCM we do not try to forecast what central bankers will do, but rather we assess or measure monetary conditions. This is a lot less straight forward than people often think. For example the actually level of the key policy rate – in the case of the Fed the Fed funds target rate – on its own says very little about the monetary stance.
Overall, the price level and nominal demand in the economy is determined by the interaction between the money supply and money demand.
It is the task of the central bank to use whatever instrument(s) it uses to to ensure that this interaction between money supply and money demand causes the target – for example inflation – to be hit.
Therefore our starting point in GMCM is to assess monetary conditions relative to the given central bank’s target. In the case of the Fed a 2% inflation target.
Said in another way in our composite indicator for monetary conditions a zero “score” indicates that the Fed will hit its 2% inflation target in the medium-term (2-3 years). If the score is above (below) the then it indicates that the central bank will overshoot (undershoot) its inflation target.
Similar we say that monetary policy is too easy (tight) if the composite indicator is above (below) zero.
The composite indicator is a weighted average of four sub-indicators – broad money supply growth (in the case of the US Divisia M4-), nominal demand growth (often nominal GDP, but in the case of the US Private Consumption Expenditure growth), exchange rate developments and finally the key policy rate (the Fed funds target rate in the US).
For all of these sub-indicators we calculate a growth rate or level, which we believe is what we call “policy-consistent” meaning the growth rate of for example broad money supply growth, which is necessary to hit the central bank’s inflation target.
In the case of the US we see that broad money supply growth (here measured as Divisia M4- growth) presently is more or less in line with the policy-consistent growth rate meaning that looking at money supply growth along we should expect the Fed to hit it’s 2% inflation target in the medium-term.
For the money supply we calculate the policy-consistent growth rate based on the Equation of Exchange (in growth rates):
(1) m + v = p + y
Where m is the growth rate of the broad money supply, v is money-velocity growth, p is inflation and y is real GDP growth
We can re-arrange that:
(1)’ m-target = p-target + y* – v*
m-target is our policy-consistent growth rate for broad money growth, p-inflation is the inflation target (in the case of the US 2%), y* is the strutural trend in real GDP growth and v* is the structural trend in money-velocity. We generally use HP-filters to estimate y* and v*.
In the graph broad money supply growth on the US “country page” the dark green line is actually broad money supply growth and the light green line is m-target (the policy-consistent growth of m).
The difference between the two is essentially a measure of the monetary stance. This is the bars in the graph. Taking into account that monetary policy works with “long and variable lags” we take an 3-year weighted moving average of this gap. That is also the input into the composite indicator.
We use the same kind of method for the three other sub-indicators.
In the case of the US we see that money supply growth and nominal demand growth are pretty much in line with the policy-consistent growth rates, while the rate of appreciation of the dollar is (or rather has been) slightly too fast and the interest rate level is slightly too high.
Overall, we see that the composite indicator for the US is quite close to zero, but still below. This indicates that US monetary conditions are what we term “broadly neutral”, but also that inflation risks in the medium-term are twisted slightly to the downside relative to Fed’s 2% inflation target.
We also see this from our inflation forecast graph. The inflation “forecast” is essentially a simulation of the most likely path for inflation given the present monetary stance (not to be confused with Fed’s key policy rate) and the recent trends in inflation.
We see that the forecast is for US inflation to continue to inch up, but it will not quite get to 2%. This is pretty much also what for example TIPS breakeven inflation expectations show.
What does this mean for market pricing?
When assessing the overall monetary stance it is always very important to remember that we have to look at for example interest rates or the exchange rate relative to expectations. Hence, a 25bp interest rate hike today from the Fed in itself is not monetary tightening is it is completely priced in already.
Therefore, if we want to assess future monetary developments in the US we need to look at market pricing.
Overall the markets are presently pricing in somewhere between two and three 25bp hikes from the Fed this year – including the hike expected for today.
The purpose of our framework in Global Monetary Conditions Monitor is not to forecast how many rate hikes the Fed will deliver this year. But it can tell us about the consequences of difference paths for interest rates.
Hence, one can say that since our composite indicator for US monetary conditions indicates that the Fed is likely to slightly undershoot its 2% inflation target then it would be better for the Fed to deliver a little be less in terms of rate hikes than is presently priced by the markets.
This is not a forecast as central banks often do things they shouldn’t – if they didn’t it would be very easy to forecast their actions – but it nonetheless tells us something about the potential risks relative to market pricing if we assume that the Fed at least in he end will end up doing the right thing.
Looking for reviewers
We are looking forward to publishing Global Monetary Conditions Monitor very soon, but we are also still looking for input. So we are looking for “reviewers” of what we call the country pages of the 25 countries covered in GMCM.
So if you are interested in getting a sneak preview on parts of the GMCM in return for comments please let us know. Mail LC@mamoadvisory or LR@mamoadvisory.com. We prefer policy makers/central bankers and market participants, but don’t be shy to drop us a mail.
Posted by Lars Christensen on March 15, 2017
So here we go again – another Mountain bike ride and another MTB cast. This time we got three in one.
First on Icelandic currency controls.
Second, this week’s FOMC meeting.
Third, are European central bankers overly worried about political risks?
Posted by Lars Christensen on March 14, 2017
I have been out on a mountain biking this morning, but I could not help noticing the Czech inflation numbers for February.
So have a look at my first MTB cast where I comment on the Czech inflation numbers.
If you like this I will continue doing this in the future and please remember to sign up for the Markets & Money Advisory Youtube channel.
See our updated inflation forecast in the graph below. It is based on the latest inflation data and trends as well as our composite indicator for Czech monetary conditions.
If you want to know more on our monetary conditions indicator please contact us by mail: LC@mamoadvisory.com or LR@mamoadvisory.com
Update: The day started with Mountain biking and Czech inflation and ended with an interview with Icelandic TV (RUV TV) about the booming Icelandic economy. See here (in Danish and Icelandic).
Posted by Lars Christensen on March 9, 2017
Yesterday, we wrote a short post on Israeli monetary policy and linked to one page on Israeli monetary conditions to give an example of how the “country pages” in our – Markets & Money Advisory – new monthly flagship publication Global Monetary Conditions Monitor (GMCM) will look like. We expect to publish the first edition in March – coinciding with the launch of our new website.
So what is the GMCM? Overall one can say it is our attempt to create a measure of monetary conditions for investors and policy makers alike so they can track global monetary developments.
It will not be a forecasting publication as such, but obviously investors can use the publication to make informed decisions on investments as there certainly is no doubt that changes in monetary conditions have a significant impact on changes asset prices.
The overall structure in GMCM will be the following.
First of all, the firsts page (5-6 pages) will discuss global monetary developments with a particular focus on what we call the Global Monetary Superpowers – the Federal Reserve, PBoC, ECB, BoJ, BoE and SNB. The discussion will be based both on our new composite indicator of monetary conditions (see more below) in each of the “Superpowers” and on what the financial markets are telling us about monetary conditions and expectations for monetary policy.
This will be followed by a monthly “special topic” (1-2 pages). That could for example be about the relationship between our measure(s) of global monetary conditions and the development in equity prices or commodity prices or we could decide to zoom in on monetary policy developments in a given country that we find of particular interest.
Finally we will “country pages” for each of the 25 countries covered in the publication. The countries are the following:
We expect to expand the number of countries to more than 30 countries in the coming months based on client requests and interests. The main focus is on countries with floating exchange rates with inflation targets or similar nominal targets. If you are missing a country you are terribly interested in please let us know.
Each country page will consist of six graphs.
The first graph will be a graph for the development in our composite indicator for monetary conditions in that given country. This indicator is calibrated so that a value of zero indicates that the central bank is likely to hit its inflation target in the medium-term (2-3 years).
A score below (above) zero indicates that the central bank will undershoot (overshoot) its inflation target and hence is keeping monetary conditions too tight (easy). Overall, we define monetary conditions to be “broadly neutral” when the indicator is between -0.5 and +0.5.
The second graph will be a graph with an inflation forecast for the given country three years ahead. The inflation forecasts is based on composite indicator for the monetary conditions (assuming no supply side shocks).
In addition to that there will be four graphs on the sub-indicators on which the composite indicator is constructed.
These indicators are the following: Broad money supply growth (typically M2 or M2), nominal demand growth (typically nominal GDP or nominal consumption expenditure), exchange rate developments and finally the key policy interest rates.
For each of these these indicators we calculate a level or a growth rate, which we think would be consistent with the given central bank’s inflation target. Based on this we calculate a gap between the policy-consistent growth rate of for example the money supply and the actual growth rate of the money supply. This gap we use as input into our composite indicator.
The Hungary central bank is on track to (nearly) hit its 3% inflation target
Yesterday we showed an example of how such a country page in the GMCM would look like. Yesterday’s example was Israel because we had a Israeli monetary policy decision yesterday. If you missed it yesterday have a look at the country page for Bank of Israel here.
Today we have another monetary policy decision in Hungary. Therefore we think it is suiting to use Hungary as the next example of a country page.
This is how it looks.
If you want a closer look you can also see it in PDF here.
We are already getting a lot of feedback on the GMCM, but would be very happy to hear what you think so we can incorporate comments and ideas before the launch of the GMCM.
The Global Monetary Conditions Monitor will be priced at EUR 2,000 for a 12-month subscription. Furthermore, discounts can be negotiated for more than one subscription or as part of a general advisory deal.
If you want to hear more about Global Monetary Conditions Monitor please contact us by mail on LC@mamoadvisory.com (Lars Christensen) or LR@mamoadvisory.com (Laurids Rising).
See more on the Global Monetary Conditions Monitor:
Posted by Lars Christensen on February 28, 2017
It is hard to be very critical about the conduct of monetary policy in Israel. I have earlier praised the Bank of Israel (BoI) for essentially being an NGDP targetter and when Stanley Fischer was BoI governor nominal GDP basically was kept on a straight line (see here).
And even though Fischer’s successor Karnit Flug initially back in 2014 kept monetary conditions slightly too tight (see here) it now seems like the BoI under Flug’s leadership is back on track.
At least that is what our – Markets & Money Advisory’s – composite indicator for Israeli monetary conditions is showing.
Introducing Global Monetary Conditions Monitor
The indicator will be part of the first edition of our new flagship publication Global Monetary Conditions Monitor (GMCM), which will be published in March and given the Bank of Israel today (3pm CET) has its monetary policy announce we thought it would be a good idea to share a page from the upcoming GMCM on israel.
You will see the country page on Israeli monetary conditions here.
You can also see the page as a PDF here.
When we put out GMCM there will be 25 such pages on different countries plus of course addition commentary on global monetary matters. A 12 month subscription will be priced at EUR 2,000.
If you are interested in more information on the Global Monetary Conditions Monitor please let us know. Mail to LC@mamoadvisory.com or LR@mamoadvisory.com.
As expected the BoI kept its key policy rate unchanged at 0.1%.
See more on the Global Monetary Conditions Monitor:
Posted by Lars Christensen on February 27, 2017
Did you book your speaker for this year’s seminar or conference? You might as well book me!
See a sample of my speeches here.
To book me internationally see here.
In Denmark see here.
Or contact me directly: LC@mamoadvisory.com
Recent speaking topics include:
- Populism and the global economy and markets
- 1930s style politics: Monetary policy failure and the emergence of Trump, Le Pen and Brexit
- Will the euro survive the German, Dutch and French elections in 2017?
- The African growth miracle
- China will never be the largest economy in the world
- Russia: Between oil prices, lack of reforms and geopolitical uncertainty
- The Maghreb economies: A coming miracle or permanent stagnation?
- Oil prices, monetary policy and the crisis in the Gulf States economies
- Prediction markets – why governments and central banks should leave forecasts to the market
- Global economic and financial outlook 2017/2018
- Currency wars – good or bad?
- The end of the ‘dollar bloc’
- Global Monetary developments: The end of deflation?
Posted by Lars Christensen on February 22, 2017
The economic suffering of the Greek people is horrendous and it has to stop – interview on TRT World
Yesterday I was interviewed for TRT World about the Greek economy and possible Grexit. Have a look here.
Posted by Lars Christensen on February 21, 2017
Greece is once again back on the agenda in the European financial markets and we are once again talking about Greek default and even about Grexit. There seems to be no end to the suffering of the Greek economy and the Greek population.
I must say that I have a lot of sympathy with the Greeks – they have terrible policy makers and no matter how many austerity measures are implemented there is no signs of any visible improvement either in public finances or in the overall economic performance.
Hence, the Greek economy has essentially been in decline for nearly nine years and there seems to be no signs of it changing.
To me there is no doubt what the main reason it – it is the monetary strangulation of the Greek economy due to the countries membership of the euro area.
I don’t like to see the euro area fall apart and I believe it can be avoided, but on the other hand I have a very hard time seeing Greece getting out of this crisis without either receiving a more or less complete debt write-off or leaving the euro area (or both).
ECB can’t do much more
Since 2008 there has been two dimensions to the monetary strangulation of the Greek economy.
First of all for much of the period since 2008 the ECB has kept overall euro zone monetary conditions far too tight to achieve its own 2% inflation target as illustrated by our – Markets & Money Advisory’s – composite indicator for monetary conditions in the euro zone, which shows that monetary conditions in the euro zone essentially were too tight from 2008 until early 2015 and only has been broadly neutral (indicator close to zero) over the past 20 months or so.
Second, the euro zone is not an optimal currency area and it is very clear that Greece today needs significantly easier monetary conditions than for example Germany, which might need tighter monetary conditions.
Looking at these to factors it is clear that the ECB indeed has moved in the right direction in the last two years and overall we believe that monetary conditions right now are about right for the euro zone as a whole. However, the problem is that monetary conditions still is far too tight for Greece.
As long as overall euro zone monetary conditions were too tight there was a good argument that the ECB should ease monetary policy to ensure that it would hit its 2% inflation target over the medium-term and that would help Greece. However, that is not really the case now. While there is no reason for the ECB to tighten monetary conditions it is today much harder to argue for new measures to ease euro zone monetary conditions.
That makes Greece’s problem even more acute and makes the argument for Greek euro exit even stronger.
The problem of course is that Greece is damned no matter what. If Greece stays in the euro area then the hardship continues for the Greek people and there is no reason to believe that more austerity fundamentally will improve public finances and while there have been some signs of growth beginning to pick over the past year any minor tightening of monetary policy from the ECB will likely send Greece directly back to recession.
On the other hand if Greece where to leave the euro area it is unlikely it would happen in an orderly fashion. Rather it is likely to happen in a chaotic fashion and lot of things could go badly wrongly – also for the rest of the euro zone. Just think about what speculation it would create regarding possible Italian or even French euro exit. And will euro exit also mean EU exit and what will be the geopolitical ramifications of this?
So it is not an easy choice. However, I continue to believe that it would be both in the interest of Greece and of the rest of euro area as a whole that Greece leaves the euro area.
The suffering will have to end. However, Greece should not be kicked out of the euro. Rather Greece should be helped out of the euro. Unfortunately there is little will within the EU or the ECB to make this happen and populists around Europe are eager to use this debacle to further sabotage European reforms.
See also my earlier posts on Greece her:
Posted by Lars Christensen on February 10, 2017