The most important economic report each month is the release of employment stats in the first week for the immediately prior month.
If so important, you’d think we’d get it right. But the numbers are so big, and survey-based, and seasonally adjusted by dampened finger in the breeze that once in a while the result is goop. Today is goop, thickened by lasting effects of the shutdown.
Pay no attention to news of only 20,000 new jobs last month, yet falling unemployment, and possibly an upward tilt in wages. Markets have paid no attention, so join them. The 10-year T-note is stuck at 2.63%, likewise mortgages just above 4.50%. The Fed-sensitive 2-year T-note did slide slightly below the Fed’s 2.50% cost of money, making it 52%-48% that the Fed’s next move will be down. Don’t elevate hopes.
The important news pushing down on rates is overseas. On Thursday the European Central bank cut its zone GDP forecast for 2019 from 1.9% to 1.1%, and for inflation from 1.7% to 1.2%. The ECB announced the resumption of its direct long-term lending to banks, still so broken that markets are not eager to lend to them.
These episodes of overseas weakness, so long as they do not run out of control have been beneficial to the US. They push down on inflation and interest rates, and our economy is the least dependent on exports to the others of any major economy.
So, survey the outside world. Trouble overseas is difficult to quantify in China, but not so much in Japan and Europe. The US forced open Japan to trade and foreign money in 1853. It still behaves as though it would rather re-close. “Insular” hardly describes the place: over 95% of its immense national debt is held inside Japan, and it is effectively closed to immigration. Thus there is nothing to stop its implosion, but its extraordinary unity protects it. It’s 10-year bond is back below zero, -.033%. More a curiosity than worry.
China’s economic miracle has been just that in the last 30 years. But the foundation is poor. It has no system of law worthy of the name. Power rules, and the Party is the power but with ridiculous philosophical footing, still mouthing Marxist and Maoist homilies. Post-Mao the Party became soft at the top and corruption threatened a new version of the old plague of regional lords. The Party also fears a drift to a Chinese Gorbachev, and has installed Xi Jinping as Mr. Top-Down. He is smart, able, worldly, and humble (letting his hair go gray), a new cult of personality his unhappy duty.
China’s deepest and constant fear is instability. And if we had its history it would be ours, too. Autocrats in any nation who bark orders downhill beget “Yes sir, oh wise one,” later finding that little has changed and thus demand more control. The more control the less bottom-up information and the top loses what little adaptability it had. “Capitalism with Chinese characteristics” cannot work if those characteristics are top-down and thought-control. Capitalism requires structure (law and government), but does best in a free-for-all encouraging innovation and “creative destruction” of bad or obsolete ventures. Note the US success versus just about anybody.
China’s apparent entanglement in its underwear could continue for months until a social breach, or centuries. As it tries to maintain growth it will continue to off-load its troubles via over-production, but with less and less result as the outside world resists. The over-production does push down on global wages and prices, but by undermining everyone else.
Europe. Oh, my. After WW II, the ultimate European catastrophe, Europe looked back at its dozen blood-soaked centuries since the fall of Rome and dreamed of peaceful unity. The end of the Cold War in 1989 opened the opportunity to the current experiment. The upper crust of wealth, education, and class together with the oh-so-enlightened left wanted for good reason to put nationalism into Europe’s past.
Yet, if we could transport Julius Caesar into the present, drive him around Europe and describe Europe’s difficulty unifying cultures, he might laugh. He would instantly recognize Hispania, Belgica, Helvetia, Britannia, and Gallia, and even cultural traits, remarking on the impossibility of civilizing either Germania or Caledonia. He would be pleased to find his name a lasting generic for the all-powerful: Czar and Kaiser. Two thousand years of European cultural durability.
After WW II Europe established an excellent customs union among those dozens of distinct cultures. The advent of currency union, the benighted euro in 1999 before any union of spending, taxes, debt, or banking has magnified cultural fracture lines.
National currencies mediate differences in productivity, thrift, and decadence. In the 1950s supported by the US, European nations re-established currencies, the French franc, deutschmark, Swiss franc, lira, and others. The Ffr, DM, and Sfr were valued close to $.25. Currencies diverge mostly because of trade balances and local monetary policy. Run a surplus and tight money, and your currency will rise until your products cost to much to export. That’s healthy self-correction, and devaluation works in reverse, cheapening exports and forcing domestic discipline.
By the time of the euro rollout, the French franc had fallen in value roughly to $.18. The Swiss Franc had risen to about $.67, and the deutschemark to $.60. The lira has always been its own universe, in the 1960s worth about $.00167 (600/dollar), and at euro rollout down to $.000625 (1600/dollar).
The national tendencies which produced these changes in exchange rates are as durable as the Colosseum, Roman roads and aqueducts.
Germany runs a budget surplus of 3% of GDP, and a trade surplus of 7.5% of GDP. Yet the euro does not punish it for this deflationary and predatory behavior so damaging to its neighbors. The euro is pulled down in value by the predicaments of the others — too weak for Germany, too strong for the others. If Germany went back on the deutschemark, the currency might rise by half and crush Germany’s surplus. But then the others could devalue and restore economic health.
The euro’s odds are a lot worse than Japan’s and China’s. Markets know, hence the violent reaction to the ECB confession on Thursday. The German 10-year has fallen to a 2016 low at 0.072%, again approaching negative yield.
The US 10-year T-note in the last year, no trend since January, waiting for something big to happen:
The Fed-predictive 2-year T-note has retreated from a future progression of Fed hikes, today the lowest since January but truly a no-change forecast. The chart is one year back:
0.5% is better than last week’s 0.3%, still weaker than reality. The Atlanta Fed’s math is counting on an inventory drawdown, not tipover to recession:
The ECRI for the second week has improved slightly, still in dangerous terrain. Its metrics heavily value the flat yield curve, which is deceptive, but the ECRI’s record is so good that we should not dismiss its warning: