Fed not in any hurry to signal a rise in rates after tapering ends

Outlook

The US economy is in decent shape, if we believe the JOLTS survey. Job openings rose to 3.3, up 0.5%, while those quitting jobs rose 47,000, meaning plenty of people think they can get a new job. The ratio of job seekers to job openings fell to 2.02 from 2.14, the lowest since 2008. The average from 2002 to 2006 is 2.18. A Barclays analyst told Market News "… this sug-gests that there is little slack remaining in labor markets and that wage growth will pick up more quickly than it did at similar levels of the unemployment rate in past cycles."

This is a punch in the nose to the developing mindset that the Fed is deliberately behind the curve on tightening because of labor market conditions and will postpone until our teeth hurt to get a fat cushion of job growth and good labor market conditions. Sensible analysts have been pushing out the First Rate Hike to Sept—Oct 2015 from the original estimate of end-June. But these folks are not engaging in the housing market--mortgage applications released today is the third lowest volume since 2000. Real estate is moribund and perhaps fading.

This reminds us that JOLTS is not the only thing the Fed cares about. It cares about housing, too, and income inequality that deeply affects housing. The FT notes that US income inequality is at a record high when measured as the difference between metropolitan regions. This shapes “an uneven housing recovery that threatens to hold back the broader revival of the world’s largest economy.”

According to the FT, “US Commerce and Labor Department data for the 100 largest metropolitan areas by population, analysed for the Financial Times by property website Trulia, found the income disparity between the 10th most expensive region and the 90th by home prices in 2013 hit its widest since records began in 1969. The research shows Boston – ranked at 10 – reporting a per-capita income 1.61 times that of Cincinnati ranked at 90. At its low point in 1976, the gap was 1.36 times, between San Francisco and El Paso.”

Bottom line—the Fed is not in any hurry to signal a rise in rates after tapering ends. The bond market gets it. The lower for longer stance is also encouraged by world events, of course.

We get US retail sales today, but more importantly, European GDP tomorrow. These two data sets are expected to highlight the growing divergence between the two regions. Normally this would be dollar-positive but we need to worry about the euro being so oversold. One thing we can probably feel more clear about is no more comments from eurozone officials calling for a weak euro. Central bankers can’t stop politicians from yammering, but they can squash the idea that they are listening or heeding.

The NYT reports that LeMonde quotes BBK chief Weidmann "The temptation to boost the competitive-ness of our economies by weakening the euro should not be the purpose of the single currency." This is in response to French calls for the ECB to take actions specifically to weaken the euro, rebutted last week by ECB chief Draghi. Reform from inside does work to revitalize (see Spain), so stop whining and get busy, he said. Weidman said "A strong Europe and a strong euro go hand in hand." This stance is very like former TreasSec Rubin’s statement that “A strong dollar is in the US best interests.” As every-one pointed out at the time about the Rubin mantra, a sentence is not a policy and in the absence of any plan or strategy to achieve the stated goal, empty words. All the same, Weidmann’s words will go down in history and we are going to hear the phrase all too many times in coming months and years.

On another policy matter, Bank of England Gov Carney said the BoE has contingency plans to avert “financial stability issues” in the event Scotland votes for independence in the Sept 18 referendum. The English want Scotland to stay (The Economist had a cover story recently on “Don’t leave us this way”) and some polls indicate the vote will be in favor of staying, but you never know. The UK government would like to forbid a currency union using the pound, but the Scots say they could keep the pound any-way. In a pinch, Scotland could adopt the euro, couldn’t it?

Net-net, the UK and Europe are in the soup and while the US is near the stove, not in the pot. And yet the dollar rally against the euro is stalled. It’s worrisome. The range is so narrow—only 115 points—that it will be easy to see any breakout as the real deal. Besides, the capital flight out of Russia and Ukraine could go more to the euro than to the dollar. We could be getting a short squeeze right when conditions look the most dire.