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    Enzio von Pfeil

    The Economic Clock® Blog

Dr. Enzio von Pfeil

A seasoned global economist. Enzio von Pfeil’s skill lies in understanding macro-economics, the business cycle and business operations. Hong Kong-based Enzio von Pfeil has an international education which culminated in studying inter alia under Prof. Friedrich von Hayek. He has a distinguished 34+ year career (US, Germany, UK and Hong Kong) in macro-investment economics.

His understanding of currency, commodity, bond and equity movements as they relate to socio-political developments across the global economy, underscores the authority and integrity of his Economic Clock® Blog.

Media Presence

Author of five books, and with a 30-year global career as an investment economist in the USA, Germany, UK and Hong Kong, Enzio von Pfeil is a professional speaker and commentator on Reuters, Bloomberg and ChannelNews Asia on economic impacts on markets, industry sectors and corporations.

Strategic Asset Allocation

Interest rates vs interest rate futures: connecting the dots

Sunday, September 21, 2014

  1. Forecasts.  (For the sake of convenience, remember that the Fed instituted its near-zero Fed Funds rates in December 2008.)        Just this Wednesday, the FOMC's members revised their Fed Funds forecasts via a "dot plot". By the end of 2015, the FOMC's median forecast is 1.375%; interest rate futures suggest 0.80%, and by late 2016, the FOMC's median forecast is 2.875%, versus interest rate futures of 1.82%. This means that in 2015, the FOMC forecasts exceed the bond market's by 72%, whilst in 2016, the FOMC's exceed the bond market's by 58%.
  2. Inflation. These projections ultimately are based on the path of inflation. The FOMC obviously gauges that threat far higher than bond markets do.
  3. Types of inflation matter. Part of this dichotomy may lie in exactly what is meant by inflation. Hitherto, all that we read about is "inflation", as if there is only one type. This is misleading. There are at least two types: cost-push, and demand-pull.  Cost-push inflation is based on supply, on inputs. Demand-pull is based on gravity, on the strength of demand fanning fear and greed.
  4. The Economic Clock's ® inflation. We gauge the Economic Time® on demand-pull inflation: the Central Bank creates an excess supply of money precisely in order to revive real-economy demand. But once such demand has fuelled dangerously higher inflation, the Central Bank seeks to cool end-demand by tightening money supply - by creating an excess demand for money.
  5. Wage pressures as root cause of demand-pull inflation. It is driven mainly by wage pressures: the more money that people have in their pockets, the more avid their consumption. So the manufacturers (of goods as well as services) need to raise prices in order to compensate for the higher labour input costs...
  6. Low wage pressures.  Wage-led inflation is a thing of the past:globalization, innovation as well as a strong dollar have pout a lid on just how much workers can demand. Globalization means that all sorts of work can be imported our out-sourced; innovation means that machines replace brawn, and the strong dollar reduces America's import costs, adding further downward pressure on domestic costs.
  7. Squinting in different directions. Thus, the FOMC may be looking at headline inflation, not sufficiently differentiating between this cost-push vs demand-pull inflation. Meanwhile, bond markets gauge primarily  low demand-pull inflation on account of wages staying in the box. Indeed, as Michael Mackenzie notes in this Friday's Financial Times (p. 22, "Expectations of inflation over the next 10 years, as measured  by comparing yields on Treasury inflation protected securities and those of nominal Treasury bonds, have dropped to their lowest level in 14 months. A drop in the so-called breakeven rate to 2.08 per cent from 2.27 per cent this summer reflects the influence of a stronger dollar and lower commodity prices, which have reduced inflationary pressures across the US economy in recent months."
  8. Investment implicationsKeep buying the dollar, as short rates will rise by 2Q15. Keep buying US stocks: the much-feared "excess demand for goods" has to keep propelling US earnings, especially of under-valued cyclicals. Play the yield curve borrow at the short end of the curve and invest at its long end./ in high dividend-yielding stocks.
  9.  Read more