It has been three weeks since I last updated these pages, and as I leaf through my charts, I am tempted to conclude that nothing substantial has changed. In the global economy, headline leading indicators signal stable and relatively robust growth. The first chart below shows that my diffusion index of macroeconomic leading indicators is rising gently, indicating that the pace of industrial production growth in the major advanced economies will rise to slightly above 4% year-over-year in the next few months. The two following charts show individual leading indicators in the large economies. They are all rising year-over-year, and momentum has accelerated, with the notable exception of the U.K's leading index still stuck below zero. Finally, I throw in charts of real M1 growth—arguably the best single macroeconomic leading indicator—and these data also are constructive. We have to watch the slowdown in China, but M1 growth rose in July, which does not suggest a liquidity crunch, at least not in Q3.
Read MoreThe second quarter finished with a tricky question for markets. Did last week’s price action signal a significant change in tune or was it just insignificant noise in an unchanged trend of lower global long-term interest rates? One the one hand, it’s tempting for me to run a victory lap. Here I was musing about a steeper U.S. yield curve and outperformance in financials and energy. On that background the most recent price action has been a slam-dunk. On the other hand, I also said that I thought yields would fall over the summer, and that the reflation trade wouldn’t re-rear its head until Q3. So perhaps I shouldn’t raise my arms in celebration just yet.
Read MoreI am still willing to give Mr. Trump the benefit of the doubt. We have no actual policymaking to judge yet, and at least some of the people he is surrounding himself with look capable. I admit, however, that the burden of evidence is getting heavy. The president-elect's tweets, on their own, are evidence that he has tendency to act long before thinking. Last week's presser also provided a timely reminder that we are dealing with a volatile character. I understand that infuriating "soft" liberals, such as yours truly, is exactly what Mr. Trump and his strategists want. I have no doubt that the incoming administration's communication "style" is carefully planned. The base loves it! But problems are brewing, chiefly among which is the growing chasm between Mr. Trump and the intelligence apparatus upon which he will so desperately depend for policymaking when he takes office.
Read MoreA number of interesting stories are being groomed at the moment in financial markets. First off, investors looking for a “Reverse Twist” story at the BOJ were partly vindicated by the introduction of yield curve control, but the details were underwhelming. In the end, the BOJ opted to commit to the maintenance of status quo.
The most interesting aspect of this policy move, however, has been the interpretation of its significance and what indeed it is trying to achieve. The main story, as I see, is that the BOJ wants a steeper yield curve, and they’re trying to achieve that by playing chicken with the momentum chasers in duration. They are sending a signal to the market that they will continue to do QE, but that they won't buy as much duration as before. They are betting on herding and front-running here. That has worked before for central banks, but will it this time, and will investors start to discount a similar move in Europe? The initial evidence doesn’t really suggest that this theme will have legs.
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