June 30, 2014

Doug Kass on James Bullard of the Fed

James Bullard, the St. Louis Fed president, does not vote and is usually middle of the road on the dove/hawk scale, but he is shifting into the hawk camp today. 

He thinks inflation "may" reach 2% by year-end (vs. year-end 2015 that the FOMC dots show). He thinks the unemployment rate will drop below 6% by year-end (FOMC dots estimate 2015). And, he sounds like Mark Carney of the Bank of England with this line: "[M]arkets don't appreciate how close Fed is to goals."

His conclusion from this is that he forecasts the first rate rise at the end of first-quarter 2015. 

Bottom line: In terms of markets and rate policy, we can discount Bullard, because he does not vote, and Fed Chair Janet Yellen and New York Fed President William Dudley still rule the dovish roost. But, the reality of the recent unemployment rate and inflation data points to a sooner rather than later meeting of the Fed's mandates, and certainly before the mid-2015 aggregate FOMC estimates, and certainly earlier than stock market expectations.

In the midst of the poor first-quarter 2014 GDP report and mediocre durable goods figure, there was a bright spot in the data today.

The Markit measure of services in the U.S. in June rose to 61.2 from 58.1 in May. The survey is only 5 years old and thus doesn't have much history, but today's number was the best since it began. The new business component was up, but backlogs fell. Employment rose to the highest level since September. Cost pressures were evident, as input prices rose to the most since October, but the prices charged fell to the lowest since March, thus creating a potential margin issue if sustained. Business expectations for the next 12 months did moderate month over month. 


Bottom line: This figure has limited history, and therefore the ISM services index should be the preferred gauge of business service sentiment. But at least today's number somewhat shifts the attention back to the fact that as bad as the first quarter was, the economy certainly improved in the second quarter (but off a much lower than expected base).

The degree of follow-through in the second half of the year remains to be seen. The bond market is certainly giving its opinion on today's data as the two-year/10-year spread is narrower by 6 basis points, to the lowest in a year. Part of this is a vote on growth, and maybe now some of it is a vote on inflation and how the Fed may respond.


via http://www.thestreet.com/story/12760009/1/bullard-a-hawk-at-the-fed-parsing-markit-data-best-of-kass.html

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