perception v reality

LOS ANGELES -- dear dearest darling diary.

market participants are for the most part too optimistic about when the

fed

will be done tightening. i feel it in my fingers. i feel it in my toes. its thumping through me so much that im going to say in the column today.

hey if you think theres going to be only one more tightening then write me so we can negotiate some kind of wager.

and yeah ive lost a few bottles of bourbon and a pile of jackson hole tee shirts on gambles like that in the past but betting makes a fun thing even funner. and besides im a good economist and a great american and so i never mind putting my money and alcohol and tobacco and firearms where my mouth is because im not a sissy.

darling diary im also thinking that we will be handed a quarter-point tightening later this month. its too tough for me to believe that even if the employment numbers print way weak tomorrow and the ppi prints way weak on the ninth and retail sales print way weak on the thirteenth and the cpi prints way weak on the fourteenth the feds will wool hey these numbers alleviate all the concerns we have about tight labor markets and wages and the gap between increases in demand and even the rapid pace of productivity-driven gains in potential supply so much that yeah we feel comfortable doing nothing now...and waiting another two full months until the august meeting to see how things play out. thats how i feel rightthisminute yet the fed funds futures

traders are way smarter than i am so if they start leaning decidedly towards no hike (and they did move more in that direction in the wake of the

napm numbers released this morning) then i got no problem at all going that route too.

the perception that the economys definitely embarked on a meaningful slowing course (one that will prove significant and permanent enough to render further rate hikes unnecessary) has been growing for a few weeks now. thats why tomorrows employment figures will (one way or another) rock us. i reckon it would take a huge set of numbers to get

participants back to thinking oh my the tightening cycle is most certainly not over. like

(a) hourly earnings would have to show a half-point increase (consensus is looking for a four-tenths print) and the comprehensive annual revisions (which will impact seasonally adjusted data through January 1995 and unadjusted data through April 1998) would have to show bigger numbers for earlier months (cause that would put trend in a worse light)

and

(b) the unemployment rate would have to drop a tenth (consensus has it holding steady at three-nine)

and

(c) payrolls would have to print near five hundred thousand (consensus is looking for something in the high threes) and the april increase would have to be revised up by a healthy margin

and what are the chances of all (or even most) of that happening? i mean we always seem to be fearing big employment reports that never come to pass.

the other option is all else. numbers that print at or near consensus (and especially ones that print way below) will send us to the races. thats great for the bullish bond call but it will cast serious doubt on the strong-economy-through-year-end forecast. folks will write in and say why do you gotta front? how can you keep spinning the same story when everything from housing to autos to retail sales to manufacturing has clearly turned over? and ill have to reiterate the same things as always.

that financial conditions are still so accommodative that to read a lot into a second-quarter slowdown in the wake of a first quarter stronger than anything weve seen in more than ten years seems unwise. that a pause in cases like these almost always turns out to be just that. that only a modest deceleration in the pace of activity will not keep the feds away because central bank thinking is such that in order to remove imbalances an economy growing x percent above trend must be slowed not just to trend but rather to x percent below it. that wages and prices can and do continue to creep up even as activity decelerates. that every time shares rally huge on slowdown thinking they make materially less likely the very policy path for which theyre most hoping.

and that i would rather lay out the thinking behind an unpopular forecast and have it prove wrong than be one of those guys who come hell or high water just keeps saying

whatever he needs to say to move product.

and diary?

i think im totally head-over-heels in love with a cute boy named cory.

Side Dish

A present to the first person to correctly name the three songs referenced above.