The big story, which we discussed in class this past week, is the rise of long-term interest rates. The 10-year ($TNX) has risen past two resistance lines over the past several weeks, and is now above the psychological 5% barrier. Next resistance is around 5.3% (I was kind in class when I used this, the preferable point is more like 5.45%). Note the recent trends surrounding this: mortgage rates rising; the dollar gaining strength; expectations for a slower pace of economic activity in the second half of this year are being reinforced.
This week, there are several critical reports to watch. There will be both a CPI report and a PPI report. Also, the minutes of the last Fed meeting will be released. All of these contain important and market-moving information. If you want a real-time indicator of inflationary expectations relevant to the 10-year bond, view the behavior of Treasury Inflation Protected Security prices (TIP) relative to bond prices for longer duration (TLT). To evaluate this, try viewing the ratio TIP:TLT on StockCharts.com. Switch from candlesticks or OHLC bars to lines, and add RSI(9) as usual. IN REAL-TIME, what are markets saying about expected inflation? How is this different from what the reports are saying? Also, check to see how this changes after each report is released.
Also view the yield curve. You can see this either from Bloomberg.com (under Market Data and rates) or Bondheads.com. If you use Bloomberg.com, click on the tabs to see the yield curves for other countries. Want to see a really strong positive yield curve? Try Japan. Interestingly, the British Pound has been appreciating relative to the US Dollar lately. Check out their yield curve. What does that say about their economy in the coming months? What about Pound strength relative to the US dollar going forward? Hmmmm.
We'll talk more about all this during class. But you should begin to follow trends like these and different variables to understand how the economy is performing now, or how things will likely change in the future. THIS IS ESPECIALLY USEFUL FOR YOUR FORECAST PAPERS!!
Monday, April 17, 2006
Sunday, April 2, 2006
Dollar Strength
The strength of the US dollar is something that has been hotly debated of late. If you follow this measure each day, you see "ups" some days and "downs" on other days, but no dominant pattern (at least if you follow the financial press).
How should you follow the dollar? The dollar index ($USD) measures the strength of the US dollar against its major trading partners. It is not a bilateral exchange rate. Think of the dollar index as an equilibrium price -- in this case for the dollar. How is this price determined? Simply by supply and demand. So, you can use the supply and demand for dollars by the US and its major trading partners to model this variable. I will also refer you to my handout on Flexible Exchange Rates.
At the present time, it appears that relative US interest rates are the most important driving force for the Dollar Index. The Fed's indecision about whether it is done raising interest rates (at least in its post-meeting statements) has lead to recent market uncertainties and dollar "bounces." This is critical in light of recent slowing by the housing sector which has done much of the "heavy lifting" for our economy the past few years (an article about this).
In the last few days, the 10-year government bond ($TNX) has gained significant ground, breaking through resistance, finishing the day at 4.85%. This is NOT a good time to have money in bond mutual funds (see article).
How high will the 10-year go? To answer this, first examine a chart of $TNX and find support and resistance. Where is the next resistance? Are we close to that now? For extra credit (part 1), graph the 10-year bond using weekly data for three years in StockCharts.com. Change the moving averages to 10 and 40 periods (this makes them comparable to daily values of 50 and 200). Annotate this graph going back as close to the beginning of the three-year period as is necessary and draw relevant support and resistance lines. Print this out in a Word document. (do not hand draw the lines).
The other relevant question is how tied to interest rates the US Dollar is. According to economic theory, it is very tied, for reasons outlined in class and on the handout for Flexible Exchange Rates. For extra credit part 2, make a graph of the US Dollar Index ($USD) as a dotted line, remove the moving averages, and select Price as one of the indicators -- use $TNX -- and place this behind the dollar graph (this is done by changing the box from "below" to "behind price." Past this into the Word document and in one paragraph discuss how these two variables are related. Is it what theory leads us to believe? Bring this to our next class. It is due at the beginning of class on Tuesday.
In order to determine whether the 10-year bond might break beyond current resistance, you can use the model of interest rates we developed in class at the beginning of the semester. A forecast by you would allow you to make an "educated" guess as to whether we will break through the next resistance.
How should you follow the dollar? The dollar index ($USD) measures the strength of the US dollar against its major trading partners. It is not a bilateral exchange rate. Think of the dollar index as an equilibrium price -- in this case for the dollar. How is this price determined? Simply by supply and demand. So, you can use the supply and demand for dollars by the US and its major trading partners to model this variable. I will also refer you to my handout on Flexible Exchange Rates.
At the present time, it appears that relative US interest rates are the most important driving force for the Dollar Index. The Fed's indecision about whether it is done raising interest rates (at least in its post-meeting statements) has lead to recent market uncertainties and dollar "bounces." This is critical in light of recent slowing by the housing sector which has done much of the "heavy lifting" for our economy the past few years (an article about this).
In the last few days, the 10-year government bond ($TNX) has gained significant ground, breaking through resistance, finishing the day at 4.85%. This is NOT a good time to have money in bond mutual funds (see article).
How high will the 10-year go? To answer this, first examine a chart of $TNX and find support and resistance. Where is the next resistance? Are we close to that now? For extra credit (part 1), graph the 10-year bond using weekly data for three years in StockCharts.com. Change the moving averages to 10 and 40 periods (this makes them comparable to daily values of 50 and 200). Annotate this graph going back as close to the beginning of the three-year period as is necessary and draw relevant support and resistance lines. Print this out in a Word document. (do not hand draw the lines).
The other relevant question is how tied to interest rates the US Dollar is. According to economic theory, it is very tied, for reasons outlined in class and on the handout for Flexible Exchange Rates. For extra credit part 2, make a graph of the US Dollar Index ($USD) as a dotted line, remove the moving averages, and select Price as one of the indicators -- use $TNX -- and place this behind the dollar graph (this is done by changing the box from "below" to "behind price." Past this into the Word document and in one paragraph discuss how these two variables are related. Is it what theory leads us to believe? Bring this to our next class. It is due at the beginning of class on Tuesday.
In order to determine whether the 10-year bond might break beyond current resistance, you can use the model of interest rates we developed in class at the beginning of the semester. A forecast by you would allow you to make an "educated" guess as to whether we will break through the next resistance.
Saturday, March 4, 2006
Rates Breakout
The big story this week is the rise of the ten year bond rate ($TNX) above resistance (both R1, as discussed in class, and now R2). This rate closed Friday at 4.684%, its highest level in more than a year. The main "fuel" for the breakout beyond R2 is a rate hike by the European Central Bank, a higher-than-expected inflation reading in Japan, implying they will begin raising rates, and several strong indicators in the US (read story about this).
There is great potential significance to this breakout, assuming it remains in tact. IF this turns out to be the bottom for bond prices, rising 10-year rates will translate into rising mortgage rates, bad news to a sector already weakening that has provided so much of the basis for economic advance. Second, bond prices tend to peak ahead of stock prices (historically), so the days of a bullish stock market might be numbered (REMEMBER my lecture on the signal given by declining year-over-year growth rates in real GDP and Real Personal Consumption Expenditures). Fortunately, though the yield curve had inverted in the most relevant way (3-month rate higher than the 10-year rate), this has reversed for now. Stay tuned!
There are "talking heads" saying that everything is well and stronger times are ahead. A good example is recent statements by Fed Vice Chairman Ferguson (read article). While I do believe we are not about to fall into the abyss of recession in the near term, I don't expect some surge in the level of economic activity that will be sustained for a number of years. That's what the persons who follow rates of change assume. As I stated in class, I am one of the rate of change in the rate of change crowd!
Finally, how does one find the new level of resistance for $TNX? I suggest switching the time frame in StockCharts.com from daily to weekly and extending the time period from the default of "Fill the Chart" to 3 Years. In other words, LOOK LEFT. WHEN USING WEEKLY DATA, CHANGE THE MOVING AVERAGE SETTINGS (divide the usual values by 5 due to 5 trading days per week). So, instead of 50-day and 200-day Moving Averages, change these to 10-week and 40-week values, respectively.
There is great potential significance to this breakout, assuming it remains in tact. IF this turns out to be the bottom for bond prices, rising 10-year rates will translate into rising mortgage rates, bad news to a sector already weakening that has provided so much of the basis for economic advance. Second, bond prices tend to peak ahead of stock prices (historically), so the days of a bullish stock market might be numbered (REMEMBER my lecture on the signal given by declining year-over-year growth rates in real GDP and Real Personal Consumption Expenditures). Fortunately, though the yield curve had inverted in the most relevant way (3-month rate higher than the 10-year rate), this has reversed for now. Stay tuned!
There are "talking heads" saying that everything is well and stronger times are ahead. A good example is recent statements by Fed Vice Chairman Ferguson (read article). While I do believe we are not about to fall into the abyss of recession in the near term, I don't expect some surge in the level of economic activity that will be sustained for a number of years. That's what the persons who follow rates of change assume. As I stated in class, I am one of the rate of change in the rate of change crowd!
Finally, how does one find the new level of resistance for $TNX? I suggest switching the time frame in StockCharts.com from daily to weekly and extending the time period from the default of "Fill the Chart" to 3 Years. In other words, LOOK LEFT. WHEN USING WEEKLY DATA, CHANGE THE MOVING AVERAGE SETTINGS (divide the usual values by 5 due to 5 trading days per week). So, instead of 50-day and 200-day Moving Averages, change these to 10-week and 40-week values, respectively.
Friday, February 17, 2006
January PPI
This morning the government reported that for January, the Producer Price Index (PPI) rose by more than was expected. The overall PPI grew by 0.3% (compared to December), while the less volatile core rate, which excludes both food and energy, rose by 0.4%. This signals that for January, at least, "wholesale inflation" was worse than thought (read an article about this and compare it to another article).
What do you suppose the reaction was in the bond market? Normally, a "hot" inflation number will cause a bond sell off, pushing bond prices down and interest rates higher. Today, however, the opposite was the case -- rates actually fell. How could this happen?
Remember, when we analyze this market, we must, of necessity, consider "other things being equal." Today, that was not the case. First, the number itself might have been bad, but this is only the first bad number in a while for the PPI. And, never pay too much attention to the value of an indicator for a single time period. Second, the shocking rise was on a sequential rate of change, comparing December to January. When an alternative comparison is used, comparing this January to last January, called the year-over-year growth rate, that number was actually fairly good (1.5%), and below the year-over-year growth rate for December (of 1.7%).
As this was happening, oil prices continued their recent rise, moving from around $58 per barrel just a few days ago to $61.29 today. Again, this would normally be bad for bonds, which makes the PPI story even more interesting. For extra credit, due at the beginning of Tuesday's class, go to StockCharts.com and plot the price of oil ($WTIC) with the 9-day RSI and the Relative Strength compared to the S&P and annotate it with comments and lines that summarize the main aspects of its performance over the last week or two.
Finally, the University of Michigan's Consumer Sentiment Index fell more than expected today, further reinforcing the upward price movement in bonds.
What do you suppose the reaction was in the bond market? Normally, a "hot" inflation number will cause a bond sell off, pushing bond prices down and interest rates higher. Today, however, the opposite was the case -- rates actually fell. How could this happen?
Remember, when we analyze this market, we must, of necessity, consider "other things being equal." Today, that was not the case. First, the number itself might have been bad, but this is only the first bad number in a while for the PPI. And, never pay too much attention to the value of an indicator for a single time period. Second, the shocking rise was on a sequential rate of change, comparing December to January. When an alternative comparison is used, comparing this January to last January, called the year-over-year growth rate, that number was actually fairly good (1.5%), and below the year-over-year growth rate for December (of 1.7%).
As this was happening, oil prices continued their recent rise, moving from around $58 per barrel just a few days ago to $61.29 today. Again, this would normally be bad for bonds, which makes the PPI story even more interesting. For extra credit, due at the beginning of Tuesday's class, go to StockCharts.com and plot the price of oil ($WTIC) with the 9-day RSI and the Relative Strength compared to the S&P and annotate it with comments and lines that summarize the main aspects of its performance over the last week or two.
Finally, the University of Michigan's Consumer Sentiment Index fell more than expected today, further reinforcing the upward price movement in bonds.
Saturday, February 4, 2006
January Employment Report
The jobs report yesterday had some surprises. The "headline" employment number rose by around 190,000, below expectations. But prior month totals were revised upwards. You should always view revisions to prior data when judging newly released data -- on anything.
To read a story about this click here. Look briefly at the overall report as well.
There is more to the employment report than just employment. It also contains data on the unemployment rate, hours worked, and the average hourly wage. It was these that triggered the ultimate reaction by the stock and bond markets. Average hourly earnings rose a greater-than-expected 0.4% for the month and 3.3 percent for the year. Along with the disappointing productivity number on Thursday, this further reinforced inflation fears. As a result, there was an initial rise in bond interest rates (remember this from class -- the inflation premium in interest rates increased, pushing up nominal rates). The stock market also reacted badly. Why? Two things. First, higher interest rates are bad for stocks. We will see in class this coming week that this entails a substitution of interest-earning assets for stocks, and it lowers the present discounted value of expected profits. Second, the acceleration of inflationary expectations means that the Fed will not be finished raising interest rates very soon as had been thought. In fact, the belief that the Fed was almost done raising rates is what led the Dow-Jones Industrial Average over the 11,000 mark earlier this year.
From a technical analysis point of view (read Stikki Stock Charts if it ever gets here), this means that the resistance encountered by the Dow-Jones average at 11,000 held, and that it will likely hold for a while. A similar argument pertains to both the NASDAQ and the S&P 500 (those doing this as your forecast paper topic should start to follow this). The pressing question from a technical point of view is therefore, where is support for each of these markets. For the S&P 500, prior resistance at 1,275 had been exceeded (i.e., a breakout
occurred). And, as typically occurs, priror resistance became support during the breakout. Now, unfortunately, things have reversed once again -- 1,275 is once again resistance. Support (for now) is at 1,250.
In the blog entry above this one, I have provided a graph of the S&P 500 and the recent breakdown from a triangle formation. Not a very flattering picture. Why? Besides the obvious declines, I have added information about the RSI (I will distribute the handout for this soon). The bad news is that the RSI is not yet in oversold territory (RSI <30), so this decline might have a ways to go yet.
To read a story about this click here. Look briefly at the overall report as well.
There is more to the employment report than just employment. It also contains data on the unemployment rate, hours worked, and the average hourly wage. It was these that triggered the ultimate reaction by the stock and bond markets. Average hourly earnings rose a greater-than-expected 0.4% for the month and 3.3 percent for the year. Along with the disappointing productivity number on Thursday, this further reinforced inflation fears. As a result, there was an initial rise in bond interest rates (remember this from class -- the inflation premium in interest rates increased, pushing up nominal rates). The stock market also reacted badly. Why? Two things. First, higher interest rates are bad for stocks. We will see in class this coming week that this entails a substitution of interest-earning assets for stocks, and it lowers the present discounted value of expected profits. Second, the acceleration of inflationary expectations means that the Fed will not be finished raising interest rates very soon as had been thought. In fact, the belief that the Fed was almost done raising rates is what led the Dow-Jones Industrial Average over the 11,000 mark earlier this year.
From a technical analysis point of view (read Stikki Stock Charts if it ever gets here), this means that the resistance encountered by the Dow-Jones average at 11,000 held, and that it will likely hold for a while. A similar argument pertains to both the NASDAQ and the S&P 500 (those doing this as your forecast paper topic should start to follow this). The pressing question from a technical point of view is therefore, where is support for each of these markets. For the S&P 500, prior resistance at 1,275 had been exceeded (i.e., a breakout
occurred). And, as typically occurs, priror resistance became support during the breakout. Now, unfortunately, things have reversed once again -- 1,275 is once again resistance. Support (for now) is at 1,250.In the blog entry above this one, I have provided a graph of the S&P 500 and the recent breakdown from a triangle formation. Not a very flattering picture. Why? Besides the obvious declines, I have added information about the RSI (I will distribute the handout for this soon). The bad news is that the RSI is not yet in oversold territory (RSI <30), so this decline might have a ways to go yet.
Saturday, January 28, 2006
GDP Report
Friday's report on Q4 GDP growth was both surprising and disappointing. Yet the stock market posted a very strong day in spite of this number. Why?
First for the GDP number. The reported growth rate, 1.1 percent, is much smaller than what was expected (around a 2.6% rate). But examination "below the surface" of this number reveals some trends that are either one-time in nature or just plain incorrect. Government spending fell at a double-digit rate from Q3 to Q4. What's the probability of that repeating? Not much. Also, the amazing car sales prompted earlier in the year by major discounts essentially "stole" sales from the end of the year, making the Consumption growth rate much slower than is realistic to expect for this year. Then there is the fact that Friday's number is preliminary, using ESTIMATED values for Net Exports and Inventories. These may also be revised in the next two relases of Q4 data.
So, why the stock market response? Other things being equal (which we spoke about in class on Thursday), this should have hurt stock prices. But "other things" are seldom equal. Housing data released the same day were encouraging. Several large companies reported strong earnings. But, in a sense, the GDP number itself was a "win-win" for the stock market. IF it is correct, then the clear implication is that the Federal Reserve will have almost no further tightening to do. This is beneficial to stocks, since rising interest rates are bad for stocks (we will go over the reasons in class over the next two weeks). But assuming this growth rate is too low, which is a very safe bet, this implies profits, which are a fundamental driver of stock prices, have remained strong going into 2006. And the stronger are profits, the higher stock prices tend to move (other things being equal, of course).
We will cover this topic in detail on Tuesday. Make sure you bring the Online Notes for GDP to class with you.
First for the GDP number. The reported growth rate, 1.1 percent, is much smaller than what was expected (around a 2.6% rate). But examination "below the surface" of this number reveals some trends that are either one-time in nature or just plain incorrect. Government spending fell at a double-digit rate from Q3 to Q4. What's the probability of that repeating? Not much. Also, the amazing car sales prompted earlier in the year by major discounts essentially "stole" sales from the end of the year, making the Consumption growth rate much slower than is realistic to expect for this year. Then there is the fact that Friday's number is preliminary, using ESTIMATED values for Net Exports and Inventories. These may also be revised in the next two relases of Q4 data.
So, why the stock market response? Other things being equal (which we spoke about in class on Thursday), this should have hurt stock prices. But "other things" are seldom equal. Housing data released the same day were encouraging. Several large companies reported strong earnings. But, in a sense, the GDP number itself was a "win-win" for the stock market. IF it is correct, then the clear implication is that the Federal Reserve will have almost no further tightening to do. This is beneficial to stocks, since rising interest rates are bad for stocks (we will go over the reasons in class over the next two weeks). But assuming this growth rate is too low, which is a very safe bet, this implies profits, which are a fundamental driver of stock prices, have remained strong going into 2006. And the stronger are profits, the higher stock prices tend to move (other things being equal, of course).
We will cover this topic in detail on Tuesday. Make sure you bring the Online Notes for GDP to class with you.
Saturday, November 5, 2005
Employment Report
Yesterday morning's employment report was, at first glance, disappointing. While payroll employment was expected to show a net change of about 125,000, the actual change was only 56,000, less than half the expectation. A good story describing this is in Money.com. While the payroll employment change was disappointing, the unemployment rate fell slightly from 5.1% to 5.0%. All of this is detailed in the official report by the Bureau of Labor Statistics.
A few things to note. Virtually all newspaper/Internet articles describing this are WRONG -- they state that the 56,000 number was the addition to employment. It was actually the net change in employment -- the difference between jobs added and jobs lost. In a post-manufacturing economy like ours, job loss occurs every month (unfortunately). About 15 or 20 years ago, what the newspapers described would have been accurate.
Note also how much of the discussion about this report centered on the unemployment rate. Did you hear anyone say (or write) that the labor force fell last month? A falling unemployment rate caused by a lower labor force (the unemployed dropping out of the labor force) is little cause for celebration! More importantly, the unemployment rate is a lagging indicator.
One last point. Average hourly wages rose more than expected, providing fuel to "inflation hawks," part of a bond market sell off yesterday. I wonder how much of this is caused by the fact that a number of the persons no longer employed as the result of the hurricanes had low and below-average earnings (tourism workers, etc.). Hmmm.
Returning to the bond market, the 10-year bond rose by 1.3 basis points yesterday to 4.66%, the dollar strengthened, and the stock market continued its recent rally. As an extra credit exercise (due at the beginning of class on Tuesday), graph the ten-year bond using daily data for the last year. Add comments, support/resistance, and indicator information, etc. with the StockCharts annotation tools (Note: when adding comments, leave a space after the last character before closing the box). Then do the same thing with two years of weekly data on the 10-year bond. In a short paragraph (a Word document where you can also paste the two graphs) contrast what the daily and weekly charts are showing.
A few things to note. Virtually all newspaper/Internet articles describing this are WRONG -- they state that the 56,000 number was the addition to employment. It was actually the net change in employment -- the difference between jobs added and jobs lost. In a post-manufacturing economy like ours, job loss occurs every month (unfortunately). About 15 or 20 years ago, what the newspapers described would have been accurate.
Note also how much of the discussion about this report centered on the unemployment rate. Did you hear anyone say (or write) that the labor force fell last month? A falling unemployment rate caused by a lower labor force (the unemployed dropping out of the labor force) is little cause for celebration! More importantly, the unemployment rate is a lagging indicator.
One last point. Average hourly wages rose more than expected, providing fuel to "inflation hawks," part of a bond market sell off yesterday. I wonder how much of this is caused by the fact that a number of the persons no longer employed as the result of the hurricanes had low and below-average earnings (tourism workers, etc.). Hmmm.
Returning to the bond market, the 10-year bond rose by 1.3 basis points yesterday to 4.66%, the dollar strengthened, and the stock market continued its recent rally. As an extra credit exercise (due at the beginning of class on Tuesday), graph the ten-year bond using daily data for the last year. Add comments, support/resistance, and indicator information, etc. with the StockCharts annotation tools (Note: when adding comments, leave a space after the last character before closing the box). Then do the same thing with two years of weekly data on the 10-year bond. In a short paragraph (a Word document where you can also paste the two graphs) contrast what the daily and weekly charts are showing.
Saturday, October 29, 2005
GDP Report
Friday morning, the preliminary Q3 GDP report was released. While the growth rate, 3.8%, was slightly higher than expected, the media has attributed the large stock market rally to this report.
Screen the media in a situation like this. Everyone knows that Q3 is history and Q4 growth will be slower than the Q3 value. Why the stock run-up then? Partially it was a short-covering rally, where shorts, persons who are betting that the market and individual stocks will be declining, sell borrowed shares of these stocks from their brokers. IF all goes as planned, and the stock prices decline, they can then purchase the shares of these stocks to replace their borrowings at a lower price, giving them profit. On rally days like yesterday, stock prices rise, meaning they will have to pay more to buy the replacement shares, either limiting profit or resulting in an outright loss. So, they often "pull the trigger" and purchase the stocks, leading to further increases. If you graph the Dow-Jones Index ($INDU), you will see two major resistance hurdles for the next couple of weeks: the 50-day MA at 10,437 and the 200-day MA at 10,500. Beyond this, the declining resistance line is at 10,640. Will another bounce off this resistance occur? Stay tuned.
Look at the dollar on days like this. The dollar was higher, and both stock and bond prices rose. What does this indicate? A capital inflow from overseas investors whose overall fears about the future course of the US economy were temporarily pushed aside (remember, they are still unsure about Fed Chair designee Bernarke).
Read about the Q3 GDP report, and remember the "tricks" I showed you about how to summarize all of this data. Look for the significant changes in items from last quarter (Table 1 is % changes, Table 2 notes contributions of individual elements). Remember: this is a preliminary report, where inventories are estimated (September data is not in yet). The same is true for Net Exports.
Keep an eye on Government -- its contribution rose significantly in Q3 as Gulf Coast relief efforts began. This will intensify in Q4, helping that quarter's final value. For durable goods, especially auto sales, sales were higher in Q3. I doubt they will do as well in Q4 as the big discount programs are largely over and they "borrowed" some sales that would have occurred in Q4.
Screen the media in a situation like this. Everyone knows that Q3 is history and Q4 growth will be slower than the Q3 value. Why the stock run-up then? Partially it was a short-covering rally, where shorts, persons who are betting that the market and individual stocks will be declining, sell borrowed shares of these stocks from their brokers. IF all goes as planned, and the stock prices decline, they can then purchase the shares of these stocks to replace their borrowings at a lower price, giving them profit. On rally days like yesterday, stock prices rise, meaning they will have to pay more to buy the replacement shares, either limiting profit or resulting in an outright loss. So, they often "pull the trigger" and purchase the stocks, leading to further increases. If you graph the Dow-Jones Index ($INDU), you will see two major resistance hurdles for the next couple of weeks: the 50-day MA at 10,437 and the 200-day MA at 10,500. Beyond this, the declining resistance line is at 10,640. Will another bounce off this resistance occur? Stay tuned.
Look at the dollar on days like this. The dollar was higher, and both stock and bond prices rose. What does this indicate? A capital inflow from overseas investors whose overall fears about the future course of the US economy were temporarily pushed aside (remember, they are still unsure about Fed Chair designee Bernarke).
Read about the Q3 GDP report, and remember the "tricks" I showed you about how to summarize all of this data. Look for the significant changes in items from last quarter (Table 1 is % changes, Table 2 notes contributions of individual elements). Remember: this is a preliminary report, where inventories are estimated (September data is not in yet). The same is true for Net Exports.
Keep an eye on Government -- its contribution rose significantly in Q3 as Gulf Coast relief efforts began. This will intensify in Q4, helping that quarter's final value. For durable goods, especially auto sales, sales were higher in Q3. I doubt they will do as well in Q4 as the big discount programs are largely over and they "borrowed" some sales that would have occurred in Q4.
Sunday, October 23, 2005
Assignment #1 Answers
I will provide a brief overview of questions #1 and #2.
#1) The MPC falls, so the MPS rises. This causes AE to be less steep, lowering the equilibrium value of Y. Also, the multiplier falls. With a flatter AE curve, monetary tightening, which raises r and lowers autonomous C and Ip, will cause smaller declines in equilibrium Y.
#2) As foreign income rises relative to that in the US, this stimulates US exports to these countries. At the same time, US equities become relatively less attractive, depressing equity prices here. This results in the dollar depreciating relative to foreign currencies (whose economies are growing more rapidly than the US). The capital outflow will also affect fixed income markets here, resulting in a sell off, and higher interest rates.
#1) The MPC falls, so the MPS rises. This causes AE to be less steep, lowering the equilibrium value of Y. Also, the multiplier falls. With a flatter AE curve, monetary tightening, which raises r and lowers autonomous C and Ip, will cause smaller declines in equilibrium Y.
#2) As foreign income rises relative to that in the US, this stimulates US exports to these countries. At the same time, US equities become relatively less attractive, depressing equity prices here. This results in the dollar depreciating relative to foreign currencies (whose economies are growing more rapidly than the US). The capital outflow will also affect fixed income markets here, resulting in a sell off, and higher interest rates.
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