Last week was a good day for my boss Ian Shepherdson who has been sticking his neck out since the beginning of the year with a call that the Fed would cut rates this year by more than the consensus believes. It was a bad day for a lot of other forecasters and investors. I recently joked with him that we were just one bad payroll report away from markets freaking out. That report landed on Friday, pushing already nervy markets into near meltdown. We know the drill; bonds soared, equities crashed, and “US recession risks” hit a headline near you. Of course, the Fed hasn’t cut rates yet, but even before Friday’s data, everyone expected the first cut in September. Expectations are now shifting towards a 50bp reduction, and further cuts in quick succession after that. The decision to hold rates in July is now freely being seen as a mistake.
Read MoreThere’s been a lot of talk about the political center* in Europe in the past few weeks, in the wake of the French parliamentary elections and the landslide victory for Labour in the UK. Is it reinvigorated, complacent, or perhaps just lucky? I offer two thoughts on this.
Firstly, sometimes a long-in-the-tooth incumbent is sacrificed on the altar of change no matter how reasonable or uncontroversial he or she is. In the context the most recent elections in Europe, this applies mostly to France, where the people has a tendency to throw their leaders under the bus, for no other reason that they’ve been in power for a bit too long. But I think it applies to England too, to an extent. Rishi Sunak and his cabinet weren’t that bad, or more specifically, the Sunak government was a lot of less controversial and risk-seeking than its Tory predecessors. But in the end, the weight of dissatisfaction and disillusion with previous iterations of Conservative cabinets were too much to bear. The Tories received the drubbing they deserved, having put their faith in a toxic mix of volatility and incompetence under Boris Johnson and Liz Truss. The doomed political and economic project of Brexit looms large in this story too. Whatever Labour decides to do with this smelling carcass of a political legacy, it brought the destruction of the Conservative party, and the right in UK politics, as we know it. Perhaps for that reason, Starmer will be inclined to leave it smelling for a bit longer, to remind people of what they’ll get should they consider jumping back into the Tory fold.
Read MoreIt’s been a while since I ran through my favourite charts for the global economy. I am happy to report that nothing much seems to have changed since my last overview. Markets are still enjoying a soft landing, defined as a world in which inflation is drifting lower, even if still-sticky in key areas, the global economy and labour markets remain unencumbered, and monetary policy is on track to ease modestly. More immediately, a run of softish inflation data in the US, rising jobless claims—despite still solid non-farm payrolls—and the return of political uncertainty in Europe have driven a bond rally in the past few weeks, and raised questions about the strength of the US economy. As a result, markets are now pricing in slightly more aggressive near-term policy easing from the major central banks. In the US, SOFR futures imply 75bp worth of easing from the Fed this year, and similarly for the ECB, which includes the 25bp cut that the Bank delivered last month. Yields also have softened in the UK. The consensus expects a second rate cut from the ECB in September, at which point markets believe Frankfurt will be joined by the BOE—with many speculating on an August cut from Bailey et al—and the Fed. The first chart below plots the implied policy path for the Fed and ECB using SOFR and Euribor, respectively. This is a pleasant picture overall. Rates will remain higher than immediately before the twin-shock of Covid and an inflationary shift geopolitics, but they’re still on track to come down some 150bp from their highs.
Read MoreThe Economist’s Free Exchange column drops in on the question of an economic motherhood penalty from childbirth. It is nice to see that the Economist correctly distinguishes between two distinct economic motherhood penalties, both of which can be traced to the interplay between evolutionary forces and modernity, where the latter in this case is defined as an environment with rapidly increasing returns to investment in human capital and education. The first, between fathers and mothers, emerge because the cost of child-rearing especially in the early part of a child’s life overwhelmingly falls on the mother, a conclusion which follows from Trivers (1972). This is true in terms of the cost during pregnancy and immediately after too. It is also true before we consider the possibility that the resource allocation trade-off for many women shifts in the wake of motherhood. The second motherhood penalty occurs between women. Put simply, in an economic structure where childless women have the ability to devote all their resources to somatic investment and take advantage of the above-mentioned increasing returns to human capital investment, the wage and wealth divergence between women who have many children and those who have none will widen significantly, at least in theory. For more on this, I cover the theory in more detail in my essay on fertility and sexual selection; see here.
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