Over the weekend, I have been thinking about the importance of putting things into context. I think that one must impose one’s own understanding on the markets in order really to understand them — as opposed to letting the news and data flow wash through you and seeing what sticks. The latter approach will inevitably lead to an excessive focus on what has happened most recently (or been reported most recently). My method of dealing with the data flow is to organise data releases within a national-accounts-style framework, and by the month to which the release refers.
It is the news flow that I have been thinking about over the weekend. I already organise observations gleaned from the news by actor, country or market. But I wonder whether it would add to my analysis to sub-divide these observations by the projects being pursued by each set of actors, and the themes relating to each market or economy. In addition to keeping observations well-organised, such a practice would also remind me of the projects that various actors were pursuing, and help me to put their actions in the context of those projects. In the European crisis, commentators often seemed to forget about the projects that various European institutions were pursuing; no doubt I have done the same with institutions to which I have given less thought.
Bloomberg reports something interesting from Ben Bernanke’s testimony to Congress last week. Mr. Bernanke said that the Fed might hold the bonds it has purchased to maturity, rather than selling them off, when the time comes to tighten policy. In that case, it would rely on increasing interest on excess reserves to raise interest rates. I have to say that I do not find this entirely surprising — I always thought that the point of paying interest on excess reserves was to enable the Fed to tighten policy without having to remove all of the excess reserves from the system. Mr. Bernanke said that there will be a review of the exit plan soon.
Incidentally, while a lot of people seem to believe that the high level of reserves in the banking system means that there could be an inflation problem when the economy finally returns to full strength, I am somewhat sceptical of that idea. I am not convinced that the level of reserves is the main constraint on banks’ expanding their balance sheets.
China has released its monthly rash of economic data, including some data that were skipped in January because they would be distorted by the effect of the Spring Festival. Industrial production and electricity production showed a weak start to the year and disappointed expectations. Fixed asset investment beat expectations at 21.2% ytd/y, but was propped up by strength in property investment; manufacturing investment growth continued to slow. New loans fell back after January’s very strong number, but remained relatively strong; the same was true of total social financing. Inflation jumped to 3.2% YOY, although analysts appear to be divided about whether this is down to the Spring Festival effect or whether it represents something more dangerous. Food price inflation does look to be increasing.
Other than that, it has not been a particularly eventful weekend. Europe continues to consider what to do about Cyprus. The Republicans and Democrats appear no closer to agreement on the sequester; Paul Ryan has said that his latest plan will include even larger cuts to social programmes and a balanced budget within ten years. Non-farm payrolls and unemployment in the US surprised on the upside, the unemployment rate falling to 7.7% and bringing the end of asset purchases by the Fed a little closer.