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Fed calm things down

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No stress: that’s how the message sent by the Fed after its FOMC meeting on June 18th can be summed up. Through a statement, it left its message from April pretty much unchanged, thus leaving no room for excessive reactions in either direction. Janet Yellen excelled at this balancing game even as the environment had grown increasingly tense in the few days before the meeting.

By calming things down, Janet Yellen has snuffed out the risk of runaway anticipations and opened the door to a correction on the two-year, whose levels had become dangerously tight in the last two weeks.

The Fed’s consistent message is a stabilizing factor amid growing geo-political tension and, consequently, stress on the price of oil.

On balance, today’s communication strengthened our expectations, validating our scenario that the probability of an interest rate hike in the foreseeable future is low. Growing concerns over the possibility of a sustained gap in long-term interest rates between the US and the euro area should ease, which also reduces the likelihood of the dollar strengthening much versus the euro.

Geo-political and oil risk notwithstanding, the overall picture is mostly favorable for equities on both sides of the Atlantic but could also prove promising for gold, given the risks associated with future developments in the situation in Iraq

Who still doesn’t have a pair of “Birkies”? Or how Made in Germany sheds stereotypes

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Retailing, leather goods, shoes…German brands are flourishing in unexpected places. Birkenstocks sandals, which seem headed to becoming the must-have item for the summer of 2014, are the latest trend in a broader movement towards reshaping “Made in Germany”.

Increasingly present on European shelves, everyday consumer products with relatively low added have gained in popularity and are a far cry from the heavy industrial goods, manufacturing equipment and upscale household appliances that have forged Germany’s industrial fabric. This is particularly interesting given markets’ recent infatuation with exotic emerging countries.

Three reasons why long-term interest rates will continue to fall

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The downwards movement of government bond yields has picked up in recent weeks revealing investors’ growing indecision, whereas the consensus had promised them just the opposite. We see several reasons for the drop in long rates which, in our opinion, is not a temporary phenomenon and could, in fact, continue:

–  The market is right not to buy the Fed’s outlook

–  The ECB is beginning a long process of unconventional monetary policy, which, given the growth slowdown, should benefit bond markets more than equities.

–  Global disinflation is gaining ground

France: survey results are converging… for the worst

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Distortions from the end of the year between PMI polls, foreshadowing recession, and INSEE data, mostly reassuring, have evened out. Good news for starters, as PMIs made up for their lag, the present convergence has become worrying: all surveys, across the board, paint a decidedly ugly picture.And for two reasons:

1) the return of consumer concerns,

2) the lack of an export recovery.

The whole picture is cause for concern. After zero growth in the first quarter, the downturn of the most recent indicators accentuates the risk of a fresh – and sustained – fall in economic activity. The more-or-less consensus forecast of 1 % French growth on average is now very “passé”. In fact, French growth will struggle to do better than 0.5% this year! This is very bad news, for France and the rest of the euro area.

“Our currency, your problem”

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Things are a little clearer since Mario Draghi’s press conference: the ECB considers the euro’s strength a deflationary risk factor. It is likely to move as a result, albeit in a measured manner starting in June then increasingly so thereafter if necessary, which will probably be the case. Against a backdrop where most other central banks are implementing monetary policies aiming to depreciate their currencies, the hesitancy of the ECB was no longer tenable. So that was a bit of good news but let’s not get ahead of ourselves: by taking such action Mr. Draghi is trying to give the other central banks a taste of their own medicine, making life hard on the Fed, BoJ and BoC, and not the other way around

With Americans taking care of their health, can the Fed relax?

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In the first quarter, Americans allocated over half of the increase in consumption spending to healthcare, which represents an increase of 10% on an annualized basis compared with previous quarter. Without this acceleration, real household consumption would not have increased 3%, as published the day before yesterday, but rather a mere 1.3%; GDP would not have flat-lined but fallen 1.0%, all other variables held constant.

A detailed analysis of these numbers undoubtedly curbs the newfound optimism resulting from the announcement of a 4.6% increase in spending on services in the first quarter and the publication of an encouraging April jobs report. The Fed is not likely to be able to ignore this news.

 

Bonds Gone Wild

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Will they rise or won’t they? There is no end to the uncertainty on the future direction of long-term interest rates. Impatience is growing as well, with, however, this paradox: the fear of being surprised by a precipitous drop in prices on the bond markets (i.e. rocketing long rates) contrasts with the long-held desire to see long rates increase, which would be a clear signal that economic conditions have improved. For nearly one year (since the start of the « taper caper »), the US market has been on edge. Now, the Bank of Japan has said it is concerned that Japanese bond markets are not taking the country’s new inflation context into account, worried about the effects should inflation finally wake up. These kinds of comments are surprising to say the least….

The last straw for the French economy

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Either eight or nine countries in the euro area are probably in the grips of deflation. In response to the situation, the direction of economic policy will play a decisive role. It’s a foregone conclusion that the ECB will not take measures in the near term that will be aggressive enough to stem the onslaught of this plague. It will be up to fiscal and tax policies to take on this responsibility. By complying with the European Commission’s constraints, France risks plunging its economy into a deflationary abyss and with it, undoubtedly, all of the euro area.