Archives par catégories : United States

Yellen resists market calls, but does she really have a choice?

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The main risk from the FOMC’s meeting in the past two days was a possible change of direction on Fed monetary policy. It looks like the bank is staying the course. Today’s statement was unequivocal: there will be no rate hike in the foreseeable future. We can only tip our cap to the Fed’s determination in resisting mounting pressure from the market. Janet Yellen would be taking an imprudent risk if she were to rise to the bait and hint at a possible rate hike. Indeed, the U.S. economy may be doing better than it was a few months ago but its ability to weather an increase in long-term interest rates, which would be the obvious corollary to anticipations of a rate hike, is, in our opinion, close to nil….even after apparently positive GDP numbers from the second quarter.

T-Bonds or S&P, which of these markets has got it wrong?

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Improving economic indicators, ongoing accommodative monetary policy from the Fed and the bountiful reporting season have propelled U.S. equity indices to new highs in recent days: the S&P has added gains of 6% in the last three months making for a YTD gain of 18% and has even flirted with the 2,000 point level. The confidence backing up these trends is, however, a far cry from the signals the bond markets are sending us. Since the end of April, the yield on 10-year T-bonds has fallen to below 2.50%, i.e. 25 basis points less than mid-April levels and 50bps off from where it started the year. Such distortions between equity and bond markets are tough to reconcile over the duration and will end up being corrected. It is merely a question of when and to what extent. The response will come from economic changes in the coming months. So what should the market being taking a very hard look at?

U.S. Real Estate, Does It Still Matter?

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The U.S. housing recovery, considered a slam dunk by the vast majority of economists since spring 2012, has sputtered since summer 2013. Even though most economic indicators have been pointed higher in recent months, real estate has been the odd man out. Housing starts have been wildly unstable from one month to the next and are hardly increasing at all. At less than 900,000 housing units in June, they are on par with end-2012 and still a long way away from returning to their long-term average, while many observers predicted they would do so by the end of this year.
How worried should we be? What would happen if activity in this sector failed to return to normal levels during the current cycle? What weight will the Fed give to these disappointments in its decision-making process?

No QE, so we’ll have to settle for the minutes…

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The ECB says it needs time to beef up its anti-deflation measures. Let’s not kid ourselves, the bank is in no hurry. There seems to be but one justification for its move to space out its meetings from every four to every six weeks and the innovation that consists of publishing its minutes: deflate ballooning expectations of future intervention.
This, in reality, was the only take-away from the ECB’s monthly monetary policy meeting held this week. In other words, there is no revolution under the European skies: the pace of change is still in slow motion and lacking in ambition.

Mind your Back!

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France is stumbling, Germany weakening, the U.S. wobbling, Brazil is down a match point and J. Bullard has promised us rate hikes by March… the summer is going to be a real barn burner! Will M&A activity be robust enough to continue to fuel investor confidence?

It’s looking like things are getting tight, considering recent economic developments and central banks’ bungled messages. Let’s take a closer look at the most disruptive factors from the week.

– Euro area: if Germany is a locomotive, is France the caboose?

– U.S. growth will not exceed 1.5% this year

– It’s match point in Brazil

– Beware of the impatience of certain central bankers

Cultural Revolution afoot at the IMF?

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Made at the same time as the downwards revision of its U.S. growth forecast for 2014, the IMF’s recommendation that U.S. authorities increase the minimum wage flew well under the market’s radar but is, by all measures, very intriguing. It is hardly standard operating procedure for the New York-based organization to suggest that a wage increase be used to increase the economic outlook of a country.

Seven years after the start of the economic crisis, does this recommendation point to an acknowledgment that ongoing policies have failed and need to be replaced? Seemingly, this is the message that is being sent, judging by the positions taken and papers published in recent months. The IMF’s recommendation would then worth more attention than it has been given up until now

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

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