Far from confirming the determination to tighten monetary policy shown by Janet Yellen after the Fed’s monetary policy meeting in September, the minutes from the FOMC’s latest meeting show that its members remain highly undecided with respect to ongoing low inflation and the need to raise interest rates further before having confirmation that low inflation is a temporary phenomenon. Fed Chair Janet Yellen is now a hawk within the FOMC, whereas she had previously been a dove: as well as being intriguing, this U-turn creates doubt about the future direction of US monetary policy.
Archives par catégories : United States
Wage rigidity to low unemployment: an aberration? Not really.
Central bankers and economists seem baffled by the fact that wages are failing to accelerate in economies where low unemployment is pointing to full employment, which traditionally means rising pressure on wages. In response, central banks are on the alert, fearing that this apparent anomaly will correct itself any time, possibly resulting in a sudden acceleration in pay for which they might be unprepared. In Germany, the unemployment rate is at a post-reunification low of 5.7% and the Bundesbank has been watching this risk closely for almost two years.
Could US Housing Prices Plummet Again?
In the past two years, the contradictions on the U.S. housing market have continued to get worse. Higher property prices, often seen as an indicator of a healthier market, now seem disproportionate compared with the reality of a market that is still limping from the battering it took during the crisis. As Fed members seem increasingly impatient to trigger a rate hike cycle, the imbalances resulting from this distortion pose a serious threat that prices could fall again.
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?
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…
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!
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