Archives par catégories : United States

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

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….

Global investment: lingering disappointment

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The improvement in the global economic backdrop since late 2013 has not provided the desired results when it comes to investment. Although the European recovery has shown a few positive signs, an overview of global investment trends continues to paint a disappointing picture:

  • In the U.S., where recent corporate earnings and leading indicators have fallen short of expectations;
  • In Japan, where the 2013 rally remains highly dependent on companies’ export performance, which has become somewhat of a mixed bag;
  • In the emerging world, where many Asian countries are confronted with excess capacities, at a time when most big countries are now paying the price for their structural shortcomings;
  • In Europe, where – unlike the rest of the world – leading indicators are actually encouraging: could the region rise to the challenge? Of course, such a scenario is unrealistic

The extended absence of an improvement in investment prospects is one the most troubling constraint for future economic development. We discuss this topic in further detail in « Investment inertia: what is at stake« .

Central bank’s fight against underemployment

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Janet Yellen’s insistence on the enduringly-soft job market in the US during her speech this week in Chicago and Mario Draghi’s unusual insistence on the risks associated with allowing high unemployment to remain at a high rate over a sustained period in the euro area were striking for reasons others than the quick succession of the two statements. What’s to be made of the messages?

What kind of message are bonds markets sending?

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Since the Fed began to taper in January, yields on 10-year government bonds have fallen across the board: 25 basis points in the U.S., nearly 80bp in Spain, 65bp in Italy and 30bp in Germany. Even the poor news from the latest FOMC held on Wednesday only had a marginal effect on 10Y yields in the U.S., which finished trading yesterday at 2.77%, i.e. where they were some ten days ago. 

None of this resembles the generally-accepted scenario about what would happen when the Fed began to change course on quantitative easing. In fact, the consensus was that the taper would trigger a sharp increase in long-term interest rates in the western world. This simply hasn’t played out. Why? And what should be made of it?