The kind of US employment report we like!

13 mars 2018 par Véronique Riches-Flores

The reflation scenario that markets have been hoping for since mid-December is very sensitive. It needs just enough growth but not too much inflation, because this would run the risk of a sudden change in monetary policy. And the high valuations prevailing on the world’s stock and bond markets would probably not survive such a change. Last month’s employment report was rather negative in this regard, with a relatively mediocre rate of new job creation accompanied by an acceleration in wages. Although modest, this movement toward higher wages convinced many market observers that there was an increased risk that the Fed would raise its rates quicker than expected (for more on this topic, please see Slightly more jobs and wages in the USA, but much more risk for the bond market, dated February 2).

Today’s report was much better, maybe even good enough to suggest the dawn of a more virtuous phase of the US business cycle.

ECB: forced to miss its turn again households_confidence

5 mars 2018 par Véronique Riches-Flores

Following the last monetary policy meeting on 25 January, there had been an increasing number of statements suggesting growing discomfort with the status quo advocated by Mario Draghi and his chief economist Peter Praet. Looking at the various comments, and particularly the optimistic tone of Benoît Cœuré, it seemed that the ECB would soon adjust its policy to provide less support to the economy. Since its asset purchase programme was scheduled to last until late September, many expected that, this spring, the ECB would state its intention to end the programme, and some even thought that it would mention a possible timetable for raising official interest rates in 2019. It therefore seemed that rates would rise, the yield curve would steepen, banks would enjoy better conditions and the euro would continue rising. However, the resulting euphoria did not last long. With a few days to go until the 8 March monetary policy meeting, the prospect of the ECB changing direction seems increasingly remote.

Central bankers caught between the Scylla of inequalities and the Charybdis of financial bubbles

26 février 2018 par Véronique Riches-Flores

Monetary policies have traditionally not been concerned with the subject of inequality, even when their role has been to help the economy achieve full employment. Rather, policymakers have generally limited themselves to a macroeconomic approach guided by statistics such as aggregate growth, inflation, unemployment rates and average wage rates. But in recent years, the subject has made its way onto the agenda of a growing number of central bankers.

Former Fed Chairwoman Janet Yellen set this change in motion and seems to have attracted a certain number of monetary policy followers. In the United States, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, has often voiced his support of this approach. In January 2017, with Ms. Yellen’s support, he even went so far as to create the “Opportunity and Inclusive Growth Institute”, whose mission is to promote research that “will increase economic opportunity and inclusive growth and help the Federal Reserve achieve its maximum employment mandate”.

In Europe, the topic has become an important factor in Mario Draghi’s adjustments to monetary policy over the last two years. As Janet Yellen began to do in January 2014 by developing a series of complementary unemployment indicators, so the ECB chairman has regularly made reference to labor market slack and called attention to the risk of relying solely on the unemployment rate, which has become less and less representative of economic reality. He regularly speaks of underemployment, forced part-time work and multiple jobs to justify the continuation of hyper-accommodative monetary policy despite clearly improved economic conditions in the euro zone since the start of last year.

English summary – Commodities correction taking shape, market shake-up in view

12 février 2018 par Véronique Riches-Flores

This week’s figures from the US Energy Information Administration (EIA) seem to have stopped traders speculating on rising prices in an overheating oil market. Lower inventories, higher production and lower US imports raised doubts about whether the current oil price is fair, after market euphoria in the last few months took it from $46 per barrel on average in June to over $71 on 25 January. The price of Brent North Sea crude, which had been wavering since the previous weekly report, gave way after Wednesday’s figures and seemed on track to end the week below $64.

Bond yields have barely responded to the move so far. However, that may not last if, as we expect, oil prices keep falling and drag metals down with them, since the rise in metals prices in the last few months has little fundamental justification.

If our scenario proves correct, that would seriously change the context, affecting inflation expectations, bond yields, the forex market and the relative performance of emerging markets and individual sectors. Overall, there is a significant risk that developments seen in the last few weeks will reverse as quickly as they occurred.

Although such adjustments could reduce the downward pressure on indexes resulting from fears that interest rates will rise too quickly, they would definitively rule out the reflation scenario that the markets have been overwhelmingly backing since mid-December. In the best-case scenario, this could stall the correction, without necessarily pushing markets back up to their recent highs.

English translation by trafine

Slightly more jobs and wages in the USA, but much more risk for the bond market

5 février 2018 par Véronique Riches-Flores

A characteristic of bubbles is that they create temporary bouts of panic, most of which are short-lived, until one day… Developments in recent days have led to concern that we might now be in that end phase: there is a risk of markets getting carried away, capable of derailing international markets that have been overly reliant on the huge amounts of liquidity lavished upon them by central banks in the last ten years.

Against that background, the January US jobs report had particular resonance. The news was not great. Job creation rose slightly to 200,000 in January from 160,000 in December but, more importantly, annual wage growth accelerated to 2.9%, its highest level since June 2009. As a result, the report has given further momentum to the correction in the US bond market.

A fall in the dollar could unleash a chain reaction

31 janvier 2018 par Véronique Riches-Flores

The trend in the US dollar’s exchange rate is becoming a source of concern. The dollar has lost nearly 15% of its value since the year-end 2016 high it reached following the election of Donald Trump, and it might now fall toward its 2011 and summer 2014 levels, i.e. 10-15% below its current value.

Confidence in the US administration is withering, and this is largely responsible for the exchange-rate situation. In addition, doubts are accumulating about how much latitude Jerome Powell, the future Fed chairman, will have to exercise his mandate, as he will be operating in the shadow of an invasive executive branch and increasingly demanding financial valuations. The risk of a dollar crash, which would consist of a significant, across-the-board fall in the currency’s value, is real.

What kind of impact could we expect if this were to occur?

The US dollar occupies such an important position in the international economic monetary and financial system that the consequences of a potential pronounced drop in the dollar are particularly complex to analyze. It is the number one reserve, payment and financing currency – both bank and non-bank – and it is used as a peg by more than 70 countries. The size and strength of the US economy as well as the accumulation of deficits vis-à-vis the rest of the world have made dollars abundant outside the United States and contributed to a level of supremacy that neither the euro nor the yuan can challenge. At the end of 2017, the US economy’s net external debt to the rest of the world was nearly $8 trillion, of which $6.4 trillion was financed by treasury bonds held by non-residents the world over. The presence of the US dollar in every nook and cranny of the world economy does not make the analysis any easier. What would be the net effect, for example, of a drop in the dollar on the Chinese economy? Chinese companies would become less competitive, but their debt, much of which has been contracted in dollars in recent years, would decline. At the same time, the country’s war chest of $3.1 trillion in currency reserves, half of which is invested in US treasury bonds, would erode fast... Lire la suite…

So the era of low interest rates will soon be over, right?

22 janvier 2018 par Véronique Riches-Flores

Trends in the financial markets have accelerated in the last few days. After hesitating slightly at the start of 2018, it is increasingly obvious to investors that reflation is around the corner. That belief is based on widespread growth, a surging oil price, the first positive effects of Donald Trump’s tax reform – with giant US companies promising to repatriate profits – and good news on investment and jobs. It is hard to see how that situation could fail to end the phase of latent deflation in the last few years and support expectations – seen throughout 2017 – of inflation getting back to normal. The impact of rising oil prices alone could significantly change the inflation situation, judging by how sensitive inflation is to movements in oil prices. If crude stabilises at $70 per barrel between now and the summer, inflation could rise by more than half a point in the industrialised world, taking it well above the 2% target that it touched only briefly in February 2017.

So what could prevent a significant increase in interest rates? It is very tempting to change our outlook for 2018. How is the interest-rate environment likely to develop?

BoJ governor Kuroda has plenty of time and should use it

16 janvier 2018 par Véronique Riches-Flores

Is the Bank of Japan about to embrace tapering? The idea suddenly came into renewed focus at the beginning of the week when the BoJ reduced its purchases of long-term securities as part of its usual quantitative easing operations. The market responded without delay: the price of Japanese government bonds immediately declined, but more importantly, the yen rose against most other major currencies. It is understandable that the markets would anticipate such a change. The BoJ’s increasingly large recovery operations have been underway for many years and have inflated its balance sheet to 92% of Japan’s GDP, while the Fed and the ECB have both committed to gradually reducing their monetary policy support. What’s more, the Japanese economy seems to have found new vigor in the last year. That said, it is unlikely that the Bank of Japan has the latitude to begin reducing its monetary support. There are at least three reasons for this.