Posts Tagged: interest rate

 

No amount of reassuring rhetoric by Janet Yellen and her colleagues at the Federal Reserve can prevent markets’ overreaction when benchmark interest rates start heading higher.

 That’s the conclusion of Deutsche Bank AG economists Joseph LaVorgna and Brett Ryan after studying turns in Fed policy in the past two decades.

Take 1994, the annus horribilis for bond traders. The selloff of the 10-year note sent its yield up 203 basis points as the Fed raised its benchmark by 250 basis points, according to Bloomberg data.

 In 1999, the Fed began boosting rates in June, extending a decline that left the yield up 179 basis points in the year. By 2003, disappointment the Fed didn’t cut more deeply was reflected in a rise in yields of 43 basis points over the year with a surge of more than a percentage point in the third quarter.

Even a rate cut in January 1996 was followed by a rise in 10-year rates of 85 basis points over the course of the year as signs of economic strength led investors to rein in forecasts of more reductions.

That takes us to 2013, when a signal that the Fed would soon start winding down bond purchases generated the “taper tantrum.” The yield ended the year 127 basis points higher than where it began. >> Read More

 

Economist Steen Jakobsen, Chief Investment Officer of Saxo Bank, believes 2015 will be another “lost year” for the economy. And he predicts the Federal Reserve will indeed start to raise rates later this year, surprising the market and taking the wind of out asset prices.

He recommends building cash and waiting to see how the coming storm — which he calls the “greatest margin call in history” — plays out: 

0% interest rates at $0 down has not created the additional momentum to the economy The Fed was hoping for. The trickle down effect, the wealth effect, has instead made for bigger inequality in society. So I think we’re set for a rate hike in either in June or in September. I think this will be the biggest margin call in history on the asset inflation created by the Fed .

 

That’s where I differ from most Fed watchers. Everyone else is looking at employment, inflation targeting. I don’t think Fed is at all looking at those. They are saying “Listen, the 0% interest rate is getting us absolutely nowhere, we think it’s very, very important for us to move to a more neutral place”. At the same time we will communicate that we are open-minded to additional programs or whatever needs to be done to secure the long term growth of the economy. But that will be on the down side, not on the up side. And as year has progressed, and I’ve said this publicly, I think 2015 is already lost in terms of recovery here. And that will take the market by surprise.

 

The market will ask in September when the Fed hikes: “Why are you hiking interest rate when growth is below target, inflation below target”? Well, the Fed’s response will be “Because this is the biggest asset inflation we’ve seen in human history and we need to address it”.

>> Read More

 

The US Federal Reserve will do its best to avert a bloodbath for emerging markets as it prepares to raise interest rates for the first time in eight years, but warned that it cannot let inflationary pressures take hold in the US itself.

Bill Dudley, head of the powerful New York Fed, acknowledged that the institution has a special duty of care for the whole world, vowing to act with caution to soften a potentially brutal squeeze for borrowers holding record levels of dollar debt outside the US.

“The normalisation of US monetary policy could create significant challenges for those emerging market economies that have been the recipients of large capital inflows in recent years,” he said.

“We at the Fed take the potential international implications of our policies seriously. In part, this is out of simple self-interest, since the international effects of Fed policies can spill back onto the US economy and financial markets. In part, too, it reflects a sense of special responsibility we have given the dollar’s role as the international reserve currency.”

The assurances came after the International Monetary Fund warned of a “cascade of disruptions” for the global financial system if US rates jump suddenly and there is a further surge in the dollar.

>> Read More

 

China’s central bank is considering taking a page from Europe’s financial-crisis handbook to free up more credit as growth in the world’s second-largest economy slows.

The proposed strategy would allow Chinese banks to swap local-government bailout bonds for cash as a way to bolster liquidity and boost lending, said people familiar with the People’s Bank of China talks.

Adopting the strategy would mark a major shift in the central bank’s money-supply policy and underscore the leadership’s deep concern about missing already lowered growth expectations.

In recent months, China’s leaders have directed the central bank to try to beef up bank lending and lower borrowing costs as the economy slows and capital leaves the country.

But a barrage of easing measures—including two interest-rate cuts since November—has had limited success. Instead of stimulating targeted areas of the economy, such as small businesses, they have helped companies already heavily in debt. >> Read More

 

The Federal Reserve remains on course to start lifting interest rates this year, but when it does so it will raise them gradually, a leading policymaker said.

Jerome Powell, a Fed governor, told a conference in New York that he expected progress in the jobs market to continue even after the setback seen in the March payroll numbers.

An increase in rates could come as soon as the June meeting of the Federal Open Market Committee he added, and when it comes it was not likely to “materially restrain” the economy’s progress.

But it was more difficult than usual to assess how much slack there is in the labour market, which means it needed to tighten policy slowly.

Mr Powell said: >> Read More

 

America’s robust employment growth last year makes for compelling evidence that the Federal Reserve should hold off raising interest rates until there is further progress, according to one of the central bank’s policymakers.

Narayana Kocherlakota, the president of the Minneapolis Fed, said an acceleration in jobs growth last year is at odds with predictions that extra monetary muscle from the Fed couldn’t bring down the unemployment rate.

In a speech on Thursday, Mr Kocherlakota said:

Last year featured the largest improvement in labor market performance in many years.

This dramatic change is not consistent with an economy stuck in a post-recession new normal. The pessimists were wrong—and so the FOMC should be aiming to facilitate a continuation of the 2014 improvement in the labor market.

The policymaker, who doesn’t have a vote on interest rates this year, has spent the last year urging his colleagues to keep interest rates at record low levels.

He added on Tuesday that lifting inflation and returning the US to full employment will take many years:

There is no tension between these two objectives at the current time. I expect that it will take several years for employment to return to its maximal level. I expect that it will take several years for inflation to return to target.

 

Reasons for optimism

The data we follow suggest that the household deleveraging process has largely run its course and the imbalances in the housing market have been mostly worked off. Federal fiscal consolidation appears to be over for now, and employment and spending are increasing at the state and local government level.

On the US jobs report for March

It will be important to monitor developments to determine whether the softness in the March labor market report evident on Friday foreshadows a more substantial slowing in the labor market than I currently anticipate.

On a weak first quarter

The March labor market report is another indicator that the first quarter is likely to be quite weak. Our current projection is that the economy will grow at about a 1 percent annual rate in the first quarter of 2015.

>> Read More

Emerging Markets: An Update

04 April 2015 - 7:25 am
 
1) China churns out more measures
2) The Bank of Israel increased the level of FX reserves that it considers adequate
3) Nigeria has a new president
4) Chile is joining Mexico in setting a hawkish tone
5) Brazil’s president Rousseff’s popularity fell off a cliff
6) Thailand’s military junta ended martial law after more than ten months
Over the last week, Brazil (+8.4%), Russia (+8.4%), and UAE (+8.0%) have outperformed in the EM equity space as measured by MSCI, while Hungary (-2.3%), Korea (-0.2%), and Singapore (flat) have underperformed. To put this in better context, MSCI EM rose 3.7% over the past week while MSCI DM fell -0.1%.
In the EM local currency bond space, Brazil (10-year yield -26 bp), Ukraine (-22 bp), and Russia (-20 bp) have outperformed over the last week, while Chile (10-year yield +13 bp), China (+7 bp), and Indonesia (+5 bp) have underperformed. To put this in better context, the 10-year UST yield fell -9 bp over the past week. 
In the EM FX space, BRL (+3.3% vs. USD), RUB (+2.0% vs. USD), and CLP (+1.4% vs. USD) have outperformed over the last week, while COP (-0.4% vs. USD), CZK (-0.3% vs. EUR), and ARS (-0.2% vs. USD) have underperformed.
1) China churns out more measures. PBOC Governor Zhou hinted at additional stimulus and the central bank lowered the down payment required for some second home buyers. After increasing the QFII quota for a large US asset manager last week, officials now indicate that money managers no longer need to be part of QFII program in order to invest in HK shares through the exchange link. 

>> Read More

 

The monthly US jobs report always draws interest. But the figures for March, released later on Friday, arrive at a delicate juncture as investors try to work out when the Federal Reserve will raise interest rates.

Here’s what to watch for when the Bureau of Labor releases the figures at 8:30am local time in Washington.

What’s expected?

The pace of job creation is expected to have slowed from the giddy three-month average of 288,000. Economists are forecasting a tally of 245,000, which would also sit just below the 256,000 monthly average of 2014. The unemployment rate is expected to stay at 5.5 per cent.

What’s changed since February’s number?

While 245,000 is the official forecast (based on a Bloomberg survey of economists), the jobs data served up so far this week may well have knocked confidence in that prediction.

A survey of the jobs market by ADP Research, for example, missed expectations, while a snapshot of American manufacturers showed hiring intentions dropping in March. >> Read More

 

I’m not sure [European QE] is going to do anything – certainly, nothing that’s good. The fundamental problem here, as I see it anyway, is that the European banking system is still broken… I think, increasingly, bankers are discomforted more than anything else (it’s not just the ex central bankers but increasingly the people that are still holding the levers)… they are starting to ask whether they have somehow been backed into a place where they don’t really want to be…. Unfortunately, [it] is getting bigger and bigger. There is a possibility at least that this whole exercise could end very badly.”

Part 2…

“I fear that central bankers may have been inadvertently drawn into what they are currently doing… [QE] won’t work and may have many undesired side effects that will build up over time. Many of the central bankers at Davos this year said explicitly that they were only buying time for governments to act but, seven years into the crisis, it already seems we have been waiting forever…  the effectiveness of monetary policy in terms of stimulating aggregate demand goes down with time, because you’re constantly bringing spending forward from the future…  Logically, at this point, central bankers should say, “We are doing more harm than good.This policy must be reversed.” But I don’t see anybody actually doing it.

Via Hinde Capital, The Cobden Centre, and True Sinews

Sean Corrigan: Well, we hear this line from Mr. Carney. Without getting to personalities, of course since I don’t know him – he may well be a very worthy individual – but I can’t read any of his pronouncements without shuddering. He explicitly says this, doesn’t he? “We need more borrowing. We need more borrowing,” and then, “Oh, we will only put up interest rates gently, because with all this borrowing, we will just shock the system again the minute we do anything.”

William White: Who is that you’re talking about?….. >> Read More

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Team ASR,
Baroda, India.