In two days, central bankers, finance ministers and economists gather in Wyoming for the annual Jackson Hole Symposium. Federal Reserve chair Janet Yellen will be speaking on financial stability, while investors will keep their eyes and ears peeled for any market-moving news.
While Ms Yellen is unlikely to discuss the economy and or the immediate outlook for monetary policy, given the subject of her speech, some have suggested that she could address systemic risks — a subject on which two Fed officials took differing views in the minutes of the July monetary policy meeting, and which could be a factor in future interest rate decisions.
Here’s what Wall Street is expecting from the meeting:
Lewis Alexander, at Nomura’s Instinet, notes that Ms Yellen could address concerns about systemic risk in her remarks, which could signal a December move. He said pointed out that the minutes of the Fed’s July meeting showed one member arguing that a gradual approach to raising rates would strike the appropriate balance between achieving the Fed’s mandate on inflation and employment while also mitigating financial stability concerns, adding:
If Yellen makes this point in her Jackson Hole speech, we think that reinforces the likelihood that the FOMC will raise rates again at their meeting on December. Linking interest rate decisions to concerns about financial stability would be new. Federal Reserve officials have long argued that prudential regulation should be used to address financial stability and that monetary policy should focus on the Federal Reserve’s macroeconomic objectives.
In our opinion it is unclear why Federal Reserve officials are considering a change in this fundamental view at this time…
One possibility is that if regulatory changes beyond the Federal Reserve’s control prevent them from implementing prudential policies they believe are necessary to limit systemic risk, the FOMC may have to use monetary policy to promote financial stability.
Top central bankers will gather in Wyoming for their annual policy summit at Jackson Hole next week; solar eclipse mania grips the US and the Royal Bank of Canada kicks off the earnings season for Canadian banks.
Here’s what to watch in the coming days.
Yellen at Jackson Hole
Federal Reserve chair Janet Yellen will join European Central Bank President Mario Draghi in Jackson Hole, Wyoming next week and investors will be parsing through every comments for clues to the monetary policies of the world’s two most powerful central banks.
Mrs Yellen will speak on the topic of financial stability at 8am local time (10am EST) on at the conference hosted by the Federal Reserve Bank of Kansas City on Friday, August 25.
Solar eclipse mania
It promises to be one of the most watched natural spectacles of all time. On the morning of Monday August 21, a band of darkness will race across American skies as the Moon glides smoothly and perfectly across the face of the Sun.
On one hand, credit investors have never had it better with IG credit spread at record tights and junk bond yields sliding to 3 year lows
On the other, and this is linked to the above, they have never been more nervous, and as the latest Bank of America credit investor survey shows, more worried about the Fed in general, and “Quantitative Failure” in particular.
But why, if as so many claim, the Fed has nothing to do with the the return of risk assets? Ignore that, it’s rhetorical.
The Czech central bank said on Thursday that it would raise its main interest rate by 20 basis points, in its first move to tighten monetary policy since the financial crisis.
In a statement, the CNB said that it would raise its two-week repo rate from 0.05 to 0.25 per cent. It will also increase the Lombard rate by 25 basis points to 0.50 per cent, but keep the discount rate unchanged at 0.05 per cent.
The Koruna jumped 0.7 per cent on the news, reaching CZK25.90 against the euro, its highest level since June 2013.
The increase is the first time that the CNB has raised rates since February 2008. As the financial crisis unfolded it cut the two week repo rate, to 0.05 per cent in 2012, and in 2013 it also introduced a cap on the Koruna in a bid to ward off deflation.
However, it abandoned the cap on the currency in April, and analysts have since been expecting it to hike rates, given that wages and house prices in the Czech Republic have been rising rapidly, and amid a growing debate over how the European Central Bank will exit its stimulus programme.
For months, Japan’s long-term interest rates have stayed near the floor, with the Bank of Japan buying the vast majority of government bonds as part of its ultra-aggressive monetary easing program.
The central bank’s extraordinary campaign to stimulate the economy out of its deflationary stagnation has effectively destroyed the ability of interest rates to serve as a key indicator of the nation’s economic health.
With yields on Japanese government bonds artificially frozen by the BOJ, investors have been leaving the bond market in droves.
“We seldom receive phone calls from our customers anymore,” a bond dealer at a major Japanese brokerage said. “Our team can be downsized at any moment.”
The government bond market is suffering from the strong effects of the BOJ’s highly unconventional program, launched last year, to smother long-term rates by purchasing enormous amounts of government debt.
“In the past several months, transactions for profit-taking have also significantly decreased to very low levels,” a government bond trader at another major brokerage said.
The data this week is expected to confirm what many investors have come to assume. The US economy accelerated in Q2. The eurozone economy is enjoying steady growth, but the momentum appears to be slowing. The UK economy was unable to recover much after a soft Q1. The Japanese economy is still not generating price pressures, but growth, led by the export/industrial production capex, is also fueling somewhat better consumption.
The Federal Reserve meeting is not live in the sense that anyone expects a change in the policy of any kind. For reasons beyond our ken, the Federal Reserve insists on making changes only at the half of the FOMC meetings which are followed by a press conference. Since there are several workarounds, including, as we have suggested, holding press conferences after every meeting, which the ECB and BOJ already do, for example.
In any event, the market understands full well where the Fed is. It is getting close to allowing its balance sheet to begin shrinking. After raising rates in March and June, officials are not ready to go again: Not in July and not September. December is a closer call. The softer price pressures rather than, the weaker growth impulses become the focal point in Q2. It will take a few months of data to assuage these concerns. The main argument that what the headwind on prices is transitory seems to assume that decline in prices is narrow. Breadth indicators of price changes, therefore, be more important than usual in the current context. Sure enough, the diffusion indicators for the CPI were narrow, until the recent June reading.
Political stability in India paved the way for root-and-branch reforms such as demonetization and the new Goods and Services Tax. But as one of the country’s key economic advisers acknowledged, they came at a cost: subdued growth this year that could extend into 2018.
“I think in the last year or so there has been a slowdown in the momentum,” said Arvind Subramanian, chief economic adviser to Finance Minister Arun Jaitley. “All the numbers point in that direction: GDP, industrial production, capacity utilization, and credit. For the first time you see consistency of deceleration in the last three or four quarters, and that is a bit worrying.”
Expansion of gross domestic product slowed to an annual 6.1% in the first quarter of 2017. The economy is hitting speed-breakers including an agricultural malaise featuring low crop prices and farmer distress, moribund manufacturing, and sluggish investment. The challenge of rapid urbanization has seen job creation slow to a snail’s pace.
Yet, Prime Minister Narendra Modi has never been more secure in power. Opposition parties are in disarray — underlined by their inability to reach consensus on a candidate for the presidential election. The vote for the largely ceremonial post will be held among an electoral college of legislators on July 17, and the Modi-backed candidate, Bihar state governor Ram Nath Kovind, a loyalist of the ruling Bharatiya Janata Party, is widely expected to win.
Picking up where he left off last week, when Bill Gross told Bloomberg that U.S. markets are at their highest risk levels since before the 2008 financial crisis “because investors are paying a high price for the chances they’re taking”, in his latest monthly investment outlook, the Janus Henderson bond manager says that investors should be wary as low interest rates, aging populations and global warming which inhibit real economic growth and intensify headwinds facing financial markets:
Excessive debt/aging populations/trade-restrictive government policies and the increasing use of machines (robots) instead of people, create a counterforce to creative capitalism in the real economy, which worked quite well until the beginning of the 21st century. Investors in the real economy (not only large corporations but small businesses and startups) sense future headwinds that will thwart historic consumer demand and they therefore slow down investment.
Lamenting the onset of the new normal era, Gross says that “because of the secular headwinds facing global economies, currently labeled as the “New Normal” or “Secular Stagnation”, investors have resorted to “making money with money” as opposed to old-fashioned capitalism when money and profits were made with capital investment in the real economy”
This week, it’s all about the central banks, and monetary policy-watchers will have their plates full with decisions on deck from the US, UK, Russia and Japan.
Here is what investors will be watching in the days ahead:
It’s that time of year, again — Federal Open Market Committee policymakers are set for their once-every-two-months powwow in Washington on Wednesday to decide whether to raise interest rates for the second time this year. Analysts fully expect them to do so — although some on Wall Street have expressed their doubts about whether economic conditions — including softness in first-quarter GDP growth and stubbornly slow inflation, even as unemployment remains low — fully support its charge forward.
The real focus will be on Fed chair Janet Yellen’s press conference following the meeting. She is likely to give some insight into how the Fed perceives the mixed bag of economic readings and whether that will knock the central bank off of its expected path for the year.
There could also be some adjustments on tap for the Fed’s inflation or unemployment projections in light of recent data. And, more importantly, Ms Yellen may offer some insight on the Fed’s plans for starting to reduce the size of its $4.5tn balance sheet, which bank officials have been teasing for several months now. The biggest question analysts are asking is whether that plan gets debuted at the September meeting or if central bankers would prefer to wait until December.
UBS economists offered this to help read the tea leaves next week: