Wed, 23rd August 2017

Anirudh Sethi Report


Archives of “milton friedman” Tag

What Wall St is watching for when Yellen speaks at Jackson Hole

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.

Coming up Thursday – European Central Bank monetary policy meeting minutes

A preview of the ECB minutes (July meeting) due at 1130GMT on Thursday 17 August 2017

Bank of America / Merrill Lynch:
  • With market attention focusing on Draghi’s participation to Jackson Hole on 25/26 August, while ECB speakers are silent in this holiday season, the publication of the minutes of the Governing Council July meeting on Thursday 17 August is likely to draw quite some attention.
  • Those minutes – or “accounts” – are in our view often used by the central bank not so much as a “verbatim” of the deliberations but much more as a tool to fine-tune communication in between two meetings.
  • Draghi’s very guarded comments on the exchange rate appreciation in July had been met with surprise at the time … and the ECB has an occasion there to say more than “the re-pricing of the exchange rate has received some attention”. We think the minutes could get into this in two non-exclusive ways: first, in the opening statement by the ECB’s chief economist, insisting on – and possibly quantifying – the impact of the stronger euro on the inflation outlook; second, in the general discussion, with voices highlighting the recent tightening in monetary conditions.
  • Still, we would not be surprised if some members were not quoted as expressing “benign neglect”, seeing the euro appreciation merely as the signal of stronger confidence in the region, with little sinister side effects.
  • The timeline for the decision on the quantum of QE after Dec-17 will also be another area of interest. Draghi explicitly said the council wanted to “deliberately keep options open”, but a discussion of the pros and cons of September versus October could shed some light on the council’s state of mind, especially if – beyond what was said exactly last month – the Euroystem wants to send a message ahead of Jackson Hole.
  • We are not holding our breath, though. Our call remains unchanged: we expect the ECB to announce a policy decision on the quantum of QE in October -specifically, we expect monthly purchases to be cut from EUR 60bn at the moment to EUR 40bn for six months starting in January 2018, and more regular taper to zero in 2H18.

Global Capital Markets Have Added Over $11 Trillion Since Trump’s Election

Since President Trump’s election, global equity markets have added more absolute value than at any time in history (around $12 trillion) – surpassing the front-running exuberance that started when Bernanke hinted at QE2 in 2010.

The value of global equity markets reached a record high $76.28 trillion yesterday, up a shocking 18.6% since President Trump was elected. This is the same surge in global stocks that was seen as the market front-ran QE2 and QE3

Of course, some might say this is driven by animal spirits. Still others will proclaim this is all Trump as Obama’s suppressive boot on the throat of business is lifted.

However, there is another explanation… a $1.4 trillion addition to global central bank balance sheets seems to have a curiously strong correlation to the gains…

Biggest Threats to Dollar’s Global Supremacy are at Home -FITCH

The US dollar will almost certainly remain the world’s most important
reserve currency for the foreseeable future, as no other offers the same
set of advantages to money managers, including central banks, or is as
deeply embedded in the global financial system. The primary cost to
the US is surrendered competitiveness due to dollar appreciation, but
lower interest rates and unrivalled government access to funding bestow
considerable benefits, ultimately supporting the sovereign’s ‘AAA’ rating.

As the Fed tightens, expect calls for an alternative to US dollar dominance, but no real change.

Congress is the most plausible medium-term threat.

FOMC meeting minutes: Balance sheet plan would raise rolll off caps every 3 months

Tightening likely appropriate soon” most Fed officials said

Other comments:
  • Prudent to only evidence a slowdown is transitory
  • Fed officials still saw gradual tightening as appropriate
  • FOMC expected consumer spending to rebound in coming months
  • Fed staff outline plan for gradual phaseout of reinvestment
  • Most Fed officials: inflation data reflects transitory factors
  • Nearly all Fed officials favorite staff proposal on rolloff caps
  • risks from some elevated commercial property values
  • a few Fed officials concern progress on inflation goal slowed
  • jobless rate of 4.5% at or below Fed officials long run levels
  • almost all Fed officials favor starting to shrink assets in 2017
  • deregulation could raise financial risks according to several Fed officials

The meeting minutes can be found here….

Key Economic releases/events next week

For the week starting May 14th, 2017

Monday May 15, 2017
  • New Zealand Retail sales.
  • China Industrial Production
  • US Empire state Manufacturing index
Tuesday, May 16, 2017
  • Australia Monetary Policy Meeting minutes
  • UK CPI
  • ECB Notwotny speaks
  • ECB Coeure speaks
  • US Housing starts/building permits
  • US Capacity Utilization/Industrial Production
  • US Building permits
  • NZ Global Dairy Trading prices index
Wednesday, May 17, 2017
  • NZ PPI QoQ
  • UK Employment statistics
  • EU Final CPI YoY
  • Canada Manufacturing Sales
  • Crude oil inventories
Thursday, May 18, 2017
  • Japan Preliminary GDP
  • Australia Employment
  • UK Retail Sales
  • ECB Mersch speaks
  • US Unemployment claims
  • Feds Mester speaks on the economy/monetary Policy
Friday, May 19, 2017
  • ECB Constancio speaks
  • Canada CPI
  • Canada Retail Sales
  • Fed’s Bullard speaks on the economy and monetary policy

WSJ on Yellen:”indicates era of extremely stimulative monetary policy is coming to an end”

The Wall Street Journal recap of Yellen’s speech and remarks earlier today

  • Ms. Yellen said the Fed was moving away from its efforts to revive a recession-scarred economy and focusing instead on maintaining the gains of the past few years
  • That will change the central bank’s policy-making stance, she said
  • Noting that Fed officials plan to continue gradually raising interest rates unless the economy begins to deteriorate
  • The Fed’s benchmark short-term interest rate will continue to move up to its long-term average, she said.
None of which comes a surprise, Fed communication efforts in past days have been on this message.

5 key takeaways from RBI’s first bi-monthly policy statement, 2017-18

The Reserve Bank of India, in its first monetary policy review of financial year 2017-18, kept the repurchase (repo) rate unchanged at 6.25%, citing upward risks to inflation and global uncertainty. 

The Monetary Policy Committee, however, raised the reverse repo rate by 0.25 basis points to 6%, and cut the marginal standing facility (MSF) rate to 6.5%.

“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth,” said RBI in its policy statement.

“RBI hiked reverse repo rate by 25 bps to 6.00% thereby reducing the corridor between repo and reverse repo to 25 bps from the existing 50 bps. The essential aim seems to be ensuring a sharper focus on the keeping overnight rates (especially the overnight call money rate) aligned to the repo rate,” said Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund.

Here are five key takeaways from the RBI’s policy statement:

Banks can invest in REITs

While reviewing the monetary policy, the central bank has proposed that banks be allowed to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). This follows an earlier proposal by market regulator Securities and Exchange Board of India (Sebi).

The RBI proposed to allow banks to participate in Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvITs) following a proposal by market regulator Securities and Exchange Board of India (SEBI). Banks would be allowed to invest in these instruments within the stipulated limit of 20 percent of net-owned funds.

“One of the highlights of today’s policy was the decision to allow banks to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) within the 20% umbrella limit. It will allow banks to invest in an important asset class thereby providing much needed boost to this segment. Owing to better liquidity, the cost of capital for developers in the commercial segment will come down in the future,” said Surendra Hiranandani, chairman & managing director, House of Hiranandani in an emailed note.

Fed’s Mester: Built in >3 hikes to her forecasts for 2017

Loretta Mester, president of the Federal Reserve bank branch in Cleveland:

  • It is important for public to understand that variation on inflation is expected and normal
  • Says she built in more than three hikes into her forecasts for 2017
  • Would be concerned if there were less than three rate hikes this year if US economic data holds up
  • Says on rising business sentiment that there isn’t yet convincing evidence that firms are spending more as a result in her district
  • FOMC continues to discuss implementation and timing of change on balance sheet policy, can offer no further details
  • Balance sheet policy should not substitute for federal funds rate changes
  • Says there is not enough precision to use balance sheet as an ‘active’ tool outside of extraordinary circumstances

David Stockman Offers “More Proof Of Janet Yellen’s Idiocy”

During the last 129 months, the Fed has held 86 meetings. On 83 of those occasions it either cut rates or left them unchanged.

So you can perhaps understand why Wednesday’s completely expected (for the last three weeks!) 25 bips left the day traders nonplussed. The Dow rallied over 100 points that day.

Traders understandably believe that this monetary farce can continue indefinitely, and that our Keynesian school marm’s post-meeting presser was evidence that the Fed is still their friend.

No it isn’t!

Our monetary politburo has expanded its balance sheet by a lunatic 22X during the last three decades and in the process has systematically falsified financial asset prices and birthed a mutant debt-fueled of simulacrum of prosperity.

But once it begins to withdraw substantial amounts of cash from the canyons of Wall Street as per its newly reaffirmed “normalization” policy, the whole house of cards is destined to collapse.

There will be a stock market implosion soon, and that will in turn generate panic in the C-suites as the value of stock options vanish. Like in the fall of 2008 — except on an even more sweeping and long-lasting scale — corporate America will desperately unload inventories, workers and assets to appease the robo-machines of Wall Street.

But there is nothing left to brake the casino’s fall.