Is the Fed's action a catalyst to monetary policy normalisation?
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Showing posts with label Fed. Show all posts
Showing posts with label Fed. Show all posts
Saturday, 24 September 2016
Monday, 19 September 2016
Is the Fed's action a catalyst to monetary policy normalisation?
This week see's both the Bank of Japan and US Federal Reserve divulging the progress of their respective monetary policies with the market leaning on expectations of a steady advancement of a dovish undertone in the months ahead as many of the developed nations central banks battle to flex it's economic muscle in moving activity forward.
But with the Fed's policymakers insistence of a interest rate hike occurring within the last two meetings of the year, the market is growing skeptical of any such actions as its counterparts remain committed to immersing their economies with "free money" in a bid to shield them from deflation placing the Fed in a predicament where it stands to decouple policy alignment by implementing an opposing strategy than it's peers.
The perpetuate notion of the central bank's delaying the inevitable and effectively stretching out monetary policy longer than would be seen as plausible in the normal course of a business cycle continues to spill over into current thinking amongst policy makers with many assuming the hindrance of such actions being brought about to appease market valuations.
Alternatively it could ignore the warning signs and impose interest rate hikes on the global economy but it could come with the cost of having to take the blame for throwing the entire financial system into disrepute by upending the ambivalent calm that lies in the market which doesn't conform to the thought of sharing the responsibility in an age of globalisation.
Either way the Fed is stuck between two evils of which the decision will ultimately come down to choosing the one with lesser impact, but it won't take away from the necessary action of departing from the thought of monetary infinity.
But with the Fed's policymakers insistence of a interest rate hike occurring within the last two meetings of the year, the market is growing skeptical of any such actions as its counterparts remain committed to immersing their economies with "free money" in a bid to shield them from deflation placing the Fed in a predicament where it stands to decouple policy alignment by implementing an opposing strategy than it's peers.
The perpetuate notion of the central bank's delaying the inevitable and effectively stretching out monetary policy longer than would be seen as plausible in the normal course of a business cycle continues to spill over into current thinking amongst policy makers with many assuming the hindrance of such actions being brought about to appease market valuations.
However the longer the Federal Reserve's holds up marching forward with interest rates, the less credible the inferences made from statements become and the less likely the market will find comfort in finding a voice of reason when dire consequences take hold.The old Fed is dead https://t.co/E0NpqCMCXO— Michael S. Rubin (@mrubin63) September 19, 2016
Alternatively it could ignore the warning signs and impose interest rate hikes on the global economy but it could come with the cost of having to take the blame for throwing the entire financial system into disrepute by upending the ambivalent calm that lies in the market which doesn't conform to the thought of sharing the responsibility in an age of globalisation.
Either way the Fed is stuck between two evils of which the decision will ultimately come down to choosing the one with lesser impact, but it won't take away from the necessary action of departing from the thought of monetary infinity.
Monday, 12 September 2016
PBOC introduces interest rate uncertainty with HIBOR surge
Who can forget the events of 11th August 2015 when the global financial system was sent into a tailspin after a decision made by the People's Bank of China relating to the way it fixed the price of it's currency, the Renminbi, brought chaos into financial markets worldwide when participants suddenly feared the abrupt devaluation of the Chinese Yuan was suggesting all wasn't well underneath the surface in China.
After heavily intervening in it's markets, the PBOC was able to bring about stability to markets again following a six month volatility spell that sowed distress throughout financial markets, an achievement that was applauded last month when market participants marked the one year anniversary since market turmoil began and subsequently referred to as the Yuanniversary.
Most commentators had said the central bank's market orientated approach to currency movements as opposed to intervention had boosted confidence in its ability to prevent financial contagion but were skeptical of it's consistency of following up with it.
It wasn't long before those doubts cast a dark shadow over financial markets with the latest surge in the benchmark Hong Kong Interbank Offered Rate jumping to the highest levels in months on speculation the PBOC was holding back liquidity reaching the offshore market in Hong Kong.
This would translate into a weaker outlook and eventually a weaker economy, something Chinese policymakers are unwilling to lose given the stability created thus far.
But in creating a liquidity shortage in the offshore market the PBOC is implying that restrictive monetary conditions are well on their way, ravaging the markets expectancy of perpetual money creation from global central banks and introducing volatility back into the system.
If contemplating the tone of a number of central banks statements, it's difficult to interpret a set pathway with the Fed providing an ambiguous thought on the continuation of rate hikes and the ECB noting it's view of seeing rates lower for longer but no discussions underway about a possible extension of its current quantitative stimulus program.
The confusion being created in the midst of monetary policymakers hesitancy to offer the market confidence is generating uncertainty that's dictating the movements. It's highly doubtful we'll see any clear direction in the short term until we see the outlook become less hazy.
After heavily intervening in it's markets, the PBOC was able to bring about stability to markets again following a six month volatility spell that sowed distress throughout financial markets, an achievement that was applauded last month when market participants marked the one year anniversary since market turmoil began and subsequently referred to as the Yuanniversary.
Most commentators had said the central bank's market orientated approach to currency movements as opposed to intervention had boosted confidence in its ability to prevent financial contagion but were skeptical of it's consistency of following up with it.
It wasn't long before those doubts cast a dark shadow over financial markets with the latest surge in the benchmark Hong Kong Interbank Offered Rate jumping to the highest levels in months on speculation the PBOC was holding back liquidity reaching the offshore market in Hong Kong.
These latest interventional measures were prompted by the PBOC's defence of the 6.70 level on the US Dollar against the Chinese Yuan with policymakers resolute in upending the weakness that's occurred in recent months saying any further devaluation could spur on an increase in capital outflows due to concern. The outflows that happened during the height of last years panic stricken commotion is yet to return with the result being a tighter monetary supply leading to a shortage of foreign lending into the economy.AsiaPac Stocks Plunge Most In 8 Months As China Money Market Turmoil Accelerates https://t.co/Lkxggdnxc8— zerohedge (@zerohedge) September 12, 2016
This would translate into a weaker outlook and eventually a weaker economy, something Chinese policymakers are unwilling to lose given the stability created thus far.
But in creating a liquidity shortage in the offshore market the PBOC is implying that restrictive monetary conditions are well on their way, ravaging the markets expectancy of perpetual money creation from global central banks and introducing volatility back into the system.
If contemplating the tone of a number of central banks statements, it's difficult to interpret a set pathway with the Fed providing an ambiguous thought on the continuation of rate hikes and the ECB noting it's view of seeing rates lower for longer but no discussions underway about a possible extension of its current quantitative stimulus program.
The confusion being created in the midst of monetary policymakers hesitancy to offer the market confidence is generating uncertainty that's dictating the movements. It's highly doubtful we'll see any clear direction in the short term until we see the outlook become less hazy.
Monday, 22 August 2016
The US Federal Reserve's indecision making markets nervous
Market participants were scarcely off their recent rebounded confidence at the start of the week heading into a crucial week for the US Federal Reserve whose annual Economic Policy Symposium to be hosted in Jackson Hole, Wyoming from the 25-27th August evolving into an uncertain distraction away from the focus on buoyancy driving markets higher.
The annual symposium sees Fed officials from around the United States gathering in one place to discuss economic circumstances the country is absorbing as a result of monetary policy implemented throughout the year. This year's theme: Designing Resilient Monetary Policy Frameworks for the Future giving a good idea what might be on many officials minds.
Last week we saw the Fed release the FOMC minutes of the meeting that happened in July which highlighted a deep divide amongst members in deciding whether the US economy was strong enough to sustain an interest rate hike. Some prominent regional members such as William Dudley, president of the New York Federal Reserve expressed his view that the central bank couldn't wait much longer to implement the second round of rate hikes whilst relaying a tone that set the scene for an imminent increase expected in September.
Needless to say his thoughts weren't shared amongst all decision makers with half the participants opting for a stay of execution in favour of more evidence from economic data regarding the strength of the economy.
Yesterday we heard another prominent figure, vice chairman of the Federal Reserve Stanley Fischer reiterating Dudley's comments on the strength of the economy and necessity of an interest rate hike. He said the Fed's target's were close to being met on most economic indicators with positive remarks about employment but recognising the economy has done "less well"than hope for.
It's getting down to crunch time for the Federal Reserve to choose the direction of its course with both outcomes having major impacts in the long term scheme of things.
The Fed's integrity may have suffered in the months gone by since implementing the first interest rate hike in December while over confidently saying it expected to hike rates four times in 2016, a statement I had said showed the miscalculation of an influential policymaker.
This possibly provides an explanation why some FOMC members have come out strongly with the intention to hike conscientiously knowing how important integrity remains in building trust with the public in the decision it takes. The absence of such virtue evades policymakers from any conviction on the part of participants in finding relief in future intervention measures and thus a failure in its effectiveness.
The annual symposium sees Fed officials from around the United States gathering in one place to discuss economic circumstances the country is absorbing as a result of monetary policy implemented throughout the year. This year's theme: Designing Resilient Monetary Policy Frameworks for the Future giving a good idea what might be on many officials minds.
Last week we saw the Fed release the FOMC minutes of the meeting that happened in July which highlighted a deep divide amongst members in deciding whether the US economy was strong enough to sustain an interest rate hike. Some prominent regional members such as William Dudley, president of the New York Federal Reserve expressed his view that the central bank couldn't wait much longer to implement the second round of rate hikes whilst relaying a tone that set the scene for an imminent increase expected in September.
Needless to say his thoughts weren't shared amongst all decision makers with half the participants opting for a stay of execution in favour of more evidence from economic data regarding the strength of the economy.
I wrote an article about this dilemma the Fed had found itself in saying the split in opinion was creating uncertainty in markets which would be met with trepidation. I went further on to discuss two possible scenarios that could happen depending on the type of action the Fed decided to take saying it was likely for them to buckle under the pressure of global policy alignment that's become the norm over the past few decades and follow its developed nation peers in pushing for softer monetary conditions from a low base.Yellen’s speech at Jackson Hole set to dominate mood on Wall Street https://t.co/zyTWExtoO2 pic.twitter.com/ej5XYOfeys— Yahoo Finance (@YahooFinance) August 22, 2016
Yesterday we heard another prominent figure, vice chairman of the Federal Reserve Stanley Fischer reiterating Dudley's comments on the strength of the economy and necessity of an interest rate hike. He said the Fed's target's were close to being met on most economic indicators with positive remarks about employment but recognising the economy has done "less well"than hope for.
It's getting down to crunch time for the Federal Reserve to choose the direction of its course with both outcomes having major impacts in the long term scheme of things.
The Fed's integrity may have suffered in the months gone by since implementing the first interest rate hike in December while over confidently saying it expected to hike rates four times in 2016, a statement I had said showed the miscalculation of an influential policymaker.
This possibly provides an explanation why some FOMC members have come out strongly with the intention to hike conscientiously knowing how important integrity remains in building trust with the public in the decision it takes. The absence of such virtue evades policymakers from any conviction on the part of participants in finding relief in future intervention measures and thus a failure in its effectiveness.
Thursday, 18 August 2016
US Federal Reserve continues to be under pressure
Minutes of the FOMC meeting that took place in late July showed members of the US Federal Reserve were cautious in their belief towards hiking interest rates for a second time since initially setting the trend in motion last year in December. Although there was a considerable amount of debate whether the US economy was fit enough to sustain a fresh hike, it was decided that more certainty in terms of members full agreement on the timing of the move would be necessary.
We saw remarks earlier in the week from New York Fed President William Dudley emphasising a number of points directly showcasing the strength of the economy whilst going on further to say an interest rate hike was still on the cards at the Fed's next FOMC meeting in September.
But as surprising as it may seem, markets hardly reacted to the enticement by Dudley instead remaining relentless in its view that the current progression from other central banks around the world in extending bond-buying programs while simultaneously exploring the "new" lower bounds of interest rates underneath zero percent was slowing down the Fed's ambitions.
It requires a consensus from all other nations in following the direction of the move although not necessarily to the exact same timing as the other. If we looked at the current global monetary policy stance that's dominating headlines, it doesn't appear wise to apply discretion in the contrary direction which places the Fed's expected trajectory under scrutiny.
Should the Fed see a divergent policy appropriate it would mark the first signs of an uncoupling of a global understanding where the economic decision taken by an individual country no longer influenced by its impact or effects on its counterparts.
Or contrary to this we'll see a less stringent pathway of interest rate hikes with an eventual outcome of the Fed buckling under the pressure of a joint global effort to exploit monetary policy to its withers end till the point of financial catastrophe.
The longer the Fed stalls hiking rates the more likely it'll fall prey to the second scenario because with every meeting that passes with no action registered a wave of doubtfulness will fill the thoughts of market participants who've already become accustomed to "easy" money to drive up asset prices higher and eager to test central bankers commitment further.
We saw remarks earlier in the week from New York Fed President William Dudley emphasising a number of points directly showcasing the strength of the economy whilst going on further to say an interest rate hike was still on the cards at the Fed's next FOMC meeting in September.
But as surprising as it may seem, markets hardly reacted to the enticement by Dudley instead remaining relentless in its view that the current progression from other central banks around the world in extending bond-buying programs while simultaneously exploring the "new" lower bounds of interest rates underneath zero percent was slowing down the Fed's ambitions.
Inasmuch as the economic indicators relied upon by the Federal Reserve to make a decision constantly show positive signs within the US economy the issue of enforcing an interest rate becomes a different matter altogether with the alignment of countries economic policies over recent decades making pulling the trigger harder than it looks.#Fed minutes this week may show why Yellen & co kept timing vague on next rate increase https://t.co/gw5pirYkWY pic.twitter.com/NmnIWAwiNv— Bloomberg Economics (@economics) August 16, 2016
It requires a consensus from all other nations in following the direction of the move although not necessarily to the exact same timing as the other. If we looked at the current global monetary policy stance that's dominating headlines, it doesn't appear wise to apply discretion in the contrary direction which places the Fed's expected trajectory under scrutiny.
Should the Fed see a divergent policy appropriate it would mark the first signs of an uncoupling of a global understanding where the economic decision taken by an individual country no longer influenced by its impact or effects on its counterparts.
Or contrary to this we'll see a less stringent pathway of interest rate hikes with an eventual outcome of the Fed buckling under the pressure of a joint global effort to exploit monetary policy to its withers end till the point of financial catastrophe.
The longer the Fed stalls hiking rates the more likely it'll fall prey to the second scenario because with every meeting that passes with no action registered a wave of doubtfulness will fill the thoughts of market participants who've already become accustomed to "easy" money to drive up asset prices higher and eager to test central bankers commitment further.
Monday, 8 August 2016
US job numbers continue to grow as economy appears weaker
A closely watched gauge of economic performance often associated with the prospects of economic strength or weakness is the US non-farm payrolls that's captured much attention since overtaking a previous record set for the longest consecutive jobs gained in the labour force which last occurred in the late 1980's.
The current reading continues to surpass it's prior record by an ever increasing number of months as time passes leaving many analysts and commentators baffled at the sheer consistency of the measure over the past five years in contrast to the stagnancy of the United States economy.
One would've thought the paradoxical thought which refuses to acknowledge the direct relationship between employment growth translating into economic value might have raised the alarm bells for policymakers who continually believe the farcical numbers they broadcast.
You sense the irony in US indices breaking into higher territory off the back of this measure when the steadiness of trend in economic growth is hardly explicit.
The most probable cause for a spike in optimism relates to a lower than expected number US Federal Reserve officials would be satisfied with in its restless progression of rate hikes or even yet the possibility of rescinding it's barely formative strategy of normalisation under the pressure of following its peers in other developed economies of driving interest rates lower than zero.
Strange as it may sound, the Fed's doubt that 70 consecutive months of job gains isn't enough to be comfortable the economy is capable of handling another interest rate hike eludes to either a lack of confidence in the measure itself or quite simply using it as propaganda feed to abate the feeling of nervousness amongst the investment community. A frightening thought to ponder over considering it's stimulating nature of financial markets...
The current reading continues to surpass it's prior record by an ever increasing number of months as time passes leaving many analysts and commentators baffled at the sheer consistency of the measure over the past five years in contrast to the stagnancy of the United States economy.
One would've thought the paradoxical thought which refuses to acknowledge the direct relationship between employment growth translating into economic value might have raised the alarm bells for policymakers who continually believe the farcical numbers they broadcast.
70...— Charlie Bilello, CMT (@MktOutperform) August 5, 2016
As in 70 consecutive months of job growth, by far the longest streak in history. #payrolls pic.twitter.com/1aHcX5MCZS
You sense the irony in US indices breaking into higher territory off the back of this measure when the steadiness of trend in economic growth is hardly explicit.
The most probable cause for a spike in optimism relates to a lower than expected number US Federal Reserve officials would be satisfied with in its restless progression of rate hikes or even yet the possibility of rescinding it's barely formative strategy of normalisation under the pressure of following its peers in other developed economies of driving interest rates lower than zero.
Strange as it may sound, the Fed's doubt that 70 consecutive months of job gains isn't enough to be comfortable the economy is capable of handling another interest rate hike eludes to either a lack of confidence in the measure itself or quite simply using it as propaganda feed to abate the feeling of nervousness amongst the investment community. A frightening thought to ponder over considering it's stimulating nature of financial markets...
BREAKING: Nasdaq and S&P 500 close at record highs » https://t.co/TGMGUaWBm7 pic.twitter.com/n11XN0yRVd— CNBC Now (@CNBCnow) August 5, 2016
Thursday, 14 July 2016
Can we imply further NIRP if the BoE lowers rates?
Just as the United Kingdom received a new prime minister yesterday in Theresa May's appointment to Britain's political hot seat, focus now shifts to the Bank of England's interest rate decision with pundits expecting BoE governor Mark Carney to drop rates for the first time in seven years.
At first glance it appears the decision will be made as a reactionary measure following the developments concerning Brexit which probably holds the greatest weight in the argument to edge rates to all time lows. Needless to say it can also be seen as a coercive coordination in responding to the re-instituted quantitative stimulus by its developed nation counterparts such as the European Central Bank and the Bank of Japan.
It's prudent to be reminded that although interest rates in the UK currently sits at all time lows of 0.5%, the central bank has an arsenal of monetary tools its able to enact to fight off dangers to the economy. It briefly paused its bond buying program in 2012 when other banks opted to continue and still extensively rely upon it but to no avail.
In the past four years the BoE has resisted the temptation to restart these programs however we need to question the British economy's capability in shielding itself from additional bond purchases that's ridden the strength of the British Pound since 2012 when stimulus was paused and in the light of the drastic economic upset from the Brexit vote to leave the European Union.
If the strength with which the British economy boldly defended its monetary policy stance has been wounded badly by the future outlook, then it brings into question the validity over the distorted might of the US economy that's hardly churned out economic growth sufficient to create waves in the global economy. It would suggest that it too is susceptible to becoming influenced by its fellow central bank counterparts exploring the riskiness of negative interest rate policy.
The BoE's decision will impact the global financial system more than simply the confines of its own economy with an action of lowering rates placing pressure on the US Federal Reserve in defending its case of normalisation of interest rates and in saying this implicitly suggest that its influence of directing world economic policy has been tremendously harmed.
At first glance it appears the decision will be made as a reactionary measure following the developments concerning Brexit which probably holds the greatest weight in the argument to edge rates to all time lows. Needless to say it can also be seen as a coercive coordination in responding to the re-instituted quantitative stimulus by its developed nation counterparts such as the European Central Bank and the Bank of Japan.
It's prudent to be reminded that although interest rates in the UK currently sits at all time lows of 0.5%, the central bank has an arsenal of monetary tools its able to enact to fight off dangers to the economy. It briefly paused its bond buying program in 2012 when other banks opted to continue and still extensively rely upon it but to no avail.
In the past four years the BoE has resisted the temptation to restart these programs however we need to question the British economy's capability in shielding itself from additional bond purchases that's ridden the strength of the British Pound since 2012 when stimulus was paused and in the light of the drastic economic upset from the Brexit vote to leave the European Union.
If the strength with which the British economy boldly defended its monetary policy stance has been wounded badly by the future outlook, then it brings into question the validity over the distorted might of the US economy that's hardly churned out economic growth sufficient to create waves in the global economy. It would suggest that it too is susceptible to becoming influenced by its fellow central bank counterparts exploring the riskiness of negative interest rate policy.
The BoE's decision will impact the global financial system more than simply the confines of its own economy with an action of lowering rates placing pressure on the US Federal Reserve in defending its case of normalisation of interest rates and in saying this implicitly suggest that its influence of directing world economic policy has been tremendously harmed.
BOE set to cut rates for the first time in 7 years on Brexit backlash - MarketWatch https://t.co/MW7uuokkhN— Rod McAlpine (@Rod1015) July 14, 2016
Friday, 17 June 2016
Fed's indecision rests on government's unwillingness to commit
Much to be expected, the US Federal Reserve held interest rates steady once again following a two day FOMC meeting that concluded on Wednesday. Fed Chair Janet Yellen cast a cautionary tale over the direction of the world economy with doubts raised whether the strength of US economic growth was concrete enough to sustain consistent setbacks seeping through from their counterparts in the developed world.
In Wednesday's article I said it was becoming difficult for the Fed to defend its strategy of keeping interest rates unmoved after issuing a guide, the so called "Dot Plot", in providing the market with some clarity of the pace that would be set in hiking rates throughout the next 3 years.
December's liftoff was disguised in confidence and perhaps even a show of arrogance to other central banks who've resorted to interest rates below zero in a last bid attempt to evade deflation. Needless to say the road to normalisation is fraught in containing the onset of policy decoupling and as a result has seen the negative externalities ploughing their way into US economy.
I am of the belief that nations, especially those who make up the majority of global GDP and thus direction, benefit greatly from policy coordination. We've witnessed this simply by observing the actions of central banks in developed nations feeding their economies with a mass money creating bonanza at artificially low rates.
You can't fault central bankers for finding the propensity to enact similar measures to their peers as it fell in line with global policymakers agenda of coordination. So where has it all gone wrong then?
Quite simply the scarcity of bold fiscal policies aimed at addressing failed systemic mechanisms that brought about the height of the financial bubble in 2008/09 as well as exploring new ways of implementing regulations with rigid framework to prevent the same from occurring again.
Yet we continue to see the ignorance of world governments, most importantly those representing the bulk of the world economy, in delaying the process everytime an economic inconveneince spoils the outlook of their nations economy by propagating voters ears with utopian policies.
Until such time we see these governments take radical steps to correct the mishaps hurting their activity, the longer the world will sit with the problem of low growth coupled with deflation.
In Wednesday's article I said it was becoming difficult for the Fed to defend its strategy of keeping interest rates unmoved after issuing a guide, the so called "Dot Plot", in providing the market with some clarity of the pace that would be set in hiking rates throughout the next 3 years.
December's liftoff was disguised in confidence and perhaps even a show of arrogance to other central banks who've resorted to interest rates below zero in a last bid attempt to evade deflation. Needless to say the road to normalisation is fraught in containing the onset of policy decoupling and as a result has seen the negative externalities ploughing their way into US economy.
I am of the belief that nations, especially those who make up the majority of global GDP and thus direction, benefit greatly from policy coordination. We've witnessed this simply by observing the actions of central banks in developed nations feeding their economies with a mass money creating bonanza at artificially low rates.
You can't fault central bankers for finding the propensity to enact similar measures to their peers as it fell in line with global policymakers agenda of coordination. So where has it all gone wrong then?
Quite simply the scarcity of bold fiscal policies aimed at addressing failed systemic mechanisms that brought about the height of the financial bubble in 2008/09 as well as exploring new ways of implementing regulations with rigid framework to prevent the same from occurring again.
Yet we continue to see the ignorance of world governments, most importantly those representing the bulk of the world economy, in delaying the process everytime an economic inconveneince spoils the outlook of their nations economy by propagating voters ears with utopian policies.
Until such time we see these governments take radical steps to correct the mishaps hurting their activity, the longer the world will sit with the problem of low growth coupled with deflation.
The Fed’s missing dot belongs to the St. Louis Fed’s James Bullard https://t.co/detoU2K5GQ pic.twitter.com/Gin7suB1zv— Bloomberg Markets (@markets) June 17, 2016
Thursday, 19 May 2016
Is the Fed correct in thinking rate hikes?
When the Fed finally lifted interest rates in the US for the first time in over a decade last year December the tone that was struck by the Fed was one of caution in its pursuit to normalise the interest rate cycle from an abnormally low rate for an extended period of time. At the time I had written that although the Fed had envisioned to see its reference rate near 1.4% at the end of the year suggesting four rate hikes during the course of the year, it was highly unlikely that we would see that develop given the nature of the global economy as well as the converse pathway being followed by most of its developed counterparts.
The Fed didn't sideline this issue stating that the normalisation process would be taken in accord with the strength of the world economy knowing well that a steep climb in interest rates could destabilise the entire financial system. It's fair to assume that the Fed has stuck by its word by reconsidering a proposed hike in April saying that the outlook of the Chinese economy was waning on the global economy making it difficult for them to lift rates.
But yesterday the Fed's Minutes of Meetings for April were released showing that most FOMC members were ready to hike once again spooking the market into recess at the mere thought of it. The news came as somewhat of a surprise as many were expecting the hiking process to be further delayed to the first half of 2017.
The move certainly provides short term relief for currencies such as the Japanese Yen that have suffered severely from policy mismatch with participates inflicting the opposite action the BOJ had expected them to after announcing an expanded and extensive stimulus program. The market has been unrelenting on countries engaging with negative interest rate policy with many warning the negative impact they will have if implemented.
This leads me to the first reason I believe the Fed isn't foolish in its decision to continue hiking rates as its escaped the trap of falling into the mindset of NIRP which could've thrown the US economy further into the abyss, instead relieving the reliance of the monetary policy by shifting economic policy decision towards fiscal decision makers. This issue has been spoken about from a number of institution who have said the functions of monetary policy have started to wear thin and the need for governments to restructure their economies a necessity.
Secondly the US economy although considered weak when looking back at previous years is much stronger relative to its peers currently, so when weighing up the pros and cons it would lean towards stabilising the economy rather than making it softer by delving deeper into negative territory with interest rates. It's facing up to the headwind risk that's been created from abnormally low interest rates to be certain of normalised policy in the future, an aspect that doesn't feature at all in Europe and Japan.
If there were anyone that would be disappointed or despaired by the guidance it would be market participants who haven't adapted to this new way of economic cooperation or rather lack of. The sudden price moves that occur as a result of policy decoupling should be expected as the notion of paralleled policy enforcement no longer matches. It wouldn't be naive to think that such a move might aid the momentum of a new economic shock which I have no doubt, but we haven't reached a point where we can clearly assess the severity of such an event should it happen.
For now being aware of a changing tide is all that matters, its certainly going to make things interesting in the short term and more so over the long run.
The Fed didn't sideline this issue stating that the normalisation process would be taken in accord with the strength of the world economy knowing well that a steep climb in interest rates could destabilise the entire financial system. It's fair to assume that the Fed has stuck by its word by reconsidering a proposed hike in April saying that the outlook of the Chinese economy was waning on the global economy making it difficult for them to lift rates.
But yesterday the Fed's Minutes of Meetings for April were released showing that most FOMC members were ready to hike once again spooking the market into recess at the mere thought of it. The news came as somewhat of a surprise as many were expecting the hiking process to be further delayed to the first half of 2017.
If it were to happen it would certainly set the trend for the divergence between developed nation's monetary policy which would indicate a departure from the current undertaking of economic coordination so as to insulate the world economy from shocks and place a concerted effort from all nations on finding a unified solution to economic hardship. A common theme that's cropped up often over the last while is the need to protect a nation's sovereignty giving further evidence that the economic pathway countries are about to endure upon requires solitary objectives as opposed to collective thought.Fed signals interest rate hike firmly on the table for June https://t.co/K25aq8kE1r pic.twitter.com/j2fe5xHXeM— Reuters Top News (@Reuters) May 18, 2016
The move certainly provides short term relief for currencies such as the Japanese Yen that have suffered severely from policy mismatch with participates inflicting the opposite action the BOJ had expected them to after announcing an expanded and extensive stimulus program. The market has been unrelenting on countries engaging with negative interest rate policy with many warning the negative impact they will have if implemented.
This leads me to the first reason I believe the Fed isn't foolish in its decision to continue hiking rates as its escaped the trap of falling into the mindset of NIRP which could've thrown the US economy further into the abyss, instead relieving the reliance of the monetary policy by shifting economic policy decision towards fiscal decision makers. This issue has been spoken about from a number of institution who have said the functions of monetary policy have started to wear thin and the need for governments to restructure their economies a necessity.
Secondly the US economy although considered weak when looking back at previous years is much stronger relative to its peers currently, so when weighing up the pros and cons it would lean towards stabilising the economy rather than making it softer by delving deeper into negative territory with interest rates. It's facing up to the headwind risk that's been created from abnormally low interest rates to be certain of normalised policy in the future, an aspect that doesn't feature at all in Europe and Japan.
If there were anyone that would be disappointed or despaired by the guidance it would be market participants who haven't adapted to this new way of economic cooperation or rather lack of. The sudden price moves that occur as a result of policy decoupling should be expected as the notion of paralleled policy enforcement no longer matches. It wouldn't be naive to think that such a move might aid the momentum of a new economic shock which I have no doubt, but we haven't reached a point where we can clearly assess the severity of such an event should it happen.
For now being aware of a changing tide is all that matters, its certainly going to make things interesting in the short term and more so over the long run.
Friday, 8 April 2016
Focus turns to central bankers to qualm uncertainty
Markets have been edgy this week with much of the movement stemming from currency pairs as developed world's central banks and economies took centre stage as risk begins to build up. Most notably was the Japanese Yen's remarkable appreciation against all of its major peers with the government attempting qualm bullish optimism by saying it was ready to intervene in the market at any given time.
The abrupt appreciation of the Yen flies in the face of policymakers at the Bank of Japan who have tried but failed in their attempts to depreciate the currency with extremist monetary policy that's seemingly had an inverse impact.
We also saw shakiness in the Euro as a number of issues take strain on the economic bloc. The ECB came out reassuring the market of it's willingness to up its ante if the stimulus measure currently in place failed to produce the desired outcome market participants had been expecting.
Apart from the monetary woes weighing heavily on the Eurozone, political scandals are not afar with leaked transcripts of conversation between IMF officials providing impetus to believe that negotiations surrounding a renewed bail out deal with Greece and the Troika is set to display the same indecisiveness produced at the beginning of last year.
Notwithstanding this, the worry that the Brexit referendum vote will need more convincing than once thought adding further complexity to matter within the region with the date of both aforementioned issues falling within a tight schedule that wouldn't allow policymakers to give enough attention to each.
It was the turn of Fed Chair Janet Yellen to face the scrutiny of the market's nervousness after she sat on a panel with former Federal Reserve Chairman Paul Volcker, Alan Greenspan and Ben Bernanke discussing the state of the US economy as well as the direction of monetary policy around the globe. Yellen said she did not believe that the US economy had formed a bubble and there were no risks of a burst either. This after presidential candidate Donald Trump made remarks that the US economy could be on the brink of implosion at anytime.
Evidence is pointing to the market becoming unsettled and the lack of response to central bankers dovish tones is spelling danger for the weeks that lie ahead. The focal point around major central bankers of the world happens as the backdrop of political uncertainty takes hold of fears however this time the once turned to financial superheroes of yesteryear are tripping up over their own powers to save the world economy from it's inevitable fate.
The reasoning could lie in the fact that New Zealand's economy operates with a wide exposure to agricultural production which probably gives a clue to the performance. In the article below its said that the lack of foreign investment and defensive stock all played its part in helping lift the index. If this were the case it could possibly be one of the first indications that investors are starting to channel their capital towards defensive plays as they expecting a world recession.
The abrupt appreciation of the Yen flies in the face of policymakers at the Bank of Japan who have tried but failed in their attempts to depreciate the currency with extremist monetary policy that's seemingly had an inverse impact.
We also saw shakiness in the Euro as a number of issues take strain on the economic bloc. The ECB came out reassuring the market of it's willingness to up its ante if the stimulus measure currently in place failed to produce the desired outcome market participants had been expecting.
Apart from the monetary woes weighing heavily on the Eurozone, political scandals are not afar with leaked transcripts of conversation between IMF officials providing impetus to believe that negotiations surrounding a renewed bail out deal with Greece and the Troika is set to display the same indecisiveness produced at the beginning of last year.
Notwithstanding this, the worry that the Brexit referendum vote will need more convincing than once thought adding further complexity to matter within the region with the date of both aforementioned issues falling within a tight schedule that wouldn't allow policymakers to give enough attention to each.
It was the turn of Fed Chair Janet Yellen to face the scrutiny of the market's nervousness after she sat on a panel with former Federal Reserve Chairman Paul Volcker, Alan Greenspan and Ben Bernanke discussing the state of the US economy as well as the direction of monetary policy around the globe. Yellen said she did not believe that the US economy had formed a bubble and there were no risks of a burst either. This after presidential candidate Donald Trump made remarks that the US economy could be on the brink of implosion at anytime.
Evidence is pointing to the market becoming unsettled and the lack of response to central bankers dovish tones is spelling danger for the weeks that lie ahead. The focal point around major central bankers of the world happens as the backdrop of political uncertainty takes hold of fears however this time the once turned to financial superheroes of yesteryear are tripping up over their own powers to save the world economy from it's inevitable fate.
Discussing it earlier this week in Travelling Technicals I had said that the New Zealand NZX 50 Index looked to be the best looking technical chart I've done analysis on so far this year and it proved the best performing index this year amongst its developed market peers.It's been a rocky week for the $5.3 trillion-a-day forex market https://t.co/Uz3hFWDqG4 pic.twitter.com/N23tksqJ3I— Bloomberg (@business) April 8, 2016
The reasoning could lie in the fact that New Zealand's economy operates with a wide exposure to agricultural production which probably gives a clue to the performance. In the article below its said that the lack of foreign investment and defensive stock all played its part in helping lift the index. If this were the case it could possibly be one of the first indications that investors are starting to channel their capital towards defensive plays as they expecting a world recession.
New Zealand is a rare case of a developed market that's posting gains this year https://t.co/JDp7BT4ixs pic.twitter.com/Gv1Jm42Xwh— Bloomberg (@business) April 8, 2016
Wednesday, 16 March 2016
Fed expected to keep rates on hold as tone closely watched
There's been a level of mutedness that has lay around global markets awaiting the Federal Reserve's decision on interest rates with expectations that hiking will be held off during this FOMC meeting after its European counterparts, the ECB spooked markets last week by painting a bleak economic outlook that could see deeper negative territory for interest rates in that region.
We heard yesterday that the Bank of Japan voted to keep measures in place fearing that any deviation might trigger a global selloff on the back of desperate actions needed to be taken by central bankers to save their respective economies from distress.
Today's Fed announcement doesn't possess speculation over whether there will be a rate increase or not but rather the pace being set. FOMC members expected to initiate four rate hikes during 2016 which many had thought to be an optimistic number that has subsequently proven true as world markets are being faced with tougher economic climates and little leeway allowing policymakers to maneuver.
I've said over the last few days that I expect the market to be tuned in to the tone Yellen strikes when it comes to the issue of negative interest rates. So far we've seen adverse reactions to what policymakers believed would spur markets on but failed to ignite the passion to drive optimism higher. These moves are leaving central bankers confused over whether to continue exploring the effects of negative interest policy or perhaps start seeking support from their fiscal partners in crime...governments.
Nonetheless we are moving closer to what I believe to be the edge of a cliff in terms of market valuations and I don't envision seeing much more support for the current bull run that recently celebrated its 7th year of existence. Unless the true facts are placed in front of the markets eyes instead of constantly being distracted away with artificial monetary stimulus that seemingly helps fade away the responsibilities by those elected to manage economic affairs in the interest of its people.
The irony of it all is it took one rate hike of 25 basis points to halt its march upwards, hardly the kind of penetrative action expected to place a drag on the economy. One would've expected a series of hikes before any kind of headwinds begin to be felt. This highlights the fragility of the US ecconomy is dealing with that just can't kickstart the growth engine so many have hoped would've eased up on the hard landing experienced by China.
We heard yesterday that the Bank of Japan voted to keep measures in place fearing that any deviation might trigger a global selloff on the back of desperate actions needed to be taken by central bankers to save their respective economies from distress.
Today's Fed announcement doesn't possess speculation over whether there will be a rate increase or not but rather the pace being set. FOMC members expected to initiate four rate hikes during 2016 which many had thought to be an optimistic number that has subsequently proven true as world markets are being faced with tougher economic climates and little leeway allowing policymakers to maneuver.
I've said over the last few days that I expect the market to be tuned in to the tone Yellen strikes when it comes to the issue of negative interest rates. So far we've seen adverse reactions to what policymakers believed would spur markets on but failed to ignite the passion to drive optimism higher. These moves are leaving central bankers confused over whether to continue exploring the effects of negative interest policy or perhaps start seeking support from their fiscal partners in crime...governments.
Nonetheless we are moving closer to what I believe to be the edge of a cliff in terms of market valuations and I don't envision seeing much more support for the current bull run that recently celebrated its 7th year of existence. Unless the true facts are placed in front of the markets eyes instead of constantly being distracted away with artificial monetary stimulus that seemingly helps fade away the responsibilities by those elected to manage economic affairs in the interest of its people.
This chart of the Dollar Index provided by Jeroen Blokland puts things into context really well. Up until the Fed has implemented an interest rate hike of 25 basis points, nothing stood in the way of upside momentum in Dollar strength. Fast forward three months after the rate has had time to work itself through the system and the Dollar is trapped in a consolidatory price range that refuses to budge.More hikes may be coming... your guide to Fed decision day https://t.co/LyydTaQ8Z0 pic.twitter.com/mQmUpst7co— Bloomberg Business (@business) March 16, 2016
The irony of it all is it took one rate hike of 25 basis points to halt its march upwards, hardly the kind of penetrative action expected to place a drag on the economy. One would've expected a series of hikes before any kind of headwinds begin to be felt. This highlights the fragility of the US ecconomy is dealing with that just can't kickstart the growth engine so many have hoped would've eased up on the hard landing experienced by China.
#USD strength is now a far less(!) compelling reason for the #Fed to postpone rate hikes. $DXY pic.twitter.com/3fwYHnBn1K— jeroen blokland (@jsblokland) March 16, 2016
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