Don’t discount an autumn rate rise

31 Aug 2015 | Author: | No comments yet »

Bond Market Anxieties Divide Wall Street on Fed’s Next Move.

Wall Street opened the week in the red after comments from Federal Reserve Vice Chairman Stanley Fischer over the weekend appeared to keep the door open for a rate hike in September. European Central Bank (ECB) President Mario Draghi may have skipped the US Federal Reserve’s Jackson Hole symposium this year, but he can not dodge its conclusion: Central banks can not steer inflation as well as they thought.Although the exact timing remains uncertain, at some point over coming months the monetary policies of the world’s leading central banks will almost certainly diverge further, as the U.S.

Dominic Konstam isn’t sure about Deutsche Bank AG’s forecast that the Federal Reserve will raise interest rates in September — and he works there.Crude prices jumped after data indicated surprise cuts to U.S. oil production and as OPEC said it was ready to talk to other producers about the recent drop in prices. Less than six months into a stimulus program that Draghi promised would revive consumer-price growth, the euro area is facing renewed disinflationary pressure as China’s economy slows and commodity prices slump.

The S&P energy index reversed course and was up 1.05 percent — on track for its best four-day gain in seven years — boosted by ConocoPhillips , Schlumberger and Phillips 66 . One consequence of that divergence is likely to be changes in the exchange rates of the major currencies, although some of that adjustment may have already taken place in anticipation of the change. Still, Wall Street was poised for its worst monthly drop in more than three years on worries about the health of China’s economy and the timing of a U.S. interest rate hike. The newest risk to prices highlights how in the 19-nation currency bloc — as in the US, the UK and other industrialized nations — headline inflation is still far below target even as the economy recovers.

Fischer’s remarks suggest the Fed could look beyond a week of stock market turmoil brought on by persistent fears that China’s economy is faltering. “The market turmoil will continue in the near future. The split highlights the widening gap between those who take their cues from the bond market to gauge the prospects for U.S. growth and those who focus on economic indicators. China is the catalyst, but the real reason for the selloff is the nervousness about the first US rate hike,” KBC senior economist Koen De Leus said. That’s primarily because sharp appreciations in the dollar and the pound would put downward pressure on already low inflation rates as the prices of imports fall.

With China’s stock meltdown convulsing markets worldwide and commodities stuck near the lowest levels this century, bond traders pared back their inflation expectations as worries about a global slowdown deepen. The CBOE Volatility index, or VIX — known as Wall Street’s fear gauge — rose about 7 percent to 27.80 on Monday, above its long-term average of 20. New research by economists at the International Monetary Fund and the World Bank shows that currency moves have a more muted impact on trade flows than they used to. Three-quarters of those surveyed by Bloomberg in August say the Fed will lift the upper bound of its target rate to 0.5 percent at its Sept. 16-17 meeting.

The ECB’s Governing Council is to convene in Frankfurt from tomorrow to set monetary policy and Draghi is to present the quarterly economic forecasts at a press conference on Thursday. While the survey was taken before markets went haywire, it was backed by data on Thursday, which showed the U.S. economy expanded more last quarter than previously reported. At 13:08 ET, the Dow Jones industrial average was down 46.3 points, or 0.28 percent, at 16,596.71, the S&P 500 was down 6.67 points, or 0.34 percent, at 1,982.2 and the Nasdaq Composite was down 10.21 points, or 0.21 percent, at 4,818.11.

Officials including Executive Board member Peter Praet, the ECB’s chief economist, said last week that they are ready to extend or expand quantitative easing if needed. “The ECB staff macroeconomic projections are likely to show a downward revision in inflation forecasts for both this year and 2016, resulting from a stronger euro and weaker oil-price futures,” Barclays PLC chief European economist Philippe Gudin said in a note to clients on Friday. A weaker currency is therefore a double-edged sword: it may cut the cost of your product for an overseas buyer, but it increases the cost to you of making the thing in the first place. Investors will be keeping a sharp eye on economic data again this week, especially the monthly jobs report on Friday, the last one before the Fed meets on Sept. 16-17.

Central bankers have an opportunity to discuss their predicament again starting on Friday, when they and finance ministers from the G20 nations gather for a two-day meeting in Ankara. This may explain why the yen’s depreciation following the launch of the Bank of Japan’s program of quantitative easing has had such little impact, and why the euro’s fall over the past 16 months has failed to deliver much of a boost to eurozone growth. Well before last week’s upheaval, which was triggered in part by China’s surprise devaluation of its currency, traders were signaling that the U.S. was having an increasingly tough time generating the type of growth to spur inflation. At Jackson Hole, academics effectively delivered a beating to central banks’ confidence in their ability to predict and manage their key variables, by pointing out wide gaps in knowledge about how inflation works.

Indeed ECB Vice President Vitor Constancio, speaking Saturday on a panel at the Fed conference, said the central bank had seen limited pass through from a weaker euro into inflation in Europe. He added that the main point of the ECB’s stimulus policies was not to weaken the euro but instead to juice financial conditions through stocks and long-term interest rates.

Those expectations, which are based on the premium that bond buyers demand to own Treasuries over inflation-protected securities, fell as low as 1.44 percent last week. The big worry now is that the collapse in oil prices — from more than $100 a barrel a little over a year ago to less than $50 today — reflects deteriorating growth in China and the rest of the world.

Here you can write a commentary on the recording "Don’t discount an autumn rate rise".

* Required fields
Twitter-news
Our partners
Follow us
Contact us
Our contacts

About this site