Deja Vu

August 17, 2016

Wednesday’s been very quiet from a data release standpoint. Market trading has been dominated by Fed watching, which in the wake of remarks yesterday by Fed District Presidents Dudley of New York and Lockhart of Atlanta has markets pricing in much higher odds of a fed funds rate increase before yearend. They suggested a move could come even next month.

3-1/4 years have passed since former Chairman Bernanke floated the idea of policy normalization with is “tapering” clue regarding quantitative stimulus (QE), which at the time amounted to $85 billion of asset buying each month. QE was eventually phased out but not nearly as soon as the initial hint, and in all this time there has been just a single 25-basis point hike in the central bank interest rate. All this while, Fed rhetoric has gone back in forth in telling the market whether the next move in normalization will come sooner or later. Investors never tire of the act and dutifully follow each clue. 

In May of 2013, Fed officials released a dot plot diagram showing policymakers on average anticipating that the federal funds rate would be at 1.0% by late 2015. Almost a year later than that horizon, the central bank rate is at 0.25-0.50%, trailing behind that road map. The take-away is that normalization continues to be a very gradual process in the face of continuing sub-target inflation and subdued growth in nominal GDP.

The hawkishly-tinged remarks of Dudley and Lockhart have lent the dollar support, lifted long-term interest rates, and given pause to stock market optimism. Compared to May 21, 2013, when Bernanke first spoke of tapering, the dollar has on net risen some 14% against the euro but lost 2% against the yen. The 10-year Treasury yield is 34 basis points lower now than then. The DOW has strengthened 21% on balance, and real GDP has expanded an an annualized rate of 2.2%.

Compared to yesterday at the close, the dollar today is up 0.9% against the Australian dollar, 0.6% versus the kiwi, 0.4% relative to the yen, 0.3% vis-a-vis the loonie and sterling, and 0.1% against the euro, Swiss franc and Chinese yuan. Emerging market currencies are generally softer.

Japan’s Nikkei closed 0.9% higher. Stocks also rose 1.0% in Indonesia and 0.7% in New Zealand but dropped 0.6% in Hong Kong, 0.5% in Singapore, and 0.2% in India and South Korea. European bourses have so far fallen today by 0.9% in Germany and Spain, 1.1% in Italy, 0.7% in Greece, 0.6% in France, 0.4% in Switzerland, and 0.2% in Britain.

West Texas Intermediate oil dropped back 1.0% to $46.13 per barrel.  Comex gold is 0.7% softer at $1,347.70 per ounce. Industrial metal prices faltered a bit.

Ten-year British gilt and Japanese JGB yields are 1 and 2 basis points firmer.  The German bund is steady.

New Zealand producer output prices increased just 0.2% on quarter in 2Q16 and were 0.5% greater than a year earlier. Producer input prices rose 0.9% but were merely 0.3% higher than a year earlier. Wage costs went up 0.4% on quarter and slowed to a 1.5% on-year advance. The jobless rate last quarter dipped to 5.1% from 5.2% in 1Q and 5.5% a year earlier. Employment recorded on-year expansion of 4.5%.

Australia also reported quarterly wage costs.  These went up 0.5% between 1Q and last quarter and were a subdued 2.1% greater than in the second quarter of 2015.  Westpac reported scant change in Australia’s index of leading economic indicators in July.

British wage inflation ticked up marginally to 2.4% in April-June (2.3% for regular pay only). Jobless insurance claims in the U.K. fell 8.6K in July. The jobless rate in the second quarter was 4.9%.

An index of investor sentiment toward Switzerland compiled by ZEW weakened further in August, printing at negative 2.8 following readings of 5.9 in July and 19.4 in June.

Copyright Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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