AdviserVoiceJerome Powell Archives - AdviserVoice https://www.adviservoice.com.au/tag/jerome-powell/ Financial planner information & financial planner education/CPD - AdviserVoice Thu, 23 Jul 2026 20:30:20 +0000 en-US hourly 1 https://wordpress.org/?v=7.0.2 Trump era outlook for emerging markets debt in 2025 https://www.adviservoice.com.au/2024/11/trump-era-outlook-for-emerging-markets-debt-in-2025/ https://www.adviservoice.com.au/2024/11/trump-era-outlook-for-emerging-markets-debt-in-2025/#respond Wed, 20 Nov 2024 20:50:03 +0000 https://www.adviservoice.com.au/?p=99693

Thomas Haugaard

In a new Trump era, the potential push higher in US inflation, growth, rates, the dollar and Treasury yields has implications for emerging markets debt (EMD) investors.

Janus Henderson Investors Portfolio manager, Thomas Haugaard, expects Trump’s pro-growth agenda is expected to increase pressure on the US Federal Reserve in its delicate balancing act of maintaining stable prices and a healthy labour market.

However, he adds, “as noted by Chairman Jerome Powell, this is unlikely to significantly impact Fed policy decisions. We believe it is more likely to lead to a more hawkish Fed – all things equal – to preserve its credibility to tackle inflation and given higher inflation expectations under the new administration.

“Many of Trump’s proposed policies are expected to be inflationary, such as trade tariffs, higher fiscal spending (such as defence) and tax cuts. His pro-growth policies and a loosening fiscal policy stance could also create a tailwind for US growth, attracting capital into the US and boosting the dollar.”

On the other hand, Mr Haugaard suggest, “if investors start worrying about the ballooning US fiscal deficit, this could have the opposite effect on the dollar. A strong greenback could pressure EM currencies and ergo local currency EM bonds. However, it is likely EM central banks will tread cautiously in their policy responses, as weaker currencies add to inflationary pressures. Altogether, this is likely to drive less optimistic growth than previously expected in EM.

Capital flows to EM postponed?

“Depending on the eventual US firepower to boost growth, we still expect the EM-US growth differential to trend higher, albeit less than before. This could weigh on the prospects of capital flows to EM in the short term.

“However, looking at flows outside of EM dedicated funds, some argue1 that local EM investors are stepping into emerging markets debt hard currency (EMD HC), which could mean a new and potentially stickier source of financing. Moreover, if pro-US growth policies are initiated ahead of tariffs, this could help to support credit spreads generally, including in EM. Economic growth is a priority for the US and tariffs could weigh on growth and so it would make sense for fiscal policy, such as tax cuts, to be prioritised first and tariffs later. Indeed, in the first Trump presidency, tariffs came later in his term.”

Mr Haugaard says, “we believe US policy uncertainty is likely to remain elevated, and this could result in periods of spread volatility as markets digest the outcomes. It is also worth remembering that during Trump’s first term, after the initial repricing in late 2016, EMD HC spreads tightened throughout 2017 as the “risk-on” sentiment in US financial markets filters through into credit spreads globally.

Another factor to consider in influencing credit spreads is rising US Treasury yields and an increase in the term premium. According to Morgan Stanley research, historically any move in US Treasury yields of more than 50 basis points – primarily driven by real yields – sees EM credit spreads widen as they can no longer absorb any further moves in UST yields.

However, he notes “credit spreads and the underlying Treasury yields are negatively correlated, stabilising total returns during positive and negative markets. In a risk-off environment, the underlying Treasury yield becomes a buffer, limiting a total return loss and vice versa in risk-on markets. The exception to this rule of thumb is when inflation is behind the rise in risk aversion.

So much depends on whether a rise in the US Treasury yield is fuelled by higher inflation expectations or other factors. In our view, credit spreads are affected more by the speed of a rise higher in real yields rather than the magnitude.

Trade tariffs and tax cuts

Mr Haugaard adds, “Trump’s proclaimed priority has been to bring manufacturing back to the US through tariffs and tax cuts. However, it remains unclear what will transpire as actual outcomes (rather than political posturing) and what can be implemented from a practical perspective, considering the risk of retaliatory action. After all, in Trump’s first term, trade was a bargaining tool. Some measures will require Congressional approval. One example of this is the removal of countries’ PNTR (permanent normal trade relations) status, a legal designation in the United States for free trade with a foreign nation. A Republican clean sweep facilitates this process. Another is Trump’s proposal to reduce the corporate tax rate from 21% to 15% for US domestic producers.

“Trump has pledged 60% tariffs on exports from China to the US and universal tariffs of up to 20% on all other countries’ exports to the US. There will be relative winners and losers if this comes to fruition. To categorise these, we believe two key dimensions are trade and funding costs, as well as targeted tariffs. China and Mexico (as the country with the largest US exports as a percentage of GDP and in the context of a wider renegotiation of the US Mexico Canada Agreement or USMCA) are likely to see the most impact, while smaller open economies – such as Vietnam and Singapore – may also be affected, depending on their trade export volume to the US (Figure 2). However, some of these countries are not represented in the EMD HC universe. Emerging Asia has nearly twice the US export trade exposure (as a percentage of GDP) as any other region and the largest US dollar net trade surpluses with the US. 

“Given imported inflation, those countries with high imports in their trade balance, as well as running a large trade deficit, would be most vulnerable to weakness in their currencies,” says MrHaugaard. “Tighter immigration controls could also influence those countries where tax remittances from the US form a part of their GDP, such as those in Latin America and the Caribbean.

“The impact from tariffs, however, is likely to be somewhat mitigated by currencies adjusting, buffering some of the direct impact, and trade will reorient as a buffer too. A disinflationary effect could therefore emerge elsewhere, such as in Asia, as China looks to avoid punitive costs by diverting its exports to alternative EM countries. This could create monetary tension in Asia, with central banks possibly needing to cut rates amid declining exports and inflation, despite a strong US dollar. Currency weakness could, however, create caution in moving the needle on monetary policy too much, as mentioned earlier. When considering the impact on individual countries, investors need to be cognisant of the starting point and the fiscal or monetary room to counteract effects from the US.

“The negative growth implications from tariffs and immigration policy could also somewhat offset inflation risks. Moreover, tariffs are often considered to be inflationary only in the short term, as consumers adjust their behaviour to higher prices and growth slows. The second-order effects need to be considered.”

China – fiscal thrust?

Mr Haugaard notes a key target in the tariff action and one that is struggling with its own economic woes is China. “It just announced (seemingly timed after the US election result) a US$1.4tn package to support local governments in their fiscal troubles and free up spending capacity, but the package undershot market expectations. The National People’s Congress (NPC) press conference did not reveal more details on other priorities, such as supporting consumption, stabilising the housing market and boosting bank lending through helping banks to recapitalise through central government bond issuance.

“However, China could be saving its firepower to respond to the eventual Trump policies, perhaps before the Chinese New Year and post Trump’s inauguration. Assuming the 60% tariff hike on China were to materialise in the first half of next year, JP Morgan estimates that this could trim 1 or 2% off China’s real GDP growth depending on China’s policy response.”

Differentiated response across EM

He also notes, “The combination of higher US rates (for longer) and weaker EM growth under a Trump presidency could negatively impact highly indebted countries that face high funding costs. As discussed, a strong dollar tends to weaken EM currencies, which adds pressure on imported inflation and limits the room for monetary easing or conversely, adds to tightening in EMs.

“On the flip side, some EM countries have entered funding agreements with multi-lateral agencies such as the IMF which encourage fiscal sustainability. According to our analysis using IMF data, 42% of the countries in the JPM EMBI GD Index are in IMF programmes. Market access and funding has improved significantly for BB-rated and B-rated countries, while significant progress has been made in restructuring cases. The direct effects of Trump 2.0 on many of these smaller countries in the universe will be small, in contrast to some of the larger markets such as Mexico and China.”

Mr Haugaard notes, “Countries with a high dependency on trade with the US are also vulnerable to Trump 2.0 impacts, as well as those operating in industries where the US could ramp up domestic production. Enhanced domestic oil production in the US could adversely affect oil-exporting countries in the Gulf Cooperation Council (GCC). However, the overall inflationary impact is nuanced. For example, lower commodity prices from more oil production as well as a potential solution to the war in Ukraine (a ceasefire has been speculated) could lead to more food production and lower food prices over time.

“Climate energy policy is another area to watch, as ongoing green transitions may be hindered alongside loosening of regulation on US oil and gas exploration and production. A carbon border tax and tariffs on the imports of renewable energy components – such as those supplied by countries in Asia – are also a potential, as well as less support for debt-to-nature swaps. These aim to refinance a country’s debt at lower relative interest rates, in return for a commitment to spend a portion of these savings on nature conservation.

It’s all about alpha

Mr Haugaard, suggests, “Pervasive policy uncertainty is likely to be reflected through credit risk premia alongside potential volatility in sovereign credit spreads in EMD HC, but we do not believe this materially alters the fundamental picture for the EMD HC universe. EM sovereign credit ratings continue to outpace downgrades6. While there will be relative winners and losers, the eventual impact won’t be the same across the heterogeneous EM universe. Differentiated responses are likely to arise across EMs given countries’ specific monetary, inflation and fiscal position, as well as trade dynamics with the US. This could lead to mispriced opportunities emerge as the reality unfolds and as active investors, we aim to capture alpha through these and tap into the long-term potential of emerging markets.

“Alongside careful country selection, given the rates risk, duration is also another aspect to consider in portfolio construction. We continue to favour shorter-maturity high yield issuers vis-à-vis more rates-sensitive longer-dated investment grade issuers. The latter will be more sensitive to swings in Treasury yields (higher duration), and the tighter level of investment grade sovereign spreads means there is less of a buffer against any spread weakness.”

———

Sources:
JP Morgan on official data, BIS and anecdotal evidence, 22 October 2024.
Morgan Stanley, 3 September 2024.
UN, IMF, Haver Analytics, Morgan Stanley Research, 3 September 2024.
JP Morgan, 8 November 2024.
Janus Henderson estimates using IMF data, as at 31 July 2024. Countries are those in the JP Morgan EMBI Global Diversified Index.
Bloomberg, 31 October 2024.
]]>

Thomas Haugaard

In a new Trump era, the potential push higher in US inflation, growth, rates, the dollar and Treasury yields has implications for emerging markets debt (EMD) investors.

Janus Henderson Investors Portfolio manager, Thomas Haugaard, expects Trump’s pro-growth agenda is expected to increase pressure on the US Federal Reserve in its delicate balancing act of maintaining stable prices and a healthy labour market.

However, he adds, “as noted by Chairman Jerome Powell, this is unlikely to significantly impact Fed policy decisions. We believe it is more likely to lead to a more hawkish Fed – all things equal – to preserve its credibility to tackle inflation and given higher inflation expectations under the new administration.

“Many of Trump’s proposed policies are expected to be inflationary, such as trade tariffs, higher fiscal spending (such as defence) and tax cuts. His pro-growth policies and a loosening fiscal policy stance could also create a tailwind for US growth, attracting capital into the US and boosting the dollar.”

On the other hand, Mr Haugaard suggest, “if investors start worrying about the ballooning US fiscal deficit, this could have the opposite effect on the dollar. A strong greenback could pressure EM currencies and ergo local currency EM bonds. However, it is likely EM central banks will tread cautiously in their policy responses, as weaker currencies add to inflationary pressures. Altogether, this is likely to drive less optimistic growth than previously expected in EM.

Capital flows to EM postponed?

“Depending on the eventual US firepower to boost growth, we still expect the EM-US growth differential to trend higher, albeit less than before. This could weigh on the prospects of capital flows to EM in the short term.

“However, looking at flows outside of EM dedicated funds, some argue1 that local EM investors are stepping into emerging markets debt hard currency (EMD HC), which could mean a new and potentially stickier source of financing. Moreover, if pro-US growth policies are initiated ahead of tariffs, this could help to support credit spreads generally, including in EM. Economic growth is a priority for the US and tariffs could weigh on growth and so it would make sense for fiscal policy, such as tax cuts, to be prioritised first and tariffs later. Indeed, in the first Trump presidency, tariffs came later in his term.”

Mr Haugaard says, “we believe US policy uncertainty is likely to remain elevated, and this could result in periods of spread volatility as markets digest the outcomes. It is also worth remembering that during Trump’s first term, after the initial repricing in late 2016, EMD HC spreads tightened throughout 2017 as the “risk-on” sentiment in US financial markets filters through into credit spreads globally.

Another factor to consider in influencing credit spreads is rising US Treasury yields and an increase in the term premium. According to Morgan Stanley research, historically any move in US Treasury yields of more than 50 basis points – primarily driven by real yields – sees EM credit spreads widen as they can no longer absorb any further moves in UST yields.

However, he notes “credit spreads and the underlying Treasury yields are negatively correlated, stabilising total returns during positive and negative markets. In a risk-off environment, the underlying Treasury yield becomes a buffer, limiting a total return loss and vice versa in risk-on markets. The exception to this rule of thumb is when inflation is behind the rise in risk aversion.

So much depends on whether a rise in the US Treasury yield is fuelled by higher inflation expectations or other factors. In our view, credit spreads are affected more by the speed of a rise higher in real yields rather than the magnitude.

Trade tariffs and tax cuts

Mr Haugaard adds, “Trump’s proclaimed priority has been to bring manufacturing back to the US through tariffs and tax cuts. However, it remains unclear what will transpire as actual outcomes (rather than political posturing) and what can be implemented from a practical perspective, considering the risk of retaliatory action. After all, in Trump’s first term, trade was a bargaining tool. Some measures will require Congressional approval. One example of this is the removal of countries’ PNTR (permanent normal trade relations) status, a legal designation in the United States for free trade with a foreign nation. A Republican clean sweep facilitates this process. Another is Trump’s proposal to reduce the corporate tax rate from 21% to 15% for US domestic producers.

“Trump has pledged 60% tariffs on exports from China to the US and universal tariffs of up to 20% on all other countries’ exports to the US. There will be relative winners and losers if this comes to fruition. To categorise these, we believe two key dimensions are trade and funding costs, as well as targeted tariffs. China and Mexico (as the country with the largest US exports as a percentage of GDP and in the context of a wider renegotiation of the US Mexico Canada Agreement or USMCA) are likely to see the most impact, while smaller open economies – such as Vietnam and Singapore – may also be affected, depending on their trade export volume to the US (Figure 2). However, some of these countries are not represented in the EMD HC universe. Emerging Asia has nearly twice the US export trade exposure (as a percentage of GDP) as any other region and the largest US dollar net trade surpluses with the US. 

“Given imported inflation, those countries with high imports in their trade balance, as well as running a large trade deficit, would be most vulnerable to weakness in their currencies,” says MrHaugaard. “Tighter immigration controls could also influence those countries where tax remittances from the US form a part of their GDP, such as those in Latin America and the Caribbean.

“The impact from tariffs, however, is likely to be somewhat mitigated by currencies adjusting, buffering some of the direct impact, and trade will reorient as a buffer too. A disinflationary effect could therefore emerge elsewhere, such as in Asia, as China looks to avoid punitive costs by diverting its exports to alternative EM countries. This could create monetary tension in Asia, with central banks possibly needing to cut rates amid declining exports and inflation, despite a strong US dollar. Currency weakness could, however, create caution in moving the needle on monetary policy too much, as mentioned earlier. When considering the impact on individual countries, investors need to be cognisant of the starting point and the fiscal or monetary room to counteract effects from the US.

“The negative growth implications from tariffs and immigration policy could also somewhat offset inflation risks. Moreover, tariffs are often considered to be inflationary only in the short term, as consumers adjust their behaviour to higher prices and growth slows. The second-order effects need to be considered.”

China – fiscal thrust?

Mr Haugaard notes a key target in the tariff action and one that is struggling with its own economic woes is China. “It just announced (seemingly timed after the US election result) a US$1.4tn package to support local governments in their fiscal troubles and free up spending capacity, but the package undershot market expectations. The National People’s Congress (NPC) press conference did not reveal more details on other priorities, such as supporting consumption, stabilising the housing market and boosting bank lending through helping banks to recapitalise through central government bond issuance.

“However, China could be saving its firepower to respond to the eventual Trump policies, perhaps before the Chinese New Year and post Trump’s inauguration. Assuming the 60% tariff hike on China were to materialise in the first half of next year, JP Morgan estimates that this could trim 1 or 2% off China’s real GDP growth depending on China’s policy response.”

Differentiated response across EM

He also notes, “The combination of higher US rates (for longer) and weaker EM growth under a Trump presidency could negatively impact highly indebted countries that face high funding costs. As discussed, a strong dollar tends to weaken EM currencies, which adds pressure on imported inflation and limits the room for monetary easing or conversely, adds to tightening in EMs.

“On the flip side, some EM countries have entered funding agreements with multi-lateral agencies such as the IMF which encourage fiscal sustainability. According to our analysis using IMF data, 42% of the countries in the JPM EMBI GD Index are in IMF programmes. Market access and funding has improved significantly for BB-rated and B-rated countries, while significant progress has been made in restructuring cases. The direct effects of Trump 2.0 on many of these smaller countries in the universe will be small, in contrast to some of the larger markets such as Mexico and China.”

Mr Haugaard notes, “Countries with a high dependency on trade with the US are also vulnerable to Trump 2.0 impacts, as well as those operating in industries where the US could ramp up domestic production. Enhanced domestic oil production in the US could adversely affect oil-exporting countries in the Gulf Cooperation Council (GCC). However, the overall inflationary impact is nuanced. For example, lower commodity prices from more oil production as well as a potential solution to the war in Ukraine (a ceasefire has been speculated) could lead to more food production and lower food prices over time.

“Climate energy policy is another area to watch, as ongoing green transitions may be hindered alongside loosening of regulation on US oil and gas exploration and production. A carbon border tax and tariffs on the imports of renewable energy components – such as those supplied by countries in Asia – are also a potential, as well as less support for debt-to-nature swaps. These aim to refinance a country’s debt at lower relative interest rates, in return for a commitment to spend a portion of these savings on nature conservation.

It’s all about alpha

Mr Haugaard, suggests, “Pervasive policy uncertainty is likely to be reflected through credit risk premia alongside potential volatility in sovereign credit spreads in EMD HC, but we do not believe this materially alters the fundamental picture for the EMD HC universe. EM sovereign credit ratings continue to outpace downgrades6. While there will be relative winners and losers, the eventual impact won’t be the same across the heterogeneous EM universe. Differentiated responses are likely to arise across EMs given countries’ specific monetary, inflation and fiscal position, as well as trade dynamics with the US. This could lead to mispriced opportunities emerge as the reality unfolds and as active investors, we aim to capture alpha through these and tap into the long-term potential of emerging markets.

“Alongside careful country selection, given the rates risk, duration is also another aspect to consider in portfolio construction. We continue to favour shorter-maturity high yield issuers vis-à-vis more rates-sensitive longer-dated investment grade issuers. The latter will be more sensitive to swings in Treasury yields (higher duration), and the tighter level of investment grade sovereign spreads means there is less of a buffer against any spread weakness.”

———

Sources:
JP Morgan on official data, BIS and anecdotal evidence, 22 October 2024.
Morgan Stanley, 3 September 2024.
UN, IMF, Haver Analytics, Morgan Stanley Research, 3 September 2024.
JP Morgan, 8 November 2024.
Janus Henderson estimates using IMF data, as at 31 July 2024. Countries are those in the JP Morgan EMBI Global Diversified Index.
Bloomberg, 31 October 2024.

The post Trump era outlook for emerging markets debt in 2025 appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2024/11/trump-era-outlook-for-emerging-markets-debt-in-2025/feed/ 0 Franklin Templeton reveals the data that will signal the future path of Fed interest rate cuts https://www.adviservoice.com.au/2024/09/franklin-templeton-reveals-the-data-that-will-signal-the-future-path-of-fed-interest-rate-cuts/ https://www.adviservoice.com.au/2024/09/franklin-templeton-reveals-the-data-that-will-signal-the-future-path-of-fed-interest-rate-cuts/#respond Sun, 08 Sep 2024 21:45:46 +0000 https://www.adviservoice.com.au/?p=98023

US Federal Reserve

At the recent US Federal Reserve’s (Fed’s) 2024 Jackson Hole Economic Policy Symposium, Fed Chair Jerome Powell stated that the US labor market is no longer overheated. Powell also noted that while inflation has abated, risks to growth and employment have increased.

“For investors, Powell’s language is significant. Not only does it cement the case for the Fed to ease at its September 17-18 meeting, it also signals a readiness for further rate cuts through the end of the year and into 2025. Those moves could have profound implications for investment returns across asset classes,” says Stephen Dover, Chief Market Strategist and Head of the Franklin Templeton Institute.

“The Fed has pivoted from fighting inflation to ensuring the health of the US economy. In what follows, we outline what data will matter most to the Fed and, by extension, for financial markets. Various key indicators will be revealed in the August employment report, slated for release at 8:30 am EST on Friday September 6.

“The top indicators, in our view, include initial jobless claims, non-farm payroll employment, the labor force participation rate, and temporary job losses,” notes Dover.

Labor market normalising

“Importantly, the US labor market is normalising, meaning that labor supply and demand are moving closer into balance. That follows a lengthy adjustment process following adverse labor supply shocks due to the COVID-19 pandemic. One example: The ratio of job openings to unemployed persons has decreased to 1.2 in June, close to its pre-pandemic levels.[1]

“The biggest factor in restoring balance between labor supply and demand has been the return of workers to the labor force. The labor force participation rate for prime-age workers, aged 25 to 54, increased to 84% in July, touching its highest level in more than two decades.[2] Increased labor supply relieves upward pressure on wages, which contributes to a moderation of business costs and hence in overall US inflation.”

Concerns over recession risk are overstated

“The rise in the unemployment rate to 4.3% in July triggered the so-called “Sahm Rule,”[3] which has historically been a reliable indicator of US recessions. That may be one reason why the Fed has shifted its policy emphasis from inflation to growth. However, our analysis indicates that the Sahm Rule is a lagging indicator for the business cycle and is typically triggered once a recession is already underway.

“More importantly, the Sahm Rule has historically been triggered by a larger increase in the number of unemployed persons as compared to the increase in labor force. That is not the case today. Instead, job gains remain positive, with the rise in the unemployment rate accounted for primarily by an increase in the participation rate as workers return to the labor force.

“To be sure, a spike in temporary layoffs has also lifted the unemployment rate. That bears watching, should temporary job cuts become permanent. But we think it is premature to conclude that permanent job losses are likely, much less inevitable.”

Watch payrolls

“Historically, a triggering of the Sahm Rule has coincided with a US recession in every instance except 2003. Hence, the unemployment rate will remain a closely watched indicator. But investors are likely to look beyond the unemployment rate, per se. They will want to see whether any further rise in the unemployment rate is due to actual job losses or to further gains in labor force participation. That means weekly jobless claims (a rising number indicates more workers are being laid off), temporary layoffs becoming permanent, and the overall rate of nonfarm payroll gains (or losses) should be the key data for investors.

“Based on data through July, changes in nonfarm payroll employment are not consistent with a deteriorating economic situation. Typically, when the economy is fully employed and economic growth is near its trend rate, monthly job gains are in the vicinity of 125,000.[4] The three-month moving average of job gains as of July is 169,667,[5] still above that pace. It is equally true, however, that the pace of jobs growth has declined since May.

“Markets will therefore watch the August employment report to see if the downward trend in jobs growth is extended. However, over the past month initial jobless claims have dipped, suggesting the pace of layoffs may be slowing. Recall, temporary distortions from Hurricane Beryl caused some of the increase in jobless claims.[6]

“In conclusion, although the rise in the unemployment rate has triggered the Sahm Rule, things look different this time. Job losses are modest and temporary, not large or permanent. There is not sufficient cause currently for alarm, in our view.

“Nevertheless, investors will likely be laser-focused on the US labor market, above all the key indicators of jobless claims, non-farm payrolls, temporary job losses and the participation rate for any signs of genuine growth and earnings risk.”

——–

Notes:
[1] Bureau of Labor Statistics, Macrobond. Analysis by Franklin Templeton Institute.
[2] Bureau of Labor Statistics, Macrobond.
[3] The Sahm Rule identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months.
[4] Bureau of Labor Statistics. As of August 29, 2024. Analysis by Franklin Templeton Institute.
[5] Ibid.
[6] Texas accounted for 87% of the national rise in continuing jobless claims between the week of July 8 and July 15. US Department of Labor. Analysis by Franklin Templeton Institute.
]]>

US Federal Reserve

At the recent US Federal Reserve’s (Fed’s) 2024 Jackson Hole Economic Policy Symposium, Fed Chair Jerome Powell stated that the US labor market is no longer overheated. Powell also noted that while inflation has abated, risks to growth and employment have increased.

“For investors, Powell’s language is significant. Not only does it cement the case for the Fed to ease at its September 17-18 meeting, it also signals a readiness for further rate cuts through the end of the year and into 2025. Those moves could have profound implications for investment returns across asset classes,” says Stephen Dover, Chief Market Strategist and Head of the Franklin Templeton Institute.

“The Fed has pivoted from fighting inflation to ensuring the health of the US economy. In what follows, we outline what data will matter most to the Fed and, by extension, for financial markets. Various key indicators will be revealed in the August employment report, slated for release at 8:30 am EST on Friday September 6.

“The top indicators, in our view, include initial jobless claims, non-farm payroll employment, the labor force participation rate, and temporary job losses,” notes Dover.

Labor market normalising

“Importantly, the US labor market is normalising, meaning that labor supply and demand are moving closer into balance. That follows a lengthy adjustment process following adverse labor supply shocks due to the COVID-19 pandemic. One example: The ratio of job openings to unemployed persons has decreased to 1.2 in June, close to its pre-pandemic levels.[1]

“The biggest factor in restoring balance between labor supply and demand has been the return of workers to the labor force. The labor force participation rate for prime-age workers, aged 25 to 54, increased to 84% in July, touching its highest level in more than two decades.[2] Increased labor supply relieves upward pressure on wages, which contributes to a moderation of business costs and hence in overall US inflation.”

Concerns over recession risk are overstated

“The rise in the unemployment rate to 4.3% in July triggered the so-called “Sahm Rule,”[3] which has historically been a reliable indicator of US recessions. That may be one reason why the Fed has shifted its policy emphasis from inflation to growth. However, our analysis indicates that the Sahm Rule is a lagging indicator for the business cycle and is typically triggered once a recession is already underway.

“More importantly, the Sahm Rule has historically been triggered by a larger increase in the number of unemployed persons as compared to the increase in labor force. That is not the case today. Instead, job gains remain positive, with the rise in the unemployment rate accounted for primarily by an increase in the participation rate as workers return to the labor force.

“To be sure, a spike in temporary layoffs has also lifted the unemployment rate. That bears watching, should temporary job cuts become permanent. But we think it is premature to conclude that permanent job losses are likely, much less inevitable.”

Watch payrolls

“Historically, a triggering of the Sahm Rule has coincided with a US recession in every instance except 2003. Hence, the unemployment rate will remain a closely watched indicator. But investors are likely to look beyond the unemployment rate, per se. They will want to see whether any further rise in the unemployment rate is due to actual job losses or to further gains in labor force participation. That means weekly jobless claims (a rising number indicates more workers are being laid off), temporary layoffs becoming permanent, and the overall rate of nonfarm payroll gains (or losses) should be the key data for investors.

“Based on data through July, changes in nonfarm payroll employment are not consistent with a deteriorating economic situation. Typically, when the economy is fully employed and economic growth is near its trend rate, monthly job gains are in the vicinity of 125,000.[4] The three-month moving average of job gains as of July is 169,667,[5] still above that pace. It is equally true, however, that the pace of jobs growth has declined since May.

“Markets will therefore watch the August employment report to see if the downward trend in jobs growth is extended. However, over the past month initial jobless claims have dipped, suggesting the pace of layoffs may be slowing. Recall, temporary distortions from Hurricane Beryl caused some of the increase in jobless claims.[6]

“In conclusion, although the rise in the unemployment rate has triggered the Sahm Rule, things look different this time. Job losses are modest and temporary, not large or permanent. There is not sufficient cause currently for alarm, in our view.

“Nevertheless, investors will likely be laser-focused on the US labor market, above all the key indicators of jobless claims, non-farm payrolls, temporary job losses and the participation rate for any signs of genuine growth and earnings risk.”

——–

Notes:
[1] Bureau of Labor Statistics, Macrobond. Analysis by Franklin Templeton Institute.
[2] Bureau of Labor Statistics, Macrobond.
[3] The Sahm Rule identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months.
[4] Bureau of Labor Statistics. As of August 29, 2024. Analysis by Franklin Templeton Institute.
[5] Ibid.
[6] Texas accounted for 87% of the national rise in continuing jobless claims between the week of July 8 and July 15. US Department of Labor. Analysis by Franklin Templeton Institute.

The post Franklin Templeton reveals the data that will signal the future path of Fed interest rate cuts appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2024/09/franklin-templeton-reveals-the-data-that-will-signal-the-future-path-of-fed-interest-rate-cuts/feed/ 0 A very hawkish pause https://www.adviservoice.com.au/2023/06/a-very-hawkish-pause/ https://www.adviservoice.com.au/2023/06/a-very-hawkish-pause/#respond Thu, 15 Jun 2023 21:35:50 +0000 https://www.adviservoice.com.au/?p=89471

Seema Shah

At yesterday’s meeting, for the first time since March 2022, the Federal Reserve (Fed) chose not to raise policy rates, instead keeping the benchmark rate at 5.00%-5.25%. However, the Fed still managed to deliver a hawkish blow to markets. The latest dot plot shows a peak Fed funds rate of 5.6% this year, equivalent to two more 25 basis point hikes.

Fed Chair Jerome Powell emphasised that, while the committee thinks it will be appropriate to raise rates further, considering how far and fast rates have already moved, it would be prudent to slow the pace of hiking. The long and variable lags of monetary policy means that the negative impact on growth is only just starting to unfold. Pausing in June allows them to see more economic data, helping them evaluate how much the economy is slowing and gives them a greater chance at achieving a soft landing. Market analysts, on the other hand, were less convinced, instead questioning whether a pause could simply lead to a further easing in financial conditions and ultimately raise the chances of an inflation resurgence.

Sticky inflation and a tight labor market

Chair Powell repeatedly noted that inflation has proved stickier than they had originally anticipated, and risks are still to the upside. He emphasised that while some segments of core inflation have been easing, core services ex-housing (which is closely tied to wage growth and the tightness of the labor market) is particularly stubborn. Powell did point out that there are a few signs which suggest the labor demand/supply imbalance is starting to ease, but clearly, the labor market remains extremely tight.

Updates to the Summary of Economic Projections

The new dot plot and Summary of Economic Projections (SEP) indicates that the economy is proving more resilient than expected, and the labor market is still extremely strong. With this solid economic backdrop, the FOMC believes further rate hikes are necessary to deliver price stability:

The median projection has rates ending this year at 5.6%. This equates to two more 25 bps hikes this year—above the broad market consensus for only one more hike. By implication, this also indicates rate cuts are still not on the agenda for this year. Indeed, Powell noted that “not a single person on the committee wrote down a rate cut this year.”
9 of the 18 participants believe that policy rates need to rise by 50 bps this year, and three participants see rates rising even more than that—one of whom sees rates above 6% by year-end. In other words, the majority of the FOMC sees at least two more hikes this year.
In 2024, the median dot plot sees rates falling 100 bps to 4.6%. This is also considerably more hawkish than most forecasters had anticipated, and drives home the “higher for longer” theme.

  • The median projection then falls to 3.4% in 2025, up from 3.1% in the March dot plot.
  • The Summary of Economic Projections also showed some meaningful revisions:
  • The core PCE inflation forecast for 2023 was revised slightly higher from 3.6% to 3.9%, while 2024 remained unchanged at 2.6%. Core inflation has been proving very sticky, and yesterday’s CPI reportshowed that monthly core inflation has remained at the same pace since December last year. The FOMC projections see inflation only approaching the 2% target in 2025.
  • The unemployment rate forecast for end-2023 was revised lower from 4.5% to 4.1%. This makes sense given the unemployment rate has only risen to 3.7% so far. Importantly, the 2024 unemployment rate projection was left broadly unchanged at 4.5%.
  • It’s worth pointing out that the Sahm Rule is still in play. Created by former Fed economist Claudia Sahm, it stipulates that recession occurs when the unemployment rate rises by at least 0.5%. In other words, if the Fed’s own unemployment forecast pans out, it points to recession…
  • … and yet, the GDP forecasts for this year were revised higher, from 0.4% to 1.0% for 2023, while the 2024 forecast was left broadly unchanged at 1.1%. Our own forecasts see recession starting in 4Q and lasting two quarters—a fairly modest downturn.

In recent weeks, market consensus had gathered around a June pause, followed by a July hike. While Powell confirmed that July’s meeting is “live,” markets will have been surprised by the additional 25 basis points hike included in today’s median dot plot. For now, however, markets are treating this projection with a grain of salt and have maintained their pricing for rates to peak in July. Over the last two years, the Fed’s own policy rate projections have proved woefully incorrect, continuously falling short of the tightening that has taken place. In that regard, perhaps the market should be concerned about an even more hawkish Fed than even the dot plot suggests.

Our own long-held forecast is for just one more 25 basis points hike, with rates peaking at 5.25%-5.50%, driven by a more negative view of economic growth. While Powell believes there is a path to a soft landing, we believe the very aggressive tightening to date will still take a heavier toll on the economy, and push the U.S. into recession before year-end.

By Seema Shah, Chief Global Strategist

]]>

Seema Shah

At yesterday’s meeting, for the first time since March 2022, the Federal Reserve (Fed) chose not to raise policy rates, instead keeping the benchmark rate at 5.00%-5.25%. However, the Fed still managed to deliver a hawkish blow to markets. The latest dot plot shows a peak Fed funds rate of 5.6% this year, equivalent to two more 25 basis point hikes.

Fed Chair Jerome Powell emphasised that, while the committee thinks it will be appropriate to raise rates further, considering how far and fast rates have already moved, it would be prudent to slow the pace of hiking. The long and variable lags of monetary policy means that the negative impact on growth is only just starting to unfold. Pausing in June allows them to see more economic data, helping them evaluate how much the economy is slowing and gives them a greater chance at achieving a soft landing. Market analysts, on the other hand, were less convinced, instead questioning whether a pause could simply lead to a further easing in financial conditions and ultimately raise the chances of an inflation resurgence.

Sticky inflation and a tight labor market

Chair Powell repeatedly noted that inflation has proved stickier than they had originally anticipated, and risks are still to the upside. He emphasised that while some segments of core inflation have been easing, core services ex-housing (which is closely tied to wage growth and the tightness of the labor market) is particularly stubborn. Powell did point out that there are a few signs which suggest the labor demand/supply imbalance is starting to ease, but clearly, the labor market remains extremely tight.

Updates to the Summary of Economic Projections

The new dot plot and Summary of Economic Projections (SEP) indicates that the economy is proving more resilient than expected, and the labor market is still extremely strong. With this solid economic backdrop, the FOMC believes further rate hikes are necessary to deliver price stability:

The median projection has rates ending this year at 5.6%. This equates to two more 25 bps hikes this year—above the broad market consensus for only one more hike. By implication, this also indicates rate cuts are still not on the agenda for this year. Indeed, Powell noted that “not a single person on the committee wrote down a rate cut this year.”
9 of the 18 participants believe that policy rates need to rise by 50 bps this year, and three participants see rates rising even more than that—one of whom sees rates above 6% by year-end. In other words, the majority of the FOMC sees at least two more hikes this year.
In 2024, the median dot plot sees rates falling 100 bps to 4.6%. This is also considerably more hawkish than most forecasters had anticipated, and drives home the “higher for longer” theme.

  • The median projection then falls to 3.4% in 2025, up from 3.1% in the March dot plot.
  • The Summary of Economic Projections also showed some meaningful revisions:
  • The core PCE inflation forecast for 2023 was revised slightly higher from 3.6% to 3.9%, while 2024 remained unchanged at 2.6%. Core inflation has been proving very sticky, and yesterday’s CPI reportshowed that monthly core inflation has remained at the same pace since December last year. The FOMC projections see inflation only approaching the 2% target in 2025.
  • The unemployment rate forecast for end-2023 was revised lower from 4.5% to 4.1%. This makes sense given the unemployment rate has only risen to 3.7% so far. Importantly, the 2024 unemployment rate projection was left broadly unchanged at 4.5%.
  • It’s worth pointing out that the Sahm Rule is still in play. Created by former Fed economist Claudia Sahm, it stipulates that recession occurs when the unemployment rate rises by at least 0.5%. In other words, if the Fed’s own unemployment forecast pans out, it points to recession…
  • … and yet, the GDP forecasts for this year were revised higher, from 0.4% to 1.0% for 2023, while the 2024 forecast was left broadly unchanged at 1.1%. Our own forecasts see recession starting in 4Q and lasting two quarters—a fairly modest downturn.

In recent weeks, market consensus had gathered around a June pause, followed by a July hike. While Powell confirmed that July’s meeting is “live,” markets will have been surprised by the additional 25 basis points hike included in today’s median dot plot. For now, however, markets are treating this projection with a grain of salt and have maintained their pricing for rates to peak in July. Over the last two years, the Fed’s own policy rate projections have proved woefully incorrect, continuously falling short of the tightening that has taken place. In that regard, perhaps the market should be concerned about an even more hawkish Fed than even the dot plot suggests.

Our own long-held forecast is for just one more 25 basis points hike, with rates peaking at 5.25%-5.50%, driven by a more negative view of economic growth. While Powell believes there is a path to a soft landing, we believe the very aggressive tightening to date will still take a heavier toll on the economy, and push the U.S. into recession before year-end.

By Seema Shah, Chief Global Strategist

The post A very hawkish pause appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2023/06/a-very-hawkish-pause/feed/ 0 Higher inflation will not impact infrastructure returns https://www.adviservoice.com.au/2021/07/higher-inflation-will-not-impact-infrastructure-returns/ https://www.adviservoice.com.au/2021/07/higher-inflation-will-not-impact-infrastructure-returns/#respond Tue, 13 Jul 2021 21:40:34 +0000 https://adviservoice.com.au/?p=75434 Higher inflation and interest rates will have little impact on the valuations of regulated infrastructure assets, and some assets should see cash flows increase with upswing in economic growth, leading infrastructure asset manager ClearBridge Investments has forecast.

As investors assess the outlook for inflation and the impact of higher interest rates on their portfolios, ClearBridge Investments says there appears to be little or no correlation between various listed infrastructure assets and movements in inflation over the past 30 years.

In recent central bank commentary, Federal Reserve Chairman Jerome Powell said inflation has come in ahead of expectations and could end up higher than the Fed’s current forecast of 3.4% for 2021 – up from 2.4% forecast three months ago. Powell also said the Fed expects to start raising interest rates next year, with two increases by 2023 anticipated.

Reserve Bank of Australia Governor Philip Lowe said he expects the June quarter consumer price index to rise temporarily above 3.0% due to the unwinding of some pandemic-related price reductions. But beyond that point, inflation pressure will be subdued, according to the Reserve Bank of Australia.

Portfolio Manager Shane Hurst from ClearBridge Investments says: “Looking ahead, we are constructive on a global recovery and see clear drivers for economically sensitive user-pays assets. In addition, increased mobility and policy support for renewables will be key catalysts for US utilities.”

Hurst says investors should consider infrastructure assets in two broad categories: user-pays assets and regulated assets. When it comes to user-pays assets, such as toll roads, rail networks and airports, revenue is dependent on how many people use the asset. As such, as economic growth recovers, so do the cashflows of the underlying infrastructure assets.

“With regulated assets, such as water, electricity and gas, returns allowed by regulators will typically increase if interest rates rise.”

Hurst says: “Given the large amount of stimulus proposed by US President Biden, and more expected in the US, and globally, we think there will likely be some cyclical inflation. But in the long term our view is that inflation will remain around 2%.

“Either way, rising inflation does not significantly affect utilities and infrastructure assets. Inflation generally gets passed through in the case of utilities via their cost of capital, while user-pays infrastructure assets with concessions and contracts will pass through inflation via tariffs and tolls.

“We have found there is little correlation between listed infrastructure and utility performance and inflation. Looking at the past 30 years, those periods of strongly rising bond yields have been one of the best periods for active managers to position their portfolios to take advantage of market dislocations. This has led to strong returns for investors of infrastructure assets in subsequent periods following the rate rise,” says Hurst.

]]> Higher inflation and interest rates will have little impact on the valuations of regulated infrastructure assets, and some assets should see cash flows increase with upswing in economic growth, leading infrastructure asset manager ClearBridge Investments has forecast.

As investors assess the outlook for inflation and the impact of higher interest rates on their portfolios, ClearBridge Investments says there appears to be little or no correlation between various listed infrastructure assets and movements in inflation over the past 30 years.

In recent central bank commentary, Federal Reserve Chairman Jerome Powell said inflation has come in ahead of expectations and could end up higher than the Fed’s current forecast of 3.4% for 2021 – up from 2.4% forecast three months ago. Powell also said the Fed expects to start raising interest rates next year, with two increases by 2023 anticipated.

Reserve Bank of Australia Governor Philip Lowe said he expects the June quarter consumer price index to rise temporarily above 3.0% due to the unwinding of some pandemic-related price reductions. But beyond that point, inflation pressure will be subdued, according to the Reserve Bank of Australia.

Portfolio Manager Shane Hurst from ClearBridge Investments says: “Looking ahead, we are constructive on a global recovery and see clear drivers for economically sensitive user-pays assets. In addition, increased mobility and policy support for renewables will be key catalysts for US utilities.”

Hurst says investors should consider infrastructure assets in two broad categories: user-pays assets and regulated assets. When it comes to user-pays assets, such as toll roads, rail networks and airports, revenue is dependent on how many people use the asset. As such, as economic growth recovers, so do the cashflows of the underlying infrastructure assets.

“With regulated assets, such as water, electricity and gas, returns allowed by regulators will typically increase if interest rates rise.”

Hurst says: “Given the large amount of stimulus proposed by US President Biden, and more expected in the US, and globally, we think there will likely be some cyclical inflation. But in the long term our view is that inflation will remain around 2%.

“Either way, rising inflation does not significantly affect utilities and infrastructure assets. Inflation generally gets passed through in the case of utilities via their cost of capital, while user-pays infrastructure assets with concessions and contracts will pass through inflation via tariffs and tolls.

“We have found there is little correlation between listed infrastructure and utility performance and inflation. Looking at the past 30 years, those periods of strongly rising bond yields have been one of the best periods for active managers to position their portfolios to take advantage of market dislocations. This has led to strong returns for investors of infrastructure assets in subsequent periods following the rate rise,” says Hurst.

The post Higher inflation will not impact infrastructure returns appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2021/07/higher-inflation-will-not-impact-infrastructure-returns/feed/ 0 Precious metals show their mettle as inflation fears rise https://www.adviservoice.com.au/2021/06/precious-metals-show-their-mettle-as-inflation-fears-rise/ https://www.adviservoice.com.au/2021/06/precious-metals-show-their-mettle-as-inflation-fears-rise/#respond Thu, 24 Jun 2021 21:50:44 +0000 https://adviservoice.com.au/?p=74982

Kanish Chugh

Precious metals prices have risen by around 10% in the past three months, as investors turn to alternative assets in the face of ongoing concern about a re-emergence of high inflation in the post-COVID economic environment.

Alternatives are also being sought as a source of uncorrelated returns to complement low-yielding fixed income and expensive equities.

ETF Securities Head of Distribution Kanish Chugh says gold and other precious metals have a proven track record as inflation hedges and appear to be demonstrating that characteristic now.

Inflation concerns have hung over markets for most of this year. In the latest development, in mid-June US Federal Reserve Chairman Jerome Powell said inflation had come in ahead of expectations and could end up higher than the Fed’s current forecast of 3.4% for 2021, which up from a forecast of 2.4% three months ago. Powell also said the Fed expects to start raising interesting rates next year, with two increases by 2023.

Around the same time, Reserve Bank of Australia Governor Philip Lowe said he expects the June quarter consumer price index will show a spike in inflation to 3.5% due to the unwinding of some pandemic-related price reductions. But beyond that point, inflation pressure will be subdued.

Chugh notes: “Among the alternatives to fixed income and equities on offer – commodities, hedge funds, private equity, direct property and collectibles – commodities have a number of advantages.

“One group of commodities, precious metals, trade on exchanges through exchange traded funds. Because of this they provide a high degree of transparency, investment costs are low and they are liquid.”

ETF Securities provides exposure to precious metals through ETFS Physical Precious Metals Basket (ASX code: ETPMPM), which is backed by physical allocated metal held by a custodian, JP Morgan Bank. ETPMPM tracks the Metals Basket Composite, which is the weighted average benchmark price of the London Bullion Market Association’s prices for gold, silver, platinum and palladium.

ETFMPM has produced an average return of 12.9% a year over the five years to the end of May, which is ahead of the Australian share market return over the same period. Over the past 12 months it has returned 10.4%.

Over the past three months the Fund is up 9.9 per cent, a strong performance that is in response to fears of rising inflation. Its current metal allocation is 41% gold, 33.3% palladium, 18.7% silver and 7% platinum.

Numerous studies over the years have shown that returns from mainstream asset classes suffer when inflation spikes but the returns of gold and other precious metals tend to move into the double digits.

Chugh cites a recent study by Campbell Harvey, professor of finance at Duke University, which reaffirmed that precious metals may be the most appropriate inflation hedge.

“Precious metals also offer portfolio diversification. They have no internal rates of return, unlike shares and bonds, and so their priced are set entirely by supply and demand.

“Whereas demand for most commodities is cyclical, rising and falling with economic activity, precious metals have both cyclical and countercyclical demand. Cyclical demand comes from industrial use, such as jewellery making for gold and silver, and car manufacturing for palladium.

“Countercyclical demand shows itself in demand for gold when stock markets fall. Gold is often referred to as an event risk hedge, producing positive returns when unexpected events occur. It did this during the 1987 share market crash, the 1990 Iraq war, the Russian debt crisis of the late 1990s, the bursting of the dotcom bubble in the early 2000s and the US equity bear market in 2008.

“The inclusion of other metals adds other characteristics: silver’s industrial uses are broader, including in solar panels; platinum is used in engine manufacturing but also has a role in emerging clean energy technology as a catalyst in hydrogen fuel cells; palladium is a key component for scrubbing pollutants from diesel engines,” notes Chugh.

]]>

Kanish Chugh

Precious metals prices have risen by around 10% in the past three months, as investors turn to alternative assets in the face of ongoing concern about a re-emergence of high inflation in the post-COVID economic environment.

Alternatives are also being sought as a source of uncorrelated returns to complement low-yielding fixed income and expensive equities.

ETF Securities Head of Distribution Kanish Chugh says gold and other precious metals have a proven track record as inflation hedges and appear to be demonstrating that characteristic now.

Inflation concerns have hung over markets for most of this year. In the latest development, in mid-June US Federal Reserve Chairman Jerome Powell said inflation had come in ahead of expectations and could end up higher than the Fed’s current forecast of 3.4% for 2021, which up from a forecast of 2.4% three months ago. Powell also said the Fed expects to start raising interesting rates next year, with two increases by 2023.

Around the same time, Reserve Bank of Australia Governor Philip Lowe said he expects the June quarter consumer price index will show a spike in inflation to 3.5% due to the unwinding of some pandemic-related price reductions. But beyond that point, inflation pressure will be subdued.

Chugh notes: “Among the alternatives to fixed income and equities on offer – commodities, hedge funds, private equity, direct property and collectibles – commodities have a number of advantages.

“One group of commodities, precious metals, trade on exchanges through exchange traded funds. Because of this they provide a high degree of transparency, investment costs are low and they are liquid.”

ETF Securities provides exposure to precious metals through ETFS Physical Precious Metals Basket (ASX code: ETPMPM), which is backed by physical allocated metal held by a custodian, JP Morgan Bank. ETPMPM tracks the Metals Basket Composite, which is the weighted average benchmark price of the London Bullion Market Association’s prices for gold, silver, platinum and palladium.

ETFMPM has produced an average return of 12.9% a year over the five years to the end of May, which is ahead of the Australian share market return over the same period. Over the past 12 months it has returned 10.4%.

Over the past three months the Fund is up 9.9 per cent, a strong performance that is in response to fears of rising inflation. Its current metal allocation is 41% gold, 33.3% palladium, 18.7% silver and 7% platinum.

Numerous studies over the years have shown that returns from mainstream asset classes suffer when inflation spikes but the returns of gold and other precious metals tend to move into the double digits.

Chugh cites a recent study by Campbell Harvey, professor of finance at Duke University, which reaffirmed that precious metals may be the most appropriate inflation hedge.

“Precious metals also offer portfolio diversification. They have no internal rates of return, unlike shares and bonds, and so their priced are set entirely by supply and demand.

“Whereas demand for most commodities is cyclical, rising and falling with economic activity, precious metals have both cyclical and countercyclical demand. Cyclical demand comes from industrial use, such as jewellery making for gold and silver, and car manufacturing for palladium.

“Countercyclical demand shows itself in demand for gold when stock markets fall. Gold is often referred to as an event risk hedge, producing positive returns when unexpected events occur. It did this during the 1987 share market crash, the 1990 Iraq war, the Russian debt crisis of the late 1990s, the bursting of the dotcom bubble in the early 2000s and the US equity bear market in 2008.

“The inclusion of other metals adds other characteristics: silver’s industrial uses are broader, including in solar panels; platinum is used in engine manufacturing but also has a role in emerging clean energy technology as a catalyst in hydrogen fuel cells; palladium is a key component for scrubbing pollutants from diesel engines,” notes Chugh.

The post Precious metals show their mettle as inflation fears rise appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2021/06/precious-metals-show-their-mettle-as-inflation-fears-rise/feed/ 0 The sky hasn’t fallen just yet https://www.adviservoice.com.au/2018/07/the-sky-hasnt-fallen-just-yet/ https://www.adviservoice.com.au/2018/07/the-sky-hasnt-fallen-just-yet/#respond Sun, 15 Jul 2018 21:40:37 +0000 https://adviservoice.com.au/?p=56499 Stephen Innes

Stephen Innes

Trade War Escalates, but the sky hasn’t fallen just yet as optimism crept back into the market on reports of fresh bilateral trade negotiations between China and the US, coupled with a slightly firmer RMB scrim.

“Where there is a will, there is a way”. But when it comes to backroom negotiations, one can only imagine that talk is not going to come cheap.

The broader market continues to remain in wait and see mode for further details on how China might retaliate on trade, while equity markets continue to press higher under the guise that “no escalating news is good news”. Indeed equity markets continued to retrace the sharp mid-week sell-off. But again, the US technology sector comes shining through as US internet and technology stalwarts are leading markets to a solid finish in Thursday’s New York session.

While investors could be breathing a sigh of relief, they’re probably just happy their investment portfolios are breathing and alive and kicking after the latest trade war episode. But even the most pessimistic investors must take note of just how enduringly bullish these markets are, after having everything thrown at them including the kitchen sink (Trade, Italy Germany, Long Bond Rates). It’s incredible what global bourses have withstood from all l this harmful noise and continue to march higher. But indeed, the solid foundation of a bull market is that it ignores the bad news and keep on grinding higher. A one can only imagine what levels the S&P would be trading if trade war fizzled out.

Speaking of bull markets, USDJPY continues to grind higher and perhaps a bit of the above is starting to factor in (i.e. ignore the bad news and keeps moving higher). The break above 111.75 was one of the most unambiguous signals in some time, and a move into the 113’s could trigger an unwind in longer-term structural risk-off (long JPY) positions which could see this current rally extend much higher.

And the NATO summit ended on a more cheerful note, with President Trump reaffirming his commitment to the alliance while focusing more closely on the financial obligations of the other countries. So, the market is happy to hear the NATO band marching on.

Oil market

The oil markets are trying to make some inroads after Wednesday’s spill, but are having trouble holding both tops and momentum. I think this is a one-part trade war and one-part supply coming back online. But Wednesday was one of those steep selloffs on record volumes that will give even the bravest of bull’s cause pause for thought about holding longs positions, especially into the weekend. On the supply front, the latest news from Libya is short-term bearish with the El Feel or Elephant field restarting for the first time since February, and there is some discussion suggesting the supply rebound could increase and more than offset the impacts from the Eastern port closures.

Gold market

The precious space continues to hold critical support at $1,240, but the Gold complex is still hovering in the mixed territory zone. The global equity market is bouncing higher overnight, and there are very few defensive allocations into Gold. However, with Fed Chair Powell not ringing any alarm bells for more aggressive fed tightening, gold picked up a bit of goodwill. But ultimately, the USD looks to be on solid footing while preparing to take the driver seat once again, especially on USDJPY, which should hold the gold bulls at bay.

Currency Market

The USD is looking to get back in in the driving seat once again.

JPY: USDJPY is signalling the most significant break out in years, and the long USDJPY is a position severely under-owned which suggests the pair will explode higher on any positive news. One can only imagine spot will trade if an intense wave of risk on kicks in or trade war fizzles out.

CNH: The Yuan remains at the centre of all the action, but with further signs of policy easing on the cards given the economic slowdown has been much deeper rooted than feared, markets will continue to buy dips until a definitively positive shift in trade war sentiment.

USDAsia

Strong demand on the platform for long USDAsia is consistent with the general market views.
Trade war escalation is a definite plus for the dollar and coupled with robust US economic data; it does support this view.

MYR: Despite some optimism creeping back in on reports of bilateral trade negotiations between China and the US, while most of $Asia pulled back from yesterday morning highs, the Ringgit continued to lag the moves.

The Ringgit continues to suffer from political risk and fiscal uncertainty. If the USD does start to reassert itself and coupled with short-term bearish signals on oil prices,  the USDMYR will likely slice through the 4.05 level like a hot knife through butter in this environment.

INR The Ruppe hit and all interday time low and has not plummeted over 7.6 % versus the USD will wiping out a significant portion of carry-trades in its wake. But the Rupee will continue to trade at the mercy of oil prices

KRW. After testing 1130.00, the dissenting policy vote injected some life into the Won and coupled with the firmer RMB backdrop saw the USDKRW fall below the 1124 level. The won will be the go-to trade on the escalation of trade war tensions, but in the meantime, the RMB complex will continue to dictate the pace of play.

Stephen Innes, Head of Trading

]]> Stephen Innes

Stephen Innes

Trade War Escalates, but the sky hasn’t fallen just yet as optimism crept back into the market on reports of fresh bilateral trade negotiations between China and the US, coupled with a slightly firmer RMB scrim.

“Where there is a will, there is a way”. But when it comes to backroom negotiations, one can only imagine that talk is not going to come cheap.

The broader market continues to remain in wait and see mode for further details on how China might retaliate on trade, while equity markets continue to press higher under the guise that “no escalating news is good news”. Indeed equity markets continued to retrace the sharp mid-week sell-off. But again, the US technology sector comes shining through as US internet and technology stalwarts are leading markets to a solid finish in Thursday’s New York session.

While investors could be breathing a sigh of relief, they’re probably just happy their investment portfolios are breathing and alive and kicking after the latest trade war episode. But even the most pessimistic investors must take note of just how enduringly bullish these markets are, after having everything thrown at them including the kitchen sink (Trade, Italy Germany, Long Bond Rates). It’s incredible what global bourses have withstood from all l this harmful noise and continue to march higher. But indeed, the solid foundation of a bull market is that it ignores the bad news and keep on grinding higher. A one can only imagine what levels the S&P would be trading if trade war fizzled out.

Speaking of bull markets, USDJPY continues to grind higher and perhaps a bit of the above is starting to factor in (i.e. ignore the bad news and keeps moving higher). The break above 111.75 was one of the most unambiguous signals in some time, and a move into the 113’s could trigger an unwind in longer-term structural risk-off (long JPY) positions which could see this current rally extend much higher.

And the NATO summit ended on a more cheerful note, with President Trump reaffirming his commitment to the alliance while focusing more closely on the financial obligations of the other countries. So, the market is happy to hear the NATO band marching on.

Oil market

The oil markets are trying to make some inroads after Wednesday’s spill, but are having trouble holding both tops and momentum. I think this is a one-part trade war and one-part supply coming back online. But Wednesday was one of those steep selloffs on record volumes that will give even the bravest of bull’s cause pause for thought about holding longs positions, especially into the weekend. On the supply front, the latest news from Libya is short-term bearish with the El Feel or Elephant field restarting for the first time since February, and there is some discussion suggesting the supply rebound could increase and more than offset the impacts from the Eastern port closures.

Gold market

The precious space continues to hold critical support at $1,240, but the Gold complex is still hovering in the mixed territory zone. The global equity market is bouncing higher overnight, and there are very few defensive allocations into Gold. However, with Fed Chair Powell not ringing any alarm bells for more aggressive fed tightening, gold picked up a bit of goodwill. But ultimately, the USD looks to be on solid footing while preparing to take the driver seat once again, especially on USDJPY, which should hold the gold bulls at bay.

Currency Market

The USD is looking to get back in in the driving seat once again.

JPY: USDJPY is signalling the most significant break out in years, and the long USDJPY is a position severely under-owned which suggests the pair will explode higher on any positive news. One can only imagine spot will trade if an intense wave of risk on kicks in or trade war fizzles out.

CNH: The Yuan remains at the centre of all the action, but with further signs of policy easing on the cards given the economic slowdown has been much deeper rooted than feared, markets will continue to buy dips until a definitively positive shift in trade war sentiment.

USDAsia

Strong demand on the platform for long USDAsia is consistent with the general market views.
Trade war escalation is a definite plus for the dollar and coupled with robust US economic data; it does support this view.

MYR: Despite some optimism creeping back in on reports of bilateral trade negotiations between China and the US, while most of $Asia pulled back from yesterday morning highs, the Ringgit continued to lag the moves.

The Ringgit continues to suffer from political risk and fiscal uncertainty. If the USD does start to reassert itself and coupled with short-term bearish signals on oil prices,  the USDMYR will likely slice through the 4.05 level like a hot knife through butter in this environment.

INR The Ruppe hit and all interday time low and has not plummeted over 7.6 % versus the USD will wiping out a significant portion of carry-trades in its wake. But the Rupee will continue to trade at the mercy of oil prices

KRW. After testing 1130.00, the dissenting policy vote injected some life into the Won and coupled with the firmer RMB backdrop saw the USDKRW fall below the 1124 level. The won will be the go-to trade on the escalation of trade war tensions, but in the meantime, the RMB complex will continue to dictate the pace of play.

Stephen Innes, Head of Trading

The post The sky hasn’t fallen just yet appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2018/07/the-sky-hasnt-fallen-just-yet/feed/ 0 When things are so good, they can’t get any better, they usually don’t: Principal on world economy   https://www.adviservoice.com.au/2018/03/things-good-cant-get-better-usually-dont-principal-world-economy/ https://www.adviservoice.com.au/2018/03/things-good-cant-get-better-usually-dont-principal-world-economy/#respond Mon, 12 Mar 2018 20:45:25 +0000 https://adviservoice.com.au/?p=54244

Jerome Powell

What happens after growth peaks?

“A synchronized pick-up in global growth has been happening for some time. It started in early 2016 after the commodity rout ended, then gathered steam in 2017. Japan, the eurozone, and the United States grew above trend; Chinese growth decelerated but the slowdown was smooth. Commodity prices and global trade perked up nicely. Confidence and other survey measures soared, creating record high after record high in some cases. Economic data kept surprising on the upside, especially in Europe. Investors and businesses finally realized that the post-financial crisis growth slump was over.

“But when things are so good that they can’t get any better, then they usually don’t. So, what happens after peak growth? A bit of deceleration, because the pace of world growth may have peaked. Strong surveys have likely climaxed in Europe. Growth in Japan is pushing toward trend. China’s long slowdown has begun. Still, 2018 should be a good year for the global economy with that bit of deceleration and a peak in commodity prices. The strong momentum should carry over well into 2019.”

An investment type heads the Fed

“Fed watchers may have to learn a new language with Jay Powell at the Federal Reserve (Fed). His straight, clear and unhedged talk in his first Congressional Committee appearance seemed to unsettle investors who had become used to economics PhDs who note “on one hand” before describing “on the other hand.”

“However, Powell’s clear language suggested that he was setting the stage for the Fed to hike four times in 2018. Markets sank on that reading. More likely is that Powell’s business background was simply leading him to state the obvious: that U.S. growth prospects had indeed improved. Nothing else in his words inferred that the Fed would depart from its path of gradual rate hikes.”

Asset allocation outlook: world economic momentum still strong

“The huge downdraft in early February – a peak-to-trough plunge of 12.2% on the S&P 500 Index in 10 trading days – was dreadfully, wickedly fast and far. This was triggered by faster-than-expected wage growth in January (accentuated by volatility sellers trying to limit their losses), but the fundamentals of rising interest rates implied that the correction was waiting to happen.

“It may be time for stock markets to fully adjust to higher long-term yields, so this correction might not be over for a month or two. The downdraft is being exacerbated by the March 1 announcement of tariffs by the Trump administration.

“However, world economic momentum is still quite strong, even if it climaxed in the eurozone this quarter, and earlier in China and Japan. The extra capital spending induced by the tax package will likely keep U.S. growth at the top of its range for several quarters yet. The Fed will still be accommodative even if the committee raises rates two or three times in 2018. Profit growth will be excellent and long-term interest rates should stabilise before too long. All this could generate a nice, late-inning rally in the long investment cycle that began in the United States in March 2009.”

]]>

Jerome Powell

What happens after growth peaks?

“A synchronized pick-up in global growth has been happening for some time. It started in early 2016 after the commodity rout ended, then gathered steam in 2017. Japan, the eurozone, and the United States grew above trend; Chinese growth decelerated but the slowdown was smooth. Commodity prices and global trade perked up nicely. Confidence and other survey measures soared, creating record high after record high in some cases. Economic data kept surprising on the upside, especially in Europe. Investors and businesses finally realized that the post-financial crisis growth slump was over.

“But when things are so good that they can’t get any better, then they usually don’t. So, what happens after peak growth? A bit of deceleration, because the pace of world growth may have peaked. Strong surveys have likely climaxed in Europe. Growth in Japan is pushing toward trend. China’s long slowdown has begun. Still, 2018 should be a good year for the global economy with that bit of deceleration and a peak in commodity prices. The strong momentum should carry over well into 2019.”

An investment type heads the Fed

“Fed watchers may have to learn a new language with Jay Powell at the Federal Reserve (Fed). His straight, clear and unhedged talk in his first Congressional Committee appearance seemed to unsettle investors who had become used to economics PhDs who note “on one hand” before describing “on the other hand.”

“However, Powell’s clear language suggested that he was setting the stage for the Fed to hike four times in 2018. Markets sank on that reading. More likely is that Powell’s business background was simply leading him to state the obvious: that U.S. growth prospects had indeed improved. Nothing else in his words inferred that the Fed would depart from its path of gradual rate hikes.”

Asset allocation outlook: world economic momentum still strong

“The huge downdraft in early February – a peak-to-trough plunge of 12.2% on the S&P 500 Index in 10 trading days – was dreadfully, wickedly fast and far. This was triggered by faster-than-expected wage growth in January (accentuated by volatility sellers trying to limit their losses), but the fundamentals of rising interest rates implied that the correction was waiting to happen.

“It may be time for stock markets to fully adjust to higher long-term yields, so this correction might not be over for a month or two. The downdraft is being exacerbated by the March 1 announcement of tariffs by the Trump administration.

“However, world economic momentum is still quite strong, even if it climaxed in the eurozone this quarter, and earlier in China and Japan. The extra capital spending induced by the tax package will likely keep U.S. growth at the top of its range for several quarters yet. The Fed will still be accommodative even if the committee raises rates two or three times in 2018. Profit growth will be excellent and long-term interest rates should stabilise before too long. All this could generate a nice, late-inning rally in the long investment cycle that began in the United States in March 2009.”

The post When things are so good, they can’t get any better, they usually don’t: Principal on world economy   appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2018/03/things-good-cant-get-better-usually-dont-principal-world-economy/feed/ 0 Powell’s congressional testimony displays commitment to threading-the-needle between goal attainment and overheating https://www.adviservoice.com.au/2018/03/powells-congressional-testimony-displays-commitment-threading-needle-goal-attainment-overheating/ https://www.adviservoice.com.au/2018/03/powells-congressional-testimony-displays-commitment-threading-needle-goal-attainment-overheating/#respond Wed, 28 Feb 2018 20:35:03 +0000 https://adviservoice.com.au/?p=53984 Rick Rieder

Rick Rieder

Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, regarding FOMC Chair Powell’s testimony before the U.S. Congress.

Since the late-1970s, when Congress mandated that the Federal Reserve provide it with semiannual updates on the state of the economy and monetary policy, market observers have scrutinized those remarks to try to discern the future direction of policy.

Not surprisingly, this exercise has often provided little new insight, as the Chair’s prepared remarks and answers to questions typically have hewn closely to previous statements.

As a case in point, Powell delivered a fairly upbeat message on the progress of labor market gains and on economic growth, which reflected the upgraded optimism portrayed in the recent FOMC Minutes language.

Further, his remarks suggested that he remained unperturbed about the below-target inflation levels of recent times, saying that it likely reflects “transitory influences,” which are not likely to be repeated.

As a result, Powell argued that certain economic developments that have taken hold since the Committee’s December meeting (such as passage of the tax cuts and the recent budget plan), as well as continued solid organic economic growth (both in the U.S. and around the world), make a strong case for a gradual continuation of policy normalization.

When asked explicitly whether this more stimulative fiscal policy might cause the Fed to move rates more quickly than previously anticipated, Powell responded by saying that: “My personal outlook for the economy has strengthened since December.

Each member of the FOMC is going to be writing down a new set of projections as we go into the March meeting, which begins in less than three weeks.

I would not want to prejudge that new set but we will be taking into account everything that has happened.”

Clearly, in our view, the Fed in the process of incorporating stronger growth and fiscal stimulus into the policy view, which makes the Summary of Economic Projections due at the March meeting particularly important to keep an eye on.

In the end, we think the FOMC has been doing a respectable job of threading-the-needle between attaining its policy goals (including slowly getting closer to its inflation target) and attempting to avoid potential economic overheating.

This process has been very deliberate and well communicated, and contrary to what some market commentators have suggested, it is not “behind the curve” and doesn’t appear to be in a rush.

The implications for risk-assets (better), front-end yield opportunities (better), and inflation increasing further only moderately (and not in a disruptive manner) are significant. It also suggests to us that the long-end of the curve could well have further downside from here.

That’s particularly the case because duration risk in markets largely extended during the QE-era, so this segment of the market is particularly price-sensitive today, and thus particularly perilous.

Highlights

  • FOMC Chair Powell’s Humphrey-Hawkins testimony took centre stage and in his prepared remarks he painted an optimistic picture of labor markets, and growth more broadly, and suggested that he remained unperturbed about below-target inflation, saying it likely reflects “transitory influences
  • On monetary policy, Powell made a convincing case that “fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory,” allowing the FOMC to thread-the-needle between returning inflation to target and potential economic overheating
  • In our view, the FOMC’s policy rate normalization has been deliberate, and contrary to what some commentators allege, it is not “behind the curve” and doesn’t appear to be in a rush. The implications for risk-assets, front-end yield opportunities, and inflation increasing further (yet not in a disruptive manner) are significant, and it also suggests to us that the long-end of the curve could well have further downside from here
]]> Rick Rieder

Rick Rieder

Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, regarding FOMC Chair Powell’s testimony before the U.S. Congress.

Since the late-1970s, when Congress mandated that the Federal Reserve provide it with semiannual updates on the state of the economy and monetary policy, market observers have scrutinized those remarks to try to discern the future direction of policy.

Not surprisingly, this exercise has often provided little new insight, as the Chair’s prepared remarks and answers to questions typically have hewn closely to previous statements.

As a case in point, Powell delivered a fairly upbeat message on the progress of labor market gains and on economic growth, which reflected the upgraded optimism portrayed in the recent FOMC Minutes language.

Further, his remarks suggested that he remained unperturbed about the below-target inflation levels of recent times, saying that it likely reflects “transitory influences,” which are not likely to be repeated.

As a result, Powell argued that certain economic developments that have taken hold since the Committee’s December meeting (such as passage of the tax cuts and the recent budget plan), as well as continued solid organic economic growth (both in the U.S. and around the world), make a strong case for a gradual continuation of policy normalization.

When asked explicitly whether this more stimulative fiscal policy might cause the Fed to move rates more quickly than previously anticipated, Powell responded by saying that: “My personal outlook for the economy has strengthened since December.

Each member of the FOMC is going to be writing down a new set of projections as we go into the March meeting, which begins in less than three weeks.

I would not want to prejudge that new set but we will be taking into account everything that has happened.”

Clearly, in our view, the Fed in the process of incorporating stronger growth and fiscal stimulus into the policy view, which makes the Summary of Economic Projections due at the March meeting particularly important to keep an eye on.

In the end, we think the FOMC has been doing a respectable job of threading-the-needle between attaining its policy goals (including slowly getting closer to its inflation target) and attempting to avoid potential economic overheating.

This process has been very deliberate and well communicated, and contrary to what some market commentators have suggested, it is not “behind the curve” and doesn’t appear to be in a rush.

The implications for risk-assets (better), front-end yield opportunities (better), and inflation increasing further only moderately (and not in a disruptive manner) are significant. It also suggests to us that the long-end of the curve could well have further downside from here.

That’s particularly the case because duration risk in markets largely extended during the QE-era, so this segment of the market is particularly price-sensitive today, and thus particularly perilous.

Highlights

  • FOMC Chair Powell’s Humphrey-Hawkins testimony took centre stage and in his prepared remarks he painted an optimistic picture of labor markets, and growth more broadly, and suggested that he remained unperturbed about below-target inflation, saying it likely reflects “transitory influences
  • On monetary policy, Powell made a convincing case that “fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory,” allowing the FOMC to thread-the-needle between returning inflation to target and potential economic overheating
  • In our view, the FOMC’s policy rate normalization has been deliberate, and contrary to what some commentators allege, it is not “behind the curve” and doesn’t appear to be in a rush. The implications for risk-assets, front-end yield opportunities, and inflation increasing further (yet not in a disruptive manner) are significant, and it also suggests to us that the long-end of the curve could well have further downside from here

The post Powell’s congressional testimony displays commitment to threading-the-needle between goal attainment and overheating appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2018/03/powells-congressional-testimony-displays-commitment-threading-needle-goal-attainment-overheating/feed/ 0 Jerome Powell a “continuity candidate”, says Principal Global Investors  https://www.adviservoice.com.au/2017/11/jerome-powell-continuity-candidate-says-principal-global-investors/ https://www.adviservoice.com.au/2017/11/jerome-powell-continuity-candidate-says-principal-global-investors/#respond Mon, 13 Nov 2017 20:50:02 +0000 https://adviservoice.com.au/?p=52099

Jante Yellen

Meet the new boss

“Two days after the actual Federal Open Market Committee (FOMC) meeting, President Trump officially nominated Jerome Powell to be the new Fed chair, replacing Janet Yellen when her term expires on February 3, 2018. A relatively smooth confirmation is expected. President Trump also has four Fed governor vacancies to fill, although it could only be three if Yellen serves the remainder of her term as governor, which expires in January of 2024; possible but unlikely.

“At age 64, Powell comes to the position of Fed chair with a law degree (the first Fed chair in over 30 years without a PhD in Economics) and a varied career in law, investment banking, and government.”

Continuity man

“Compared to the present Fed chair, Janet Yellen, Governor Powell is generally characterised as ‘like-minded’ on monetary policy and will likely maintain consistency and continuity in the pace and magnitude of federal funds policy rate increases. He has never cast a dissenting vote during his term as governor, although in September 2012 when then-Fed chairman Ben Bernanke announced QE3, Powell reportedly disagreed and pressed for a ‘clarification’ of the Fed’s goals, establishing what came to be called an ‘offramp’ or ‘unwind’ procedure for what proved to be the final phase of the purchase program. He then voted in favor of its implementation.

“His recent public comments on monetary policy are basically interchangeable with those of Janet Yellen. He is generally rated ‘neutral’ (neither dovish nor hawkish) compared to other members of the Fed Board of Governors. In a recent compilation, his projected federal funds rate at year-end 2018 was 2.13%, in line with seven other members, which was the largest group and included Yellen and Vice chair Bill Dudley. He is known as a ‘consensus builder’ and is reported to be well-liked and respected by colleagues and staff within the Fed.”

More open to de-regulation?

“We feel his leadership on monetary policy itself, is not likely to represent a structural shift over the medium-term; with a bit of caution: Jerome Powell the governor could be different than Jerome Powell the Fed chair. The area where he is most likely to be different is regulation.

“He feels that higher capital and liquidity requirements, along with more rigorous stress tests, have made the financial system safer and should be preserved for large banks. But, he also feels that the Volker rule should be re-written to exclude smaller banks.”

In other news, the Fed stayed put: “Amid the news on Powell, the FOMC met, and as expected, produced no change in policy. Aside from positive identity of the next Fed Chair, the main question was whether the FOMC would proceed with another policy rate boost prior to year-end. Of course, the Fed never allows this question to be answered directly, but the FOMC statement was upbeat enough about the growth outlook to guide the market to another rate hike in December. Futures traders after the meeting put an 87% likelihood on another 0.25% federal funds rate increase at the December FOMC meeting.”

]]>

Jante Yellen

Meet the new boss

“Two days after the actual Federal Open Market Committee (FOMC) meeting, President Trump officially nominated Jerome Powell to be the new Fed chair, replacing Janet Yellen when her term expires on February 3, 2018. A relatively smooth confirmation is expected. President Trump also has four Fed governor vacancies to fill, although it could only be three if Yellen serves the remainder of her term as governor, which expires in January of 2024; possible but unlikely.

“At age 64, Powell comes to the position of Fed chair with a law degree (the first Fed chair in over 30 years without a PhD in Economics) and a varied career in law, investment banking, and government.”

Continuity man

“Compared to the present Fed chair, Janet Yellen, Governor Powell is generally characterised as ‘like-minded’ on monetary policy and will likely maintain consistency and continuity in the pace and magnitude of federal funds policy rate increases. He has never cast a dissenting vote during his term as governor, although in September 2012 when then-Fed chairman Ben Bernanke announced QE3, Powell reportedly disagreed and pressed for a ‘clarification’ of the Fed’s goals, establishing what came to be called an ‘offramp’ or ‘unwind’ procedure for what proved to be the final phase of the purchase program. He then voted in favor of its implementation.

“His recent public comments on monetary policy are basically interchangeable with those of Janet Yellen. He is generally rated ‘neutral’ (neither dovish nor hawkish) compared to other members of the Fed Board of Governors. In a recent compilation, his projected federal funds rate at year-end 2018 was 2.13%, in line with seven other members, which was the largest group and included Yellen and Vice chair Bill Dudley. He is known as a ‘consensus builder’ and is reported to be well-liked and respected by colleagues and staff within the Fed.”

More open to de-regulation?

“We feel his leadership on monetary policy itself, is not likely to represent a structural shift over the medium-term; with a bit of caution: Jerome Powell the governor could be different than Jerome Powell the Fed chair. The area where he is most likely to be different is regulation.

“He feels that higher capital and liquidity requirements, along with more rigorous stress tests, have made the financial system safer and should be preserved for large banks. But, he also feels that the Volker rule should be re-written to exclude smaller banks.”

In other news, the Fed stayed put: “Amid the news on Powell, the FOMC met, and as expected, produced no change in policy. Aside from positive identity of the next Fed Chair, the main question was whether the FOMC would proceed with another policy rate boost prior to year-end. Of course, the Fed never allows this question to be answered directly, but the FOMC statement was upbeat enough about the growth outlook to guide the market to another rate hike in December. Futures traders after the meeting put an 87% likelihood on another 0.25% federal funds rate increase at the December FOMC meeting.”

The post Jerome Powell a “continuity candidate”, says Principal Global Investors  appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2017/11/jerome-powell-continuity-candidate-says-principal-global-investors/feed/ 0