AdviserVoiceUS Federal Reserve Archives - AdviserVoice https://www.adviservoice.com.au/tag/us-federal-reserve/ 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 Stonger US economy and implications for Fed policy https://www.adviservoice.com.au/2015/02/stonger-us-economy-implications-fed-policy/ https://www.adviservoice.com.au/2015/02/stonger-us-economy-implications-fed-policy/#respond Tue, 03 Feb 2015 20:40:43 +0000 https://adviservoice.com.au/?p=35255 Over the past three quarters, the US economy expanded at a 4% annualized rate, the fastest gain in a decade. The economy is also starting 2015 with added stimulus from lower energy prices and the plunge in long-term interest rates.

The stronger dollar poses a modest headwind, but domestic demand has picked up and will likely be the main growth engine. Policymakers face a difficult balancing act in the coming months, but we still expect official rates to be lifted at midyear.

The strength and composition of gross domestic product (GDP) growth over the past three quarters is very unusual for an economic recovery in its sixth year. To be sure, real GDP growth averaged 4% over the past three quarters. That’s the best in a decade (Display 1). Equally interesting, the mix of that recent growth shows a rotation toward more consumer spending (Display 2) and housing—two sectors that ordinarily record strong gains at the outset of a business cycle, not in the middle or the end.

alliance-1

We believe the shift in sectors leading the current growth paints a picture of an economy that’s finally emerging from its subpar pace. And in the January Federal Open Market Committee (FOMC) statement, policymakers acknowledged that improved growth by saying that “economic activity has been expanding at a solid pace.”

But there’s an interesting hitch: unlike past years, the US economy is entering 2015 with strong momentum and unexpected stimulus emanating from a sharp drop in oil prices and long-term interest rates. So policymakers will have to balance the faster growth and low-inflation outlook. In the latest FOMC statement, policymakers also noted that they think the drop in inflation is due to transitory factors. That’s why we believe that an official rate hike midyear still appears to be likely.

Economy’s Performance

The initial report on fourth-quarter real GDP from the US Bureau of Economic Analysis (BEA) shows an annualized gain of 2.6%, slightly below the consensus estimates (and ours) of 3% to 3.5%. Yet, if recent history is any guide, that fourthquarter preliminary estimate will be revised higher when more complete data (including all of December data) are available over the next month or two.

The big surprises in this fourth-quarter report were the initial estimates for real merchandise exports and imports. The BEA assumed a very sharp deterioration in the nominal trade deficit in December. Even on the surface, that looks to be questionable: the plunge in oil prices alone should result in a lower nominal deficit.

Upcoming data releases will yield better insight for the “true” fourth-quarter growth rate. We believe the initial estimates will be revised to reflect what appears to be an improved (rather than deteriorating) trade balance.

Even without any revision, the string of recent quarterly gains in real GDP is quite impressive. The fourth quarter’s annualized gain of 2.6% was preceded by a 5% annualized gain in the third quarter and a 4.6% annualized gain in the second quarter—making this three-quarter string the fastest cumulative gain (+4%) in real GDP growth since late 2003/early 2004.

In the fourth quarter, real consumer spending rose 4.3%, its strongest quarterly showing since 2004. Strong gains in consumer spending on durables (+7.4%) led the way, but spending on consumer nondurables (4.4%) and services (3.7%) also posted their biggest quarterly advances in some time. Construction spending also increased, with spending on residential investment increasing 4.1%.

Business spending on equipment and software experienced a minor contraction of 1.9%. But spending on industrial equipment declined 12.6%—much of that because of cutbacks in the oil and gas sector. Real fourth-quarter government spending contracted 2.2%, with the drop entirely attributable to the sharp 12.5% decline in defense spending. This pullback was expected, as it followed an unexpected 16% annualized gain in the third quarter. State and local spending advanced 1.3% in the fourth quarter. For the year ending in 4Q, total government spending rose 0.8%. That marks the first annual increase since 2008, and it also indicates an end to the fiscal drag.

Monetary Policy

The official statement of the January 28 FOMC meeting showed that policymakers characterized the economy as expanding at a “solid pace” and that the labor markets had been generating “strong job gains.” That’s the first time since 2006 that policymakers had described economic growth and labor markets in those (strong and solid) terms. We interpret the statement to mean that policymakers are getting prepared to raise official rates off the zero-interest level. But to do that, they need to see that the fall in headline inflation is, indeed, temporary and does not spill over to core inflation. We expect core inflation to move higher in 2015—a direct result of stronger US consumer markets.

The list of factors that policymakers are monitoring includes labor market conditions, indicators of inflation pressure and inflation expectations, and readings on financial and international developments. The items on the list—and their order—are important. As one can see, domestic factors dominate the list. And it’s worth noting that policymakers aren’t oblivious to overseas events and risks, but international developments could move the economy in a better or a worse direction.

In the end, we do expect the Fed to be guided by what is happening in the domestic economy. With growth running in the 3.5%–4.0% range and labor markets tightening further in 2015, we are still calling for a midyear official rate hike.

Joseph G. Carson, US Economist and Director—Global Economic Research, AllianceBernstein

————-

The information contained herein reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed herein may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates.  This document has been issued by AllianceBernstein Australia Limited (ABN 53 095 022 718 and AFSL 230698). Information in this document is on
]]> Over the past three quarters, the US economy expanded at a 4% annualized rate, the fastest gain in a decade. The economy is also starting 2015 with added stimulus from lower energy prices and the plunge in long-term interest rates.

The stronger dollar poses a modest headwind, but domestic demand has picked up and will likely be the main growth engine. Policymakers face a difficult balancing act in the coming months, but we still expect official rates to be lifted at midyear.

The strength and composition of gross domestic product (GDP) growth over the past three quarters is very unusual for an economic recovery in its sixth year. To be sure, real GDP growth averaged 4% over the past three quarters. That’s the best in a decade (Display 1). Equally interesting, the mix of that recent growth shows a rotation toward more consumer spending (Display 2) and housing—two sectors that ordinarily record strong gains at the outset of a business cycle, not in the middle or the end.

alliance-1

We believe the shift in sectors leading the current growth paints a picture of an economy that’s finally emerging from its subpar pace. And in the January Federal Open Market Committee (FOMC) statement, policymakers acknowledged that improved growth by saying that “economic activity has been expanding at a solid pace.”

But there’s an interesting hitch: unlike past years, the US economy is entering 2015 with strong momentum and unexpected stimulus emanating from a sharp drop in oil prices and long-term interest rates. So policymakers will have to balance the faster growth and low-inflation outlook. In the latest FOMC statement, policymakers also noted that they think the drop in inflation is due to transitory factors. That’s why we believe that an official rate hike midyear still appears to be likely.

Economy’s Performance

The initial report on fourth-quarter real GDP from the US Bureau of Economic Analysis (BEA) shows an annualized gain of 2.6%, slightly below the consensus estimates (and ours) of 3% to 3.5%. Yet, if recent history is any guide, that fourthquarter preliminary estimate will be revised higher when more complete data (including all of December data) are available over the next month or two.

The big surprises in this fourth-quarter report were the initial estimates for real merchandise exports and imports. The BEA assumed a very sharp deterioration in the nominal trade deficit in December. Even on the surface, that looks to be questionable: the plunge in oil prices alone should result in a lower nominal deficit.

Upcoming data releases will yield better insight for the “true” fourth-quarter growth rate. We believe the initial estimates will be revised to reflect what appears to be an improved (rather than deteriorating) trade balance.

Even without any revision, the string of recent quarterly gains in real GDP is quite impressive. The fourth quarter’s annualized gain of 2.6% was preceded by a 5% annualized gain in the third quarter and a 4.6% annualized gain in the second quarter—making this three-quarter string the fastest cumulative gain (+4%) in real GDP growth since late 2003/early 2004.

In the fourth quarter, real consumer spending rose 4.3%, its strongest quarterly showing since 2004. Strong gains in consumer spending on durables (+7.4%) led the way, but spending on consumer nondurables (4.4%) and services (3.7%) also posted their biggest quarterly advances in some time. Construction spending also increased, with spending on residential investment increasing 4.1%.

Business spending on equipment and software experienced a minor contraction of 1.9%. But spending on industrial equipment declined 12.6%—much of that because of cutbacks in the oil and gas sector. Real fourth-quarter government spending contracted 2.2%, with the drop entirely attributable to the sharp 12.5% decline in defense spending. This pullback was expected, as it followed an unexpected 16% annualized gain in the third quarter. State and local spending advanced 1.3% in the fourth quarter. For the year ending in 4Q, total government spending rose 0.8%. That marks the first annual increase since 2008, and it also indicates an end to the fiscal drag.

Monetary Policy

The official statement of the January 28 FOMC meeting showed that policymakers characterized the economy as expanding at a “solid pace” and that the labor markets had been generating “strong job gains.” That’s the first time since 2006 that policymakers had described economic growth and labor markets in those (strong and solid) terms. We interpret the statement to mean that policymakers are getting prepared to raise official rates off the zero-interest level. But to do that, they need to see that the fall in headline inflation is, indeed, temporary and does not spill over to core inflation. We expect core inflation to move higher in 2015—a direct result of stronger US consumer markets.

The list of factors that policymakers are monitoring includes labor market conditions, indicators of inflation pressure and inflation expectations, and readings on financial and international developments. The items on the list—and their order—are important. As one can see, domestic factors dominate the list. And it’s worth noting that policymakers aren’t oblivious to overseas events and risks, but international developments could move the economy in a better or a worse direction.

In the end, we do expect the Fed to be guided by what is happening in the domestic economy. With growth running in the 3.5%–4.0% range and labor markets tightening further in 2015, we are still calling for a midyear official rate hike.

Joseph G. Carson, US Economist and Director—Global Economic Research, AllianceBernstein

————-

The information contained herein reflects the views of AllianceBernstein L.P. or its affiliates and sources it believes are reliable as of the date of this publication. AllianceBernstein L.P. makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed herein may change at any time after the date of this publication. This document is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates.  This document has been issued by AllianceBernstein Australia Limited (ABN 53 095 022 718 and AFSL 230698). Information in this document is on

The post Stonger US economy and implications for Fed policy appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2015/02/stonger-us-economy-implications-fed-policy/feed/ 0 Weekly market & economic update – week ending 19 September, 2014 https://www.adviservoice.com.au/2014/09/weekly-market-economic-update-week-ending-19-september-2014/ https://www.adviservoice.com.au/2014/09/weekly-market-economic-update-week-ending-19-september-2014/#respond Sun, 21 Sep 2014 21:55:44 +0000 https://adviservoice.com.au/?p=32957 Investment markets and key developments over the past week
  • Global share markets mostly rose over the last week helped by indications from the Fed that it’s still in no hurry to raise interest rates, expectations that the ECB might have to provide more stimulus, the Scottish No vote removing risks over UK assets and the continuing slide in the Yen to a six year low providing a boost to Japanese shares. Chinese shares fell but only slightly thanks to signs of monetary easing. The combination of poor Chinese economic data and the falling $A weighed heavily on the Australian share market as foreign investors tend to retreat to the sidelines whenever the $A is under threat.  Bond yields were little changed but the $US continued its ascent which in turn saw the Australian dollar remain under pressure and falling below $US0.90.
  • The US Federal Reserve provided no surprises with another $US10bn taper to its QE program leaving it on track to end next month and an ongoing assessment that considerable labour market slack remains and that a “considerable time” is likely to elapse between the end of QE and the first rate hike. However, the Fed is incrementally continuing to become less dovish with Fed officials’ “dot plot” of interest rate expectations getting revised up slightly and Janet Yellen highlighting that the timing of the first rate hike is dependent on how the economy performs. Our assessment remains that the Fed can afford to take its time for now, but in the June quarter next year it will start to gradually raise rates. The anticipation and then the reality of this could cause bouts of share market volatility – particularly whenever there is a run of strong US economic data, but it’s unlikely to derail the bull market as rate hikes will be reflecting strong economic and profit conditions.  Only when interest rates reach onerous levels will there be a significant problem, but that will be a fair way off.
  • Thankfully common sense prevailed in Scotland and the No vote won. This is good news for UK and Scottish assets and more broadly for the Eurozone as other pro-independence movements likely the Catalonians in Spain weren’t given the encouragement a Scottish Yes vote might have provided. Catalonia’s potential referendum for November will be the next one to watch though.
  • The Ukraine crisis may be heading towards a resolution of sorts, with the Ukrainian Parliament granting a degree of autonomy to the eastern regions currently in conflict. There may still be more to go before the conflict is resolved, but with Russia describing the move as positive we may be getting to the point where Ukraine starts to recede as an issue for investment markets.
  • In Australia, the minutes from the RBA’s last meeting repeated the “period of stability” mantra on interest rates but expressed more concern about the growth in investor housing credit and house prices. The RBA is stuck between a rock – in terms of the risk of accelerating house prices – and – a hard place in the form of the Australian dollar which remains too high, despite recent falls. The best approach is likely to be more jawboning to the effect that home buyers need to be cautious and that the $A remains overvalued. If the property market does not cool down a bit and the $A remains too high, I suspect that the RBA may then be tempted to go down the path of encouraging APRA to raise the risk weighting for home loans rather than start raising interest rates.
  • Right now the Australian dollar is going in the right direction helped by the Fed’s gradual move towards monetary tightening. There is a bit of technical support around $US0.89 but I expect that by year end the $A will have fallen through the January low of $US0.8660 on its way to around $US0.80 over the next year or so. A lower $A will provide a shot in the arm for trade exposed sectors of the economy at a time that we need them to perk up as mining investment slows.

Major global economic events and implications

  • US economic data was mostly favourable with solid growth readings but low inflation. Industrial production unexpectedly slipped in August, but strong regional manufacturing surveys point to a bounce back this month. While housing starts and permits fell this was only after a huge surge in July and a stronger than expected gain in the NAHB homebuilder index points to strength head. Finally, jobless claims fell and household net wealth rose 10% over the last year, providing a strong wealth boost. Meanwhile, inflation remains low with headline and core CPI inflation falling to 1.7% year on year in August which partly explains why the Fed is in no hurry.
  • Bank take-up of the ECB’s first auction of cheap funding under its new Targeted Long Term Refinancing Operation (TLTRO) program was around half expectations at €83bn, which may partly reflect bank caution ahead of the ECB’s review of the quality of their assets. So hopefully the next auction in December will see more interest, but in the meantime it puts pressure on the ECB to quickly ramp up its quantitative easing program.
  • In China a sharp fall in the MNI business indicator suggests that the growth slowdown may have continued into September and home prices continued to fall in August with average prices down just over 1% with virtually all cities seeing falls. Meanwhile, the Chinese central bank may be reacting to the growth slowdown with reports that it is providing RMB500bn to the major banks and a fall in the 14 day money market rate. While a cut to the PBOC’s 12 month benchmark interest rate would be more appropriate as Chinese interest rates remain too high for the Chinese private sector, its latest moves are welcome and highlight that the authorities are prepared to support growth.

Australian economic events and implications

  • There were only secondary data releases in Australia over the last week and they were all soft. Auto sales and the Westpac leading index both fell in August and the weekly ANZ Roy Morgan consumer confidence index fell slightly.

What to watch over the next week?

  • Globally, the main focus in the week ahead will be the release of September business conditions PMIs (Tuesday) in China, Europe and the US. The flash HSBC manufacturing PMI for China will be watched to see whether the latest slowdown continued into September, Eurozone PMIs are expected to remain off their previous highs and the US PMI is expected to remain strong.
  • In terms of other US data, expect further gains in existing homes sales (Monday) and new home sales (Wednesday), a fall back in headline durable goods orders (Thursday) after the aircraft inspired surge seen in July but a continuing trend rise in underlying orders and another upwards revision to June quarter GDP growth (Friday) to 4.6% annualised from 4.2%.
  • Japanese inflation data will be released Friday, but is being boosted by the April sales tax hike. Excluding this it’s likely to remain around 0.5% year on year on a core basis, which is better than the deflation that prevailed for a long time but still has a fair way to go to reach the 2% inflation target.
  • In Australia, the RBA’s half yearly Financial Stability Review (Wednesday) is likely to indicate that the financial system remains in good shape, but express concern that the residential property market may be getting too hot and potentially posing risks for financial stability in the future if it continues to hot up. Speeches by RBA Governor Stevens (Thursday) and Assistant Governor Richards (Friday) will be watched for further comments on how the RBA sees the risks around the property market, the broader economic outlook and the $A. They are likely to reinforce the rates on hold message. Data for job vacancies will also be released.

Outlook for markets

  • Shares are still at risk of occasional corrections particularly ahead of the end of US quantitative easing next month, the US mid-term elections in November and with September and October often proving volatile for shares. Australian shares are also vulnerable in the short term to further falls in the iron ore price and as foreign investors stay on the sidelines as the $A falls.
  • However, occasional corrections are healthy in allowing shares to let off a bit of steam and should be seen as a buying opportunity as the cyclical bull market in shares likely has further to go. We still don’t see the signs of shares being over valued, over loved and over bought normally seen at major market tops. Valuations remain okay, global earnings are continuing to improve on the back of gradually improving economic growth, global monetary conditions are set to remain easy and there is no sign of investor euphoria.
  • Our year-end target for the ASX 200 remains 5800. Although the falling $A is initially a drag for the Australian share market as foreign investors retreat to the sidelines, after a while it will start to become a source of support as it flows through to upwards revisions to earnings expectations. Roughly speaking each 10% fall in the value of the $A boosts company earnings by 3%.
  •  Low bond yields will likely mean soft returns from government bonds, particularly as we continue to edge closer to the start of a gradual interest rate tightening cycle in the US.
  • The combination of soft commodity prices, the likelihood the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. Expect to see it fall to around $US0.80 in the next year or so.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

————-

Important note:While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.
]]> Investment markets and key developments over the past week
  • Global share markets mostly rose over the last week helped by indications from the Fed that it’s still in no hurry to raise interest rates, expectations that the ECB might have to provide more stimulus, the Scottish No vote removing risks over UK assets and the continuing slide in the Yen to a six year low providing a boost to Japanese shares. Chinese shares fell but only slightly thanks to signs of monetary easing. The combination of poor Chinese economic data and the falling $A weighed heavily on the Australian share market as foreign investors tend to retreat to the sidelines whenever the $A is under threat.  Bond yields were little changed but the $US continued its ascent which in turn saw the Australian dollar remain under pressure and falling below $US0.90.
  • The US Federal Reserve provided no surprises with another $US10bn taper to its QE program leaving it on track to end next month and an ongoing assessment that considerable labour market slack remains and that a “considerable time” is likely to elapse between the end of QE and the first rate hike. However, the Fed is incrementally continuing to become less dovish with Fed officials’ “dot plot” of interest rate expectations getting revised up slightly and Janet Yellen highlighting that the timing of the first rate hike is dependent on how the economy performs. Our assessment remains that the Fed can afford to take its time for now, but in the June quarter next year it will start to gradually raise rates. The anticipation and then the reality of this could cause bouts of share market volatility – particularly whenever there is a run of strong US economic data, but it’s unlikely to derail the bull market as rate hikes will be reflecting strong economic and profit conditions.  Only when interest rates reach onerous levels will there be a significant problem, but that will be a fair way off.
  • Thankfully common sense prevailed in Scotland and the No vote won. This is good news for UK and Scottish assets and more broadly for the Eurozone as other pro-independence movements likely the Catalonians in Spain weren’t given the encouragement a Scottish Yes vote might have provided. Catalonia’s potential referendum for November will be the next one to watch though.
  • The Ukraine crisis may be heading towards a resolution of sorts, with the Ukrainian Parliament granting a degree of autonomy to the eastern regions currently in conflict. There may still be more to go before the conflict is resolved, but with Russia describing the move as positive we may be getting to the point where Ukraine starts to recede as an issue for investment markets.
  • In Australia, the minutes from the RBA’s last meeting repeated the “period of stability” mantra on interest rates but expressed more concern about the growth in investor housing credit and house prices. The RBA is stuck between a rock – in terms of the risk of accelerating house prices – and – a hard place in the form of the Australian dollar which remains too high, despite recent falls. The best approach is likely to be more jawboning to the effect that home buyers need to be cautious and that the $A remains overvalued. If the property market does not cool down a bit and the $A remains too high, I suspect that the RBA may then be tempted to go down the path of encouraging APRA to raise the risk weighting for home loans rather than start raising interest rates.
  • Right now the Australian dollar is going in the right direction helped by the Fed’s gradual move towards monetary tightening. There is a bit of technical support around $US0.89 but I expect that by year end the $A will have fallen through the January low of $US0.8660 on its way to around $US0.80 over the next year or so. A lower $A will provide a shot in the arm for trade exposed sectors of the economy at a time that we need them to perk up as mining investment slows.

Major global economic events and implications

  • US economic data was mostly favourable with solid growth readings but low inflation. Industrial production unexpectedly slipped in August, but strong regional manufacturing surveys point to a bounce back this month. While housing starts and permits fell this was only after a huge surge in July and a stronger than expected gain in the NAHB homebuilder index points to strength head. Finally, jobless claims fell and household net wealth rose 10% over the last year, providing a strong wealth boost. Meanwhile, inflation remains low with headline and core CPI inflation falling to 1.7% year on year in August which partly explains why the Fed is in no hurry.
  • Bank take-up of the ECB’s first auction of cheap funding under its new Targeted Long Term Refinancing Operation (TLTRO) program was around half expectations at €83bn, which may partly reflect bank caution ahead of the ECB’s review of the quality of their assets. So hopefully the next auction in December will see more interest, but in the meantime it puts pressure on the ECB to quickly ramp up its quantitative easing program.
  • In China a sharp fall in the MNI business indicator suggests that the growth slowdown may have continued into September and home prices continued to fall in August with average prices down just over 1% with virtually all cities seeing falls. Meanwhile, the Chinese central bank may be reacting to the growth slowdown with reports that it is providing RMB500bn to the major banks and a fall in the 14 day money market rate. While a cut to the PBOC’s 12 month benchmark interest rate would be more appropriate as Chinese interest rates remain too high for the Chinese private sector, its latest moves are welcome and highlight that the authorities are prepared to support growth.

Australian economic events and implications

  • There were only secondary data releases in Australia over the last week and they were all soft. Auto sales and the Westpac leading index both fell in August and the weekly ANZ Roy Morgan consumer confidence index fell slightly.

What to watch over the next week?

  • Globally, the main focus in the week ahead will be the release of September business conditions PMIs (Tuesday) in China, Europe and the US. The flash HSBC manufacturing PMI for China will be watched to see whether the latest slowdown continued into September, Eurozone PMIs are expected to remain off their previous highs and the US PMI is expected to remain strong.
  • In terms of other US data, expect further gains in existing homes sales (Monday) and new home sales (Wednesday), a fall back in headline durable goods orders (Thursday) after the aircraft inspired surge seen in July but a continuing trend rise in underlying orders and another upwards revision to June quarter GDP growth (Friday) to 4.6% annualised from 4.2%.
  • Japanese inflation data will be released Friday, but is being boosted by the April sales tax hike. Excluding this it’s likely to remain around 0.5% year on year on a core basis, which is better than the deflation that prevailed for a long time but still has a fair way to go to reach the 2% inflation target.
  • In Australia, the RBA’s half yearly Financial Stability Review (Wednesday) is likely to indicate that the financial system remains in good shape, but express concern that the residential property market may be getting too hot and potentially posing risks for financial stability in the future if it continues to hot up. Speeches by RBA Governor Stevens (Thursday) and Assistant Governor Richards (Friday) will be watched for further comments on how the RBA sees the risks around the property market, the broader economic outlook and the $A. They are likely to reinforce the rates on hold message. Data for job vacancies will also be released.

Outlook for markets

  • Shares are still at risk of occasional corrections particularly ahead of the end of US quantitative easing next month, the US mid-term elections in November and with September and October often proving volatile for shares. Australian shares are also vulnerable in the short term to further falls in the iron ore price and as foreign investors stay on the sidelines as the $A falls.
  • However, occasional corrections are healthy in allowing shares to let off a bit of steam and should be seen as a buying opportunity as the cyclical bull market in shares likely has further to go. We still don’t see the signs of shares being over valued, over loved and over bought normally seen at major market tops. Valuations remain okay, global earnings are continuing to improve on the back of gradually improving economic growth, global monetary conditions are set to remain easy and there is no sign of investor euphoria.
  • Our year-end target for the ASX 200 remains 5800. Although the falling $A is initially a drag for the Australian share market as foreign investors retreat to the sidelines, after a while it will start to become a source of support as it flows through to upwards revisions to earnings expectations. Roughly speaking each 10% fall in the value of the $A boosts company earnings by 3%.
  •  Low bond yields will likely mean soft returns from government bonds, particularly as we continue to edge closer to the start of a gradual interest rate tightening cycle in the US.
  • The combination of soft commodity prices, the likelihood the Fed will start raising interest rates ahead of the RBA and relatively high costs in Australia are expected to see the broad trend in the $A remain down. Expect to see it fall to around $US0.80 in the next year or so.

By Dr Shane Oliver, Head of Investment Strategy & Chief Economist

————-

Important note:While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post Weekly market & economic update – week ending 19 September, 2014 appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2014/09/weekly-market-economic-update-week-ending-19-september-2014/feed/ 0 The Federal Reserve is many things https://www.adviservoice.com.au/2014/03/federal-reserve-many-things/ https://www.adviservoice.com.au/2014/03/federal-reserve-many-things/#respond Sun, 02 Mar 2014 21:00:05 +0000 https://adviservoice.com.au/?p=28450 The impact of tapering on global markets.

The impact of tapering on global markets.

Ben Bernanke on January 28 and 29 presided over his last policy-setting meeting as chairman of the Federal Reserve, before leaving the central bank two days later.

As expected, the policy-setting board decided to reduce the Fed’s monthly asset purchases by another US$10 billion from this month.

The Fed issued a statement of 790 words to justify its decision to yet again “taper” its quantitative-easing program. Most of the text focused on the US labour market, US inflation projections and the Fed’s assurances that US monetary policy will stay lax enough to support US economic growth even as its asset purchases drop. Not one word hinted that there was another country on earth.[1]

The lack of acknowledgement of the rest of the world may have astonished some. Over the previous weeks the Fed triggered disarray on global stock and currency markets when it implemented its first US$10 billion drop in monthly asset purchases from US$85 billion. Emerging-market currencies were engulfed in the most turmoil as investors pulled money from developing-country securities to send it largely back to the US to take advantage of higher-yielding US Treasuries. People who view the Fed as the world’s de facto central bank may have been surprised that Fed policy-board members failed to take these consequences into account before deciding to trim their asset purchases again.

They shouldn’t have been. The Fed is not the world’s central bank. It is as parochial as any other central bank when it comes to making decisions. Its mandate from Congress rightly only covers achieving outcomes for the US economy; namely, stable prices, full employment and the largely overlooked goal of moderate long-term interest rates. The Fed is there to conduct US monetary policy, act as banker for the US government and other US and foreign official financial institutions, operate and oversee the payments system, supervise and maintain the stability of the financial system and conduct research, among other things. It’s not there to worry about economic conditions in other countries unless turmoil elsewhere threatens the US economy. This sanguine approach by the Fed to any havoc created by its tapering has profound implications for the world economy.

To be sure, Fed officials do care about some pricing on financial markets, as the Fed’s statement in January points out. They mostly watch yields on US fixed-income markets because they have such telling economic impact; and they care to some extent what happens to US stocks for the flow-on effect to consumer sentiment and purchasing power. The Fed’s tapering is not the sole cause of the recent turmoil anyway – China’s credit tightening is hindering the world’s second-biggest economy, Argentina would have hosted a currency crisis anyway as its inflation is already out of control and political unrest is gripping Thailand, Turkey and Ukraine. Policymakers in some countries including Australia are glad the Fed’s tapering is boosting the US dollar because they want lower currencies to help their exporters. The policymakers bleating loudest about the ending of quantitative easing are often those who protested loudest when it began, claiming the Fed was starting currency wars. Perhaps, the Fed’s statement could have had a few sops acknowledging the turmoil in emerging countries.

But those words would ring hollow anyway to citizens in those emerging markets battered by the Fed’s tapering. People in these countries can guess that Fed officials have calculated that tapering is yet to trigger global side effects that will touch the US economy. Damage on financial markets would need to be far greater. Few emerging countries are key US export markets. US banks are not exposed to any large extent to falling emerging-market debt. In fact, the emerging-market turmoil has lowered US bond yields, making it easier for the Fed to persist with tapering, rather than put more pressure on it to suspend its timetable to end its asset purchases before year end. That was the likely message in Bernanke’s decision to make no mention of the outside world when justifying January’s decision.

Expanding list

Many implications flow from the Fed’s reminder that it is not a global welfare agency. The most obvious is that the Fed will steadily prune its asset buying as long as the US economy can withstand reduced purchases. Many in the US want the Fed to shrink its balance sheet. They are concerned that the Fed’s decision to more than double its balance sheet since 2009 to buy assets is fanning bubbles (perhaps) and could reignite inflation (unlikely). The US economic recovery appears solid enough even if hidden employment is high, Congress needs to again raise the US debt limit and factory orders suffered their steepest drop for 33 years in January (due, most probably, to a cold snap and previous stockpiling). Thus emerging markets can expect a struggle to hold onto the capital flows that came their way when the Fed, having reduced the cash rate to almost zero, began buying assets five years ago to reduce long-term US interest rates to spur the US economy.

The emerging markets most vulnerable to the Fed’s actions are those confronting political uncertainty and those with weak economic fundamentals. What started out as the “fragile five” – Brazil, India, Indonesia, Turkey and South Africa – has already expanded to become the “fragile eight” – Argentina, Chile and Russia have been added – and the roll threatens to grow. (Some include Hungary among the fragile rather than Chile.) Political strife on Ankara, Bangkok and Kiev streets and upcoming local, general and/or presidential elections in India, Indonesia and Turkey have prompted investors to pull money from these places. On top of political uncertainty, these and the other wobbly countries are vilified for their large current-account deficits, declining forex reserves, sluggish economic growth, hefty fiscal deficits and inflation. The Bank of International Settlements warned that the “massive expansion” by banks and companies in developing countries to sell bonds leaves emerging markets more exposed to the whims of foreign investors than they were during the East Asia crisis in 1998.[2]

A big problem is how emerging countries are responding to the loss of capital and the resultant dive in their currencies. Countries such as Brazil, India, Indonesia, South Africa and Turkey are defending currencies by raising interest rates – some such as Argentina and Ukraine have imposed capital controls while Russia is blowing forex reserves. After years of overly lax monetary policies in these countries, central banks are acting prudently to some extent to prevent plunging currencies boosting inflation. But for most part they are wrecking short-term growth prospects, putting their banking systems under pressure and stand little chance of propping up currencies for too long anyway. So worried are policymakers about holding onto foreign capital that even emerging markets with current-account surpluses (such as Chile and Peru) are wary of cutting key rates to stimulate their slowing economies.

Fed nemesis

The emerging countries deemed fragile are being urged to abandon the populist macroeconomic policies of recent years (low rates, fiscal deficits, prioritising growth over fighting inflation and anti-free-trade policies) and undertake structural reforms to win back the confidence of foreigners. They have much to do to convince outsiders that they have the political will to fix government finances, control banking sectors, stimulate domestic competition, boost productivity and encourage direct foreign investment. Over the long term, these countries probably will address many of their shortcomings and rebuild faith in the still-sound, long-term case for emerging markets. But the short term is another matter. A sudden slowdown is taking place in many emerging markets. That it is happening in so many large emerging markets at once is akin to a global disinflationary shock – as the prices of commodities and manufactured goods decline – particularly so if China pushes down the yuan to hold onto export-market share as it battles the aftermath of a credit boom.

Tamer inflation will be one beneficial outcome from the crisis for the fragile emerging countries infested with this curse. But a wave of disinflationary pressure from the emerging world is a big threat to the rest of the world. Japan will face a tougher struggle to escape its deflation. The heavily indebted eurozone could be pushed into the Japan-like daze, given how close it is to this stupor anyway. Prices in the 18-member eurozone only rose 0.7% in the 12 months to January, mainly because the fixed nature of the euro for its users is forcing countries with current-account deficits to deflate their economies to become competitive again. Deflation on an annual basis has already taken hold in the troubled countries of Greece, Cyprus and new euro-user Latvia and inflation is close to zero in Ireland, Slovakia, Spain and Portugal. Even if inflation stays just above zero in the eurozone, inflationary expectations have probably fallen low enough to drive up the real burden of debt to problematic levels.

Deflation is the menace the Fed probably worries about the most when judging whether a sick world could infect the US economy. Consumer prices only rose 1.5% in the US in 2013, so the margin for preventing the US economy entering into a long-term coma that worsens debt ratios is not huge. As much as the US might sometimes pretend it’s a closed economy, the outside world is still there. It could even crack a mention in Fed statements later this year if  new Chair Janet Yellen needs to explain why the US central bank has suspended tapering – for the sake of the US economy, of course.

Financial information comes from Bloomberg unless stated otherwise. Eurozone data comes from eurostat.

by Michael Collins, Investment Commentator at Fidelity

———-

[1] Federal Reserve. FMOC statement. Press release. 29 January 2014. http://www.federalreserve.gov/newsevents/press/monetary/20140129a.htm

[2] Bank of International Settlements. Working Papers No 441. “The global long-term interest rate, financial risks and policy choices in EMEs.” February 2014. Page 4. http://www.bis.org/publ/work441.htm

]]> The impact of tapering on global markets.

The impact of tapering on global markets.

Ben Bernanke on January 28 and 29 presided over his last policy-setting meeting as chairman of the Federal Reserve, before leaving the central bank two days later.

As expected, the policy-setting board decided to reduce the Fed’s monthly asset purchases by another US$10 billion from this month.

The Fed issued a statement of 790 words to justify its decision to yet again “taper” its quantitative-easing program. Most of the text focused on the US labour market, US inflation projections and the Fed’s assurances that US monetary policy will stay lax enough to support US economic growth even as its asset purchases drop. Not one word hinted that there was another country on earth.[1]

The lack of acknowledgement of the rest of the world may have astonished some. Over the previous weeks the Fed triggered disarray on global stock and currency markets when it implemented its first US$10 billion drop in monthly asset purchases from US$85 billion. Emerging-market currencies were engulfed in the most turmoil as investors pulled money from developing-country securities to send it largely back to the US to take advantage of higher-yielding US Treasuries. People who view the Fed as the world’s de facto central bank may have been surprised that Fed policy-board members failed to take these consequences into account before deciding to trim their asset purchases again.

They shouldn’t have been. The Fed is not the world’s central bank. It is as parochial as any other central bank when it comes to making decisions. Its mandate from Congress rightly only covers achieving outcomes for the US economy; namely, stable prices, full employment and the largely overlooked goal of moderate long-term interest rates. The Fed is there to conduct US monetary policy, act as banker for the US government and other US and foreign official financial institutions, operate and oversee the payments system, supervise and maintain the stability of the financial system and conduct research, among other things. It’s not there to worry about economic conditions in other countries unless turmoil elsewhere threatens the US economy. This sanguine approach by the Fed to any havoc created by its tapering has profound implications for the world economy.

To be sure, Fed officials do care about some pricing on financial markets, as the Fed’s statement in January points out. They mostly watch yields on US fixed-income markets because they have such telling economic impact; and they care to some extent what happens to US stocks for the flow-on effect to consumer sentiment and purchasing power. The Fed’s tapering is not the sole cause of the recent turmoil anyway – China’s credit tightening is hindering the world’s second-biggest economy, Argentina would have hosted a currency crisis anyway as its inflation is already out of control and political unrest is gripping Thailand, Turkey and Ukraine. Policymakers in some countries including Australia are glad the Fed’s tapering is boosting the US dollar because they want lower currencies to help their exporters. The policymakers bleating loudest about the ending of quantitative easing are often those who protested loudest when it began, claiming the Fed was starting currency wars. Perhaps, the Fed’s statement could have had a few sops acknowledging the turmoil in emerging countries.

But those words would ring hollow anyway to citizens in those emerging markets battered by the Fed’s tapering. People in these countries can guess that Fed officials have calculated that tapering is yet to trigger global side effects that will touch the US economy. Damage on financial markets would need to be far greater. Few emerging countries are key US export markets. US banks are not exposed to any large extent to falling emerging-market debt. In fact, the emerging-market turmoil has lowered US bond yields, making it easier for the Fed to persist with tapering, rather than put more pressure on it to suspend its timetable to end its asset purchases before year end. That was the likely message in Bernanke’s decision to make no mention of the outside world when justifying January’s decision.

Expanding list

Many implications flow from the Fed’s reminder that it is not a global welfare agency. The most obvious is that the Fed will steadily prune its asset buying as long as the US economy can withstand reduced purchases. Many in the US want the Fed to shrink its balance sheet. They are concerned that the Fed’s decision to more than double its balance sheet since 2009 to buy assets is fanning bubbles (perhaps) and could reignite inflation (unlikely). The US economic recovery appears solid enough even if hidden employment is high, Congress needs to again raise the US debt limit and factory orders suffered their steepest drop for 33 years in January (due, most probably, to a cold snap and previous stockpiling). Thus emerging markets can expect a struggle to hold onto the capital flows that came their way when the Fed, having reduced the cash rate to almost zero, began buying assets five years ago to reduce long-term US interest rates to spur the US economy.

The emerging markets most vulnerable to the Fed’s actions are those confronting political uncertainty and those with weak economic fundamentals. What started out as the “fragile five” – Brazil, India, Indonesia, Turkey and South Africa – has already expanded to become the “fragile eight” – Argentina, Chile and Russia have been added – and the roll threatens to grow. (Some include Hungary among the fragile rather than Chile.) Political strife on Ankara, Bangkok and Kiev streets and upcoming local, general and/or presidential elections in India, Indonesia and Turkey have prompted investors to pull money from these places. On top of political uncertainty, these and the other wobbly countries are vilified for their large current-account deficits, declining forex reserves, sluggish economic growth, hefty fiscal deficits and inflation. The Bank of International Settlements warned that the “massive expansion” by banks and companies in developing countries to sell bonds leaves emerging markets more exposed to the whims of foreign investors than they were during the East Asia crisis in 1998.[2]

A big problem is how emerging countries are responding to the loss of capital and the resultant dive in their currencies. Countries such as Brazil, India, Indonesia, South Africa and Turkey are defending currencies by raising interest rates – some such as Argentina and Ukraine have imposed capital controls while Russia is blowing forex reserves. After years of overly lax monetary policies in these countries, central banks are acting prudently to some extent to prevent plunging currencies boosting inflation. But for most part they are wrecking short-term growth prospects, putting their banking systems under pressure and stand little chance of propping up currencies for too long anyway. So worried are policymakers about holding onto foreign capital that even emerging markets with current-account surpluses (such as Chile and Peru) are wary of cutting key rates to stimulate their slowing economies.

Fed nemesis

The emerging countries deemed fragile are being urged to abandon the populist macroeconomic policies of recent years (low rates, fiscal deficits, prioritising growth over fighting inflation and anti-free-trade policies) and undertake structural reforms to win back the confidence of foreigners. They have much to do to convince outsiders that they have the political will to fix government finances, control banking sectors, stimulate domestic competition, boost productivity and encourage direct foreign investment. Over the long term, these countries probably will address many of their shortcomings and rebuild faith in the still-sound, long-term case for emerging markets. But the short term is another matter. A sudden slowdown is taking place in many emerging markets. That it is happening in so many large emerging markets at once is akin to a global disinflationary shock – as the prices of commodities and manufactured goods decline – particularly so if China pushes down the yuan to hold onto export-market share as it battles the aftermath of a credit boom.

Tamer inflation will be one beneficial outcome from the crisis for the fragile emerging countries infested with this curse. But a wave of disinflationary pressure from the emerging world is a big threat to the rest of the world. Japan will face a tougher struggle to escape its deflation. The heavily indebted eurozone could be pushed into the Japan-like daze, given how close it is to this stupor anyway. Prices in the 18-member eurozone only rose 0.7% in the 12 months to January, mainly because the fixed nature of the euro for its users is forcing countries with current-account deficits to deflate their economies to become competitive again. Deflation on an annual basis has already taken hold in the troubled countries of Greece, Cyprus and new euro-user Latvia and inflation is close to zero in Ireland, Slovakia, Spain and Portugal. Even if inflation stays just above zero in the eurozone, inflationary expectations have probably fallen low enough to drive up the real burden of debt to problematic levels.

Deflation is the menace the Fed probably worries about the most when judging whether a sick world could infect the US economy. Consumer prices only rose 1.5% in the US in 2013, so the margin for preventing the US economy entering into a long-term coma that worsens debt ratios is not huge. As much as the US might sometimes pretend it’s a closed economy, the outside world is still there. It could even crack a mention in Fed statements later this year if  new Chair Janet Yellen needs to explain why the US central bank has suspended tapering – for the sake of the US economy, of course.

Financial information comes from Bloomberg unless stated otherwise. Eurozone data comes from eurostat.

by Michael Collins, Investment Commentator at Fidelity

———-

[1] Federal Reserve. FMOC statement. Press release. 29 January 2014. http://www.federalreserve.gov/newsevents/press/monetary/20140129a.htm

[2] Bank of International Settlements. Working Papers No 441. “The global long-term interest rate, financial risks and policy choices in EMEs.” February 2014. Page 4. http://www.bis.org/publ/work441.htm

The post The Federal Reserve is many things appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2014/03/federal-reserve-many-things/feed/ 0 US gains traction as emerging markets lose their sheen https://www.adviservoice.com.au/2014/02/us-gains-traction-emerging-markets-lose-sheen/ https://www.adviservoice.com.au/2014/02/us-gains-traction-emerging-markets-lose-sheen/#respond Tue, 18 Feb 2014 20:50:06 +0000 https://adviservoice.com.au/?p=28241 Australian investors still sending record sums offshore, but choosing markets with care
Aussie investors heading to US market.

Aussie investors heading to US market.

Australian investors may still have their sights firmly set on international investments, but they are steering clear of emerging markets left struggling by US Federal Reserve monetary policy.

According to recent market analysis undertaken by GaveKal and released by Certitude Global Investments (Certitude), quantitative easing in the US has created a ‘false’ price for the US dollar, leading to a misallocation of capital and distorted trade flows between the US and many emerging markets.

CEO of Certitude, Craig Mowll, explained that while from the US perspective quantitative easing has helped stimulate the domestic economy and improve the balance of trade, it has also increased US net exports. One consequence of this is a reduction in global trade and a significant slowdown in growth of some key markets – primarily emerging markets.

“Because the US dollar is the world’s reserve currency, the US current account deficit needs to grow, not shrink, in order to increase global trade and this isn’t happening at the moment,” he said.

Mr Mowll said that while many emerging markets are struggling, it’s far from all doom and gloom, because the weaker regions are being offset by others in relative positions of strength.

“Countries such as Turkey, South Africa and Brazil are in the more challenging positions, as are those attempting to defend fixed or artificially high exchange rates, like the Ukraine and Argentina,” he explained.

“However, other emerging markets, such as the Philippines, Indonesia and Pakistan, are all travelling along nicely, even despite natural disasters and political crisis,” he said.

Mr Mowll also pointed to the January 2014 Certitude Global Investing Intentions Index Report (CGIII) as further evidence of Australian investors’ more cautious approach to emerging markets.

“The latest CGIII shows net demand for global investments by leading active Australian investors at its highest level since inception. However, investors ranked emerging markets sixth in attractiveness, well behind the top five, which are US/North America, international funds covering multiple regions, Asia, Western Europe and China,” he explained.

Mr Mowll went on to say that these latest results demonstrate that investors are less concerned with volatility and currency risk in the US and Western Europe than they have been in the past.

“On the other hand, when it comes to emerging markets, growth expectations continue to be ratcheted down, influencing investors’ allocation decisions,” he said.

In conclusion, Mr Mowll said that, despite Australian investors’ strong sense of optimism towards international investments, exposure to emerging markets is unlikely to rise in the near future.

]]> Australian investors still sending record sums offshore, but choosing markets with care
Aussie investors heading to US market.

Aussie investors heading to US market.

Australian investors may still have their sights firmly set on international investments, but they are steering clear of emerging markets left struggling by US Federal Reserve monetary policy.

According to recent market analysis undertaken by GaveKal and released by Certitude Global Investments (Certitude), quantitative easing in the US has created a ‘false’ price for the US dollar, leading to a misallocation of capital and distorted trade flows between the US and many emerging markets.

CEO of Certitude, Craig Mowll, explained that while from the US perspective quantitative easing has helped stimulate the domestic economy and improve the balance of trade, it has also increased US net exports. One consequence of this is a reduction in global trade and a significant slowdown in growth of some key markets – primarily emerging markets.

“Because the US dollar is the world’s reserve currency, the US current account deficit needs to grow, not shrink, in order to increase global trade and this isn’t happening at the moment,” he said.

Mr Mowll said that while many emerging markets are struggling, it’s far from all doom and gloom, because the weaker regions are being offset by others in relative positions of strength.

“Countries such as Turkey, South Africa and Brazil are in the more challenging positions, as are those attempting to defend fixed or artificially high exchange rates, like the Ukraine and Argentina,” he explained.

“However, other emerging markets, such as the Philippines, Indonesia and Pakistan, are all travelling along nicely, even despite natural disasters and political crisis,” he said.

Mr Mowll also pointed to the January 2014 Certitude Global Investing Intentions Index Report (CGIII) as further evidence of Australian investors’ more cautious approach to emerging markets.

“The latest CGIII shows net demand for global investments by leading active Australian investors at its highest level since inception. However, investors ranked emerging markets sixth in attractiveness, well behind the top five, which are US/North America, international funds covering multiple regions, Asia, Western Europe and China,” he explained.

Mr Mowll went on to say that these latest results demonstrate that investors are less concerned with volatility and currency risk in the US and Western Europe than they have been in the past.

“On the other hand, when it comes to emerging markets, growth expectations continue to be ratcheted down, influencing investors’ allocation decisions,” he said.

In conclusion, Mr Mowll said that, despite Australian investors’ strong sense of optimism towards international investments, exposure to emerging markets is unlikely to rise in the near future.

The post US gains traction as emerging markets lose their sheen appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2014/02/us-gains-traction-emerging-markets-lose-sheen/feed/ 0 The New Normalisation – of Fed Policy; a note from PIMCO https://www.adviservoice.com.au/2013/10/new-normalisation-fed-policy-note-pimco/ https://www.adviservoice.com.au/2013/10/new-normalisation-fed-policy-note-pimco/#respond Mon, 07 Oct 2013 20:50:05 +0000 https://adviservoice.com.au/?p=25550
Federal Reserve building, Washington DC.

Federal Reserve building, Washington DC.

Let’s jump to this note’s conclusion: Past is not prologue for the projected path of the Fed’s policy rate. Expect the Federal Reserve to keep its policy rate low for a very long time. A baby born today will probably be in kindergarten by the time the Fed adopts a neutral stance on monetary policy.

Back in the day, when the Federal Reserve decided it was time to unwind its easy money policies, it would raise its policy rate, the federal funds rate, persistently until it moved above 4%, the level the Fed believes is consistent with a neutral stance on monetary policy. The central bank’s past three rate hike cycles – 2004 to 2006, 1999 to 2000, and 1994 to 1995 – ended at 5.25%, 6.50%, and 6.00%, respectively.

Whereas the Fed in the previous three cycles increased the federal funds rate within 18 months of last cutting it, today nearly five years after the Fed lowered its policy rate to zero, the Fed is still easing, providing new monetary accommodation each time it buys bonds through its so-called quantitative easing program. No end to purchases appears likely before at least the middle of next year, if not later, given that the Fed announced in its September 18th policy statement that it had decided against reducing, a surprise to markets.

Importantly, a considerable time will pass before the end of the Fed’s bond buying and its first rate hike. The Fed said as much in its policy statement, which, along with the “no taper” decision, contained the clearest indications yet that the path to a normalisation of interest rates will be anything but normal. Call it a new normalisation – for rates, that is.

Investment Implications

For bond investors, the Federal Reserve’s decision to delay a taper will relieve some of the upward pressure on longer-term interest rates, where the Fed’s buying is greatest as a percentage of overall issuance.

Other parts of the yield curve may fare better, however, owing to the Fed’s enhanced forward guidance and its 2016 rate projection. We believe intermediate maturities should benefit most, as rate hikes were disproportionately priced into that part of the curve during the summer turbulence.

Elsewhere in markets, prospects should improve for forward rates (as seen in eurodollar futures), where large speculators had done a big “Switcheroo,” and had moved from long to short, to price in rate hikes that PIMCO believes are improbable given our forecast for the first hike to occur in 2016.

Finally, as we have stressed for some time now, stay focused on three things most of all when thinking about the Fed and why the normalisation of monetary policy is anything but normal:

The policy rate,

the policy rate,

and the policy rate!

Written by PIMCO’s Tony Crescenzi and has been used with permission from PIMCO Australia Pty Ltd.

]]>
Federal Reserve building, Washington DC.

Federal Reserve building, Washington DC.

Let’s jump to this note’s conclusion: Past is not prologue for the projected path of the Fed’s policy rate. Expect the Federal Reserve to keep its policy rate low for a very long time. A baby born today will probably be in kindergarten by the time the Fed adopts a neutral stance on monetary policy.

Back in the day, when the Federal Reserve decided it was time to unwind its easy money policies, it would raise its policy rate, the federal funds rate, persistently until it moved above 4%, the level the Fed believes is consistent with a neutral stance on monetary policy. The central bank’s past three rate hike cycles – 2004 to 2006, 1999 to 2000, and 1994 to 1995 – ended at 5.25%, 6.50%, and 6.00%, respectively.

Whereas the Fed in the previous three cycles increased the federal funds rate within 18 months of last cutting it, today nearly five years after the Fed lowered its policy rate to zero, the Fed is still easing, providing new monetary accommodation each time it buys bonds through its so-called quantitative easing program. No end to purchases appears likely before at least the middle of next year, if not later, given that the Fed announced in its September 18th policy statement that it had decided against reducing, a surprise to markets.

Importantly, a considerable time will pass before the end of the Fed’s bond buying and its first rate hike. The Fed said as much in its policy statement, which, along with the “no taper” decision, contained the clearest indications yet that the path to a normalisation of interest rates will be anything but normal. Call it a new normalisation – for rates, that is.

Investment Implications

For bond investors, the Federal Reserve’s decision to delay a taper will relieve some of the upward pressure on longer-term interest rates, where the Fed’s buying is greatest as a percentage of overall issuance.

Other parts of the yield curve may fare better, however, owing to the Fed’s enhanced forward guidance and its 2016 rate projection. We believe intermediate maturities should benefit most, as rate hikes were disproportionately priced into that part of the curve during the summer turbulence.

Elsewhere in markets, prospects should improve for forward rates (as seen in eurodollar futures), where large speculators had done a big “Switcheroo,” and had moved from long to short, to price in rate hikes that PIMCO believes are improbable given our forecast for the first hike to occur in 2016.

Finally, as we have stressed for some time now, stay focused on three things most of all when thinking about the Fed and why the normalisation of monetary policy is anything but normal:

The policy rate,

the policy rate,

and the policy rate!

Written by PIMCO’s Tony Crescenzi and has been used with permission from PIMCO Australia Pty Ltd.

The post The New Normalisation – of Fed Policy; a note from PIMCO appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2013/10/new-normalisation-fed-policy-note-pimco/feed/ 0 US Federal Reserve approves QE3 https://www.adviservoice.com.au/2012/09/us-federal-reserve-approves-qe3/ https://www.adviservoice.com.au/2012/09/us-federal-reserve-approves-qe3/#respond Sun, 16 Sep 2012 21:40:44 +0000 https://adviservoice.com.au/?p=17127 Earlier today, the US Federal Reserve Open Market Committee (FOMC) approved another round of unconventional monetary stimulus, agreeing to deliver the third set of quantitative easing (QE3).

The plans announced by US Federal Reserve Chairman, Ben Beranke, were welcomed by investors and traders as financial markets across the globe witnessed a buying spree that sent global equities surging higher. 

CMC Markets, Senior Trader, Tim Waterer said:

“The FOMC’s plan to spend US$40b per week on mortgage-backed securities, which came with no conclusion date, showed traders that the FOMC is digging its heels in. This aggressive move served to comfort US investors, so much so that the Dow and S&P500 have hit December 2007 levels.

“The exuberant buying witnessed in the US last night is similarly being played out across Asian markets today.  With investors clearly pleased with the heavy-handed approach by the Federal Reserve in tackling the struggling US economy.

“Locally the Australian market looks set to end the week in sprightly fashion.  Mining stocks, not surprisingly, are among the best performers given the rosier outlook on the US economy post the Fed announcement. The ASX200 looks like it has a fair chance to conclude the week close to the 4400 level if buying enthusiasm can be maintained in the afternoon trading session.

“Whether the QE3-inspired rally can show some longevity remains to be seen. Whilst the markets have been served a dose of good news this week, the shot of adrenaline may only last as long as the point where economic indicators abroad remind us that global growth remains precarious at best.”

]]> Earlier today, the US Federal Reserve Open Market Committee (FOMC) approved another round of unconventional monetary stimulus, agreeing to deliver the third set of quantitative easing (QE3).

The plans announced by US Federal Reserve Chairman, Ben Beranke, were welcomed by investors and traders as financial markets across the globe witnessed a buying spree that sent global equities surging higher. 

CMC Markets, Senior Trader, Tim Waterer said:

“The FOMC’s plan to spend US$40b per week on mortgage-backed securities, which came with no conclusion date, showed traders that the FOMC is digging its heels in. This aggressive move served to comfort US investors, so much so that the Dow and S&P500 have hit December 2007 levels.

“The exuberant buying witnessed in the US last night is similarly being played out across Asian markets today.  With investors clearly pleased with the heavy-handed approach by the Federal Reserve in tackling the struggling US economy.

“Locally the Australian market looks set to end the week in sprightly fashion.  Mining stocks, not surprisingly, are among the best performers given the rosier outlook on the US economy post the Fed announcement. The ASX200 looks like it has a fair chance to conclude the week close to the 4400 level if buying enthusiasm can be maintained in the afternoon trading session.

“Whether the QE3-inspired rally can show some longevity remains to be seen. Whilst the markets have been served a dose of good news this week, the shot of adrenaline may only last as long as the point where economic indicators abroad remind us that global growth remains precarious at best.”

The post US Federal Reserve approves QE3 appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2012/09/us-federal-reserve-approves-qe3/feed/ 0 Principal Global Investors Central Bank Research July 2011 https://www.adviservoice.com.au/2011/07/principal-global-investors-central-bank-research-july-2011/ https://www.adviservoice.com.au/2011/07/principal-global-investors-central-bank-research-july-2011/#respond Tue, 19 Jul 2011 00:07:20 +0000 https://adviservoice.com.au/?p=10303 Principal Global Investors’ Central Bank Research for July 2011 examines current and expected interest rate policy at the Reserve Bank of Australia (RBA), U.S. Federal Reserve, Bank of England, European Central Bank, Bank of Japan and Bank of Canada.

The report examines the trends in economic data and expectations across the Reserve Bank of Australia (RBA) and US Federal Reserve (Fed) bank.

The RBA is signalling that a further tightening in monetary policy is necessary and employment growth over the past quarter has been relatively weak.

Although there are tentative signs that some of the temporary negative economic forces are beginning to reverse, The Fed is likely to stay on middle growth due to a slowdown in economic activity.

Click here to read the report.

]]> Principal Global Investors’ Central Bank Research for July 2011 examines current and expected interest rate policy at the Reserve Bank of Australia (RBA), U.S. Federal Reserve, Bank of England, European Central Bank, Bank of Japan and Bank of Canada.

The report examines the trends in economic data and expectations across the Reserve Bank of Australia (RBA) and US Federal Reserve (Fed) bank.

The RBA is signalling that a further tightening in monetary policy is necessary and employment growth over the past quarter has been relatively weak.

Although there are tentative signs that some of the temporary negative economic forces are beginning to reverse, The Fed is likely to stay on middle growth due to a slowdown in economic activity.

Click here to read the report.

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