The Daily Update - Policy Blunders and Currencies (Part I)

The Daily Update - Policy Blunders and Currencies (Part I)

For the next 5 days we feature extracts from our macro-economist Bob Gay’s latest piece ‘Policy Blunders and Currencies’

In December 2015, I wrote a commentary entitled “The Illusion of Policy Divergence” which expressed my concerns on the longevity of the so-called ‘reflation trade’ that was in fashion at the time. The consensus of opinion was that US monetary and fiscal policies were poised to diverge from those of the rest of the world because the Federal Reserve had embarked on a pre-programmed exodus from quantitative easing and zero interest rates, while President Trump was promising to undertake a major fiscal stimulus with a massive infrastructure program. That policy mix – tighter monetary conditions and loose fiscal policy – tends to be a classic prescription for currency appreciation, at least as long as it generates a domestic economic cycle that is asynchronous with what is happening elsewhere.

The Daily Update - Fed Up to Your Eyeballs

The Daily Update - Fed Up to Your Eyeballs

Along with the Beige Book release yesterday we have had a queue of Fed Presidents/Board Members giving 1, 2 or 3 speeches this week including: Atlanta’s Raphael Bostic, Chicago’s Charles Evans, Philadelphia’s Patrick Harker, New York’s William Dudley, San Francisco’s John Williams, as well as Vice Chairman Randal Quarles speaking and giving testimony to the Senate Banking Committee. Moreover, later today, Board Member Lael Brainard addresses regulatory reform, Cleveland’s Loretta Mester delivers her economic outlook and Quarles continues his testimony… with Evans wrapping up his outlook and the week. And all this whilst long-short term Treasury spreads (take your pick: 2/10-year, 2/30s, 5/30s, 10/30s …) reach their narrowest since 2007.

The Daily Update - US inflation

The ‘eagerly’ awaited US inflation and retail sales data came out earlier today. An upside shock in these could have further uneased the both bond and equity markets, still teetering in the ‘fear zone’ with the VIX remaining above the 20 level. Whilst a tempered or only slightly stronger-than-expected reading would be enough to convince markets that the Federal Reserve would move ahead with tightening monetary policy at a faster pace than 2017, but without encouraging an inflation scare. US Treasuries ahead of the data release held steady with the 10-years trading around yields of 2.82% and the 30-years around 3.11% both ~7bp off their recent highs.

The Daily Update - Part II: Regime Change: Inflation

Extract from Bob Gay’s piece ‘Regime Change: Inflation’

The longstanding inverse relationship between inflation and economic slack seems to have weakened dramatically.

The Demise of the Phillips Curve.  Almost 60 years ago, an economist named A.W. Phillips published an empirical study that showed periods of low unemployment were associated with rising inflation. The finding was intuitively plausible and meshed nicely with economists’ belief in how competitive markets should work – namely, prices rose when resources including workers were in short supply. By the 1970s, however, that inverse correlation was coming unglued as unemployment ratcheted higher and so did inflation.

The Daily Update - Part I: Regime change: Inflation

For the next 3 days we feature extracts from our macro-economist Bob Gay’s latest piece ‘Regime Change: Inflation’.

With the nomination of Jerome Powell for Chair of the Federal Reserve Board, we hear much speculation about whether a change in Board members will alter the course and conduct of US monetary policy.  Strong Chairs, including Paul Volcker and Janet Yellen, have managed to guide policy in times of dramatic change in the economic landscape. Mr. Volcker reshaped America’s future by breaking the wage-price nexus of the 1970s. Ms. Yellen will be remembered as the architect of extricating the Fed from the extraordinary policies undertaken in the aftermath of the Global Financial Crisis.

The Daily Update - Brexit / Inflation / Nissan

In a major speech on Friday in Nottingham, the Bank of England governor Mark Carney suggested that the UK’s central bank will tolerate an overshoot of its inflation target, stating that supporting economic growth still remains the priority as well as helping cushion the blow of an anticipated rise in unemployment. With the collapse in sterling pushing up import costs, inflation expectations still running high, with the 5-year sterling inflation swap rate trading at 3.45%, up from the lows of 2.90% at the beginning of August (although this has moved down from 3.615 10 days ago).

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