Tapering needs a little less conversation, and a little more action

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by Shaun Richards

This morning both eyes and ears have returned to what has become a familiar topic in recent weeks. Let me open with a market perspective from Investing.com.

The dollar soared in early European trade Thursday, climbing to a nine-month high after the Federal Reserve raised the possibility of starting to cut back its pandemic-era monetary stimulus this year.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% higher at 93.460, just below the 93.517 level reached earlier, its strongest since early November.

So we have a bit of Holla(r) Dollar although care is needed as other world events may be driving that. But the UK Pound £ is hanging onto US $1.37 as I type this and the Euro has been pushed into the high 1.16s. If we now switch to equity markets we see some action there too.

(Reuters) -European shares fell more than 1% on Thursday on fears of a sooner-than-expected tapering in global monetary policy, while a slump in commodity prices led mining stocks to a near one-month low.

By 0735 GMT, the pan-European STOXX 600 was down 1.4% at a two-week low, with mining stocks sliding 3.8% and tracking their worst day in three months. [MET/L]

Care is needed as we are only just below all-time highs for the STOXX 600.

Federal Reserve

The Minutes of the July ( 27-28th) meeting were released last night and contained  this reference to future QE bond purchases.

Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the
Committee’s “substantial further progress” criterion as
satisfied with respect to the price-stability goal and as
close to being satisfied with respect to the maximum employment goal.

That starts as a sort of yawn with the “could be” but once we remind ourselves that the latest non-farm payrolls figures were strong it adds a bit of focus to the next part.

Various participants commented that
economic and financial conditions would likely warrant
a reduction in coming months.

So the market gets moved forwards a bit although not be a lot as we are already in the latter part of August. But then there was a push back even on this.

Several others indicated,
however, that a reduction in the pace of asset purchases
was more likely to become appropriate early next year

Actually part of this latter view was pretty breathtaking.

because they saw prevailing conditions in the labor market as not being close to meeting the Committee’s “substantial further progress” standard or because of uncertainty about the degree of progress toward the price-stability goal.

With inflation where it is at 4% on the PCE measure that the Fed targets it is rather extraordinary to be unsure about it. After all it is much higher than the Fed expected.

We can stay in the inflation space for a bit because in terms of tactics should this happen they seem to have settled on this.

Most participants remarked that they saw benefits in reducing the pace of net purchases of Treasury securities
and agency MBS proportionally in order to end both sets
of purchases at the same time.

That is also extraordinary because by buying mortgage-backed securities ( MBS) they are supporting a market which is doing this.

House prices rose nationwide in May, up 1.7 percent from the previous month, according to the latest Federal Housing Finance Agency House Price Index (FHFA HPI®). House prices rose 18.0 percent from May 2020 to May 2021. The previously reported 1.8 percent price change for April 2021 was unrevised.​

The economy

The picture here looks as though it is shifting. There is still good news reflected by reports such as this from the Atlanta Fed.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2021 is 6.1 percent on August 18, down from 6.2 percent on August 17.

There are issues for trade from the slow down in China we started the week by noting and the Pacific region in general seems to be hitting trouble.

South-east Asia has recorded twice as many Covid-related deaths as North America over the past two weeks, according to the Red Cross, which warned wealthier countries that they must urgently share their vaccine supplies.

The more aggressive Delta variant, combined with a lack of vaccines, is driving record outbreaks in countries across the region – from Vietnam to Thailand, Malaysia and Myanmar. Indonesia, the worst hit, had the highest daily death tolls in the world, with 1,466 deaths reported on average over the past seven days. ( The Guardian)

Staying with the same source there is also this.

Australia is battling an outbreak of the fast-moving Delta strain and reported its biggest one-day rise in COVID-19 infections on Thursday.

As well as this.

Japan has recorded a record number of coronavirus cases while critical care beds in Tokyo are nearing capacity less than a week before the city is due to host the Paralympic Games.

If we move on from the direct impact of the pandemic there is an ongoing indirect effect.

Aug 19 (Reuters) – Toyota Motor Corp (7203.T) will slash global production for September by 40% from its previous plan, the company said on Thursday, becoming the last major automaker to cut output due to critical shortages of semiconductors.

That factor is in play in Europe this morning too.

BERLIN (Reuters) -Volkswagen may need to cut production further due to a semiconductor supply crunch, the German carmaker said on Thursday, after a report that Toyota would slash output by 40% in September.

New Zealand

See also  Posobiec: China Just Announced Military Action Soon On Taiwan.

We learn something about the reaction function of central bankers from what the Reserve Bank ( RBNZ) did this week.

The Monetary Policy Committee agreed to retain the current stimulatory level of monetary settings, keeping the Official Cash Rate (OCR) at 0.25 per cent for now.

The “for now” is an attempt to cover off what is another forward guidance failure as an expected rise ( some thought it might even be by 0.5%) crumbled to dust. As to why there was this.

Today’s re-introduction of Level 4 restrictions to activity across New Zealand is a stark example of how unpredictable and disruptive the virus is proving to be.

So whilst they did end QE bond purchases interest-rate rises seem to be a step too far even after a large win for the All Blacks at the weekend.

Comment

We see that central banks have a completely different reaction function for slow downs when they come dashing out of the blocks like an Olympics sprinter compared to when they take the punch bowl away. So far the US Federal Reserve has not done any of the latter at all after talking about it pretty much all year. Although you could argue markets have been doing some of the tapering for it.

US FED ACCEPTS $1115.656 BLN IN DAILY REVERSE REPO OPERATION, AWARDS AT 0.05 PCT TO 82 BIDDERS – NY FED ( @DeltaOne )

Some centrals banks have made a move and as it happens it has been the Commonwealth countries of Australia, Canada and New Zealand. Although Canada was doing QE so rapidly it would have been running out of road anyway. But the biggest central bank could do with taking the advice of Elvis Presley.

A little less conversation, a little more action, please
All this aggravation ain’t satisfactioning me
A little more bite and a little less bark
A little less fight and a little more spark

Putting it another way. Whilst equity and currency markets are supposedly responding to the talk I note that the US bond market has not only ignored the news it has headed the other way. The ten-year yield has fallen and is 1.22% as I type this.

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