Tag Archives: Olivier Desbarres
Sterling: The lady’s not for turning (yet!)
There are multiple factors behind Sterling’s collapse in the past fortnight to decade lows and the question remains whether these factors will reverse any time soon.
At the top of the pyramid of causes for Sterling’s demise, in my view, is not the UK’s large current account deficit or Bank of England (BoE) policy but the stance on EU membership which Prime Minister Theresa May has adopted.
So while Sterling’s greater competitiveness may eventually drive FX inflows into the UK and help Sterling to recover, financial markets and investors are likely to continue to take their cue from the British government near-term.
Simply put, if Theresa May continues down of the path of “Hard Brexit”, however ill-defined, Sterling is likely to remain under pressure.
However, history shows that while EU leaders have a tendency to drag their feet over key issues, they are able and willing to eventually find some kind of compromise.
Moreover, Theresa May will be subject to the will of her own Conservative Party – which on the whole supports membership of the UK or at least a softer form of exit from the EU – and of the people.
While the BoE would prefer a more stable currency and lower yields, there is probably little than it can (or should) do near-term beyond trying to reassure markets, investors and households. Read more
Barbarians at the Sterling Gate
Sterling’s collapse overnight has eclipsed somewhat tepid US labour market data.
The net result is that the Sterling NEER has weakened a further 2% since yesterday and is now down about 20% since November 2015.
While trading desks will have a far better grasp of how risk management systems and liquidity contributed to sterling’s drop, recent political decisions and UK data clearly helped set the scene and will leave the currency vulnerable going forward.
Theresa May’s government and EU leaders have in recent weeks successively dismantled the raft of hopeful predictions which had helped Sterling stabilise over the summer.
Moreover, there is growing evidence that a more competitive Sterling has not translated into materially stronger UK industrial output or exports, with the UK’s trade deficit in goods and services widening in recent months
I would reiterate my view, expressed in early July, that the uncertainty associated with the UK’s possible exit from the EU will likely continue to weigh on the UK economy and currency.
This week’s fall in sterling, if anything, has reinforced my view that the Bank of England will maintain a dovish rhetoric but for now refrain from cutting its policy rate to zero or expanding its current QE program.
Moreover I would not expect the BoE to intervene in the FX market to support sterling at this stage. Read more
All to play for
Sceptical FX and rates markets looking at Fed (and world) through dovish-tinted spectacles
The US Federal Reserve (Fed) has cried wolf many times in the past nine months, preparing the market for a rate hike only to then back down and further cut its estimate of the appropriate policy rate. As a result, the sceptical US rates and FX markets’ natural tendency is to look at US and global data and events through decidedly dovish-tinted spectacles, giving weight to “negatives” while seemingly discounting all but the most compelling evidence pointing to a December hike. The past eight days are a case in point. Read more
Federal Reserve – the Father Christmas of central banks
Thursday’s Fed policy meeting contained few major surprises, even if the divide amongst FOMC members has received much attention.
The bottom line is that 14 out of the 17 FOMC members, and at a minimum 7 of the 10 voting members, estimate that at least one 25bp rate hike before year-end would be appropriate.
Should the Fed hike in December – currently my core scenario – this almost unprecedented glacial pace of hikes would be in line with my January forecast of only 1-2 hikes in 2016.
The Fed’s accompanying statement and Yellen’s press conference were, if anything, reasonably upbeat. There were no direct allusions to the dollar, property, equity and bond markets or to global factors, with some justification (for now at least).
The Fed’s two main concerns are squarely centred on sub-target inflation and areas of weakness in the labour market.
It will thus be paying particular attention (and so should markets) to evidence of slack in the US labour market, with the unemployment rate becoming a less useful measure per se of labour market strength and potential wage/price pressures, in my view.
The Fed is clearly giving weight to the historically low neutral Fed funds rate. Even so FOMC members may have to further tone down their 2017-2018 estimates of the appropriate policy rate in relation to realistic (if still a little optimistic) economic forecasts.
Financial markets’ reaction has so far been mostly text-book: a jump in market pricing for a December hike to 16bp, a bull-flattening of the US yield curve, a slightly weaker dollar, a rally in EM and commodity currencies and stronger global equities.
But now comes the hard part. Volatility in Fed fund futures is likely to remain fluid in coming weeks, with financial markets increasingly sensitive to key US data, particularly on inflation and labour markets, speeches by FOMC members and presidential opinion polls.
Should Clinton win the US elections, US data improve and the Fed hike in December, I would expect the dollar to end the year stronger, EM currencies and global equities to struggle to hold onto post-US election gains and major currencies to underperform.
The more problematic scenario for the Fed (and its credibility) is one whereby Donald Trump wins and/or US economic activity slows down.
This would likely cause a sharp sell-off in global equities while safe-haven assets (e.g. gold, Swiss Franc) would outperform the dollar and in particular EM currencies. Moreover, these moves could struggle to reverse even if the Fed decided to pause in December. Read more
Global Central Bank Easing Nearing Important Inflexion Point
Recent comments from the Fed, ECB and BoJ have rattled financial markets after a summer of relatively low volatility.
The correction in financial markets has so far been relatively modest, particularly for equities and the dollar. But the questions remain where global monetary policy goes from here, the implications for asset valuations and ultimately whether elevated global risk appetite will correct more forcefully.
My core view is that eight years of ultra-low (and in some cases negative) central bank policy rates and expansive bond-buying programs have helped stabilise global growth and inflation, albeit at low levels.
At the same time, the costs of ultra-loose monetary policy, including asset price bubbles, distortions in bond markets, pressure on the banking sector and even rising inequality, may be starting to outweigh the benefits.
Therefore, major central banks, with the exception of the BoJ, may refrain from loosening monetary policy further near-term.
I would certainly expect central bank policy rate cuts to become increasingly less frequent than in the past and the ECB and BoE to keep the modalities of their current QE programs broadly unchanged for now.
At the very least, the world’s most influential central bankers may going forward tweak a discourse which has in recent years largely focused on doing “whatever it takes”.
To be clear, the risk near-term remains biased towards more central bank monetary policy easing. Bar the Fed and possibly a handful of EM central banks still fighting weak currencies and high inflation, no major central bank is likely to hike policy rates or tighten monetary policy this year, in my view. That’s a story for 2017, at the earliest.
But if we have indeed reached an inflection point in global central bank monetary policy, if anything financial markets will become more sensitive to any downturns in still tepid global growth and inflation and to the negative side-effects of loose monetary policy.
In this context higher volatility is likely to prevail and global risk appetite may struggle to forcefully regain traction for now. Read more
Fed – Sense of déjà vu
Recent US data have likely put a Fed rate hike at its 21st September policy meeting beyond reach, with a post-US presidential election rate hike now the more feasible scenario.
US labour market data for August – sandwiched between very weak ISM prints – suggest that there is still slack in the US labour market. Aggregate weekly payrolls in the private sector rose only 3.5% year-on-year, which in turn is likely taming inflation.
Job creation growth was stable at around 1.9% yoy, which in itself is compatible with a Fed hike in September. But working hours fell in August, earnings growth slowed further and the pool of potentially available workers has now increased for three consecutive months.
These numbers will have done little to convince Chairperson Yellen that the time for reflection is over and the market is now only pricing rate hikes of 5bp and 13bp, respectively, for the Fed’s September and December meetings.
There is a sense of déjà-vu and the path of least resistance is probably for the Fed to keep rates unchanged this month while keeping alive the possibility of a hike on 14th December.
Moreover, the Fed will have the added benefit in December of knowing the still uncertain outcome of the US presidential elections scheduled for 8th November.
The Fed remains apolitical and has in the past hiked rates in the run-up to US presidential elections, but a Clinton victory and a positive US and global market reaction are probably necessary if insufficient conditions for the Fed to hike with conviction.
Should the Fed hike in December, this almost unprecedented glacial pace of rate hikes would be in line with my January forecast of only one or two hikes in 2016.
Financial markets’ reaction to recent US data has been a familiar one – lower rates, weaker dollar and stronger EM currencies and global equities. But it has revealed little about how markets are likely to respond if and when the next Fed rate hike comes into clearer focus.
Is it a hawk, is it a dove, no…it’s the Fed
It has now been 260 days since the Fed hiked its policy rate 25bp (for the first time in a decade) and all we really know is that, in the words of Fed Chairperson Yellen speaking at the Jackson Hole symposium last week, “the case for an increase in the federal funds rate has strengthened in recent months”. Admittedly some of the more hawkish voting members of Federal Open Market Committee (FOMC), including Vice-Chairmen William Dudley and Stanley Fisher, have more forcefully made the case for a rate hike sooner rather than later.
But as forward guidance goes this is still of limited value beyond the Fed indicating, as it has done throughout most of 2016, that the next move will likely be a hike, rather than a cut, and that it will likely take place this year. As a result the market is still pricing only 7bp of hikes at the Fed’s policy meeting on 21st September and 17bp of hikes (using a weighted average) at its 14th December meeting. Similarly, in a Reuters poll in early August analysts attributed only a 25% probability to a hike in September, versus a 58% probability to a December hike.
UK economy post referendum – for richer, but mostly for poorer
We may well never know the true extent of the impact of the EU referendum outcome on the British economy, markets and ultimately standards of living. This may not be the most satisfying conclusion, but this uncertainty is one which policy-makers will have to grapple with.
As to the bigger question of whether the UK is better off today or will be better off in years to come when one takes into account not only the impact on the economy but also broader, less tangible issues such as sovereignty, the answer is and will likely remain even more subjective.
In any case, available data paint a patchy picture of the UK economy post-referendum. Construction and services have been harder hit than manufacturing. Retail sales were strong in July thanks in part to a robust labour market and plentiful lending. While this defies the collapse in consumer confidence temporary factors may also have been at play.
The residential property market at a national level has been softer but resilient post referendum. Mortgage lending remains depressed but government policies are for now more likely to blame. The commercial property market has been harder hit.
Sterling’s 10% collapse since the referendum, following a 10% depreciation between November and June, is seemingly supporting economic growth and demand for UK assets even if history suggests that it is no panacea. Its inflationary impact has so far been very modest but the risk is a squeeze on profit margins and real wages.
At the same time sterling’s collapse has tangibly eroded the UK’s net wealth, at least when expressed in foreign-currency terms – a fact largely ignored by policy-makers and the media.
I would expect the BoE to continue favouring monetary and credit policies which explicitly help spur lending, spending and investment and, implicitly at least, help cap sterling. While this may not translate into another policy rate cut or round of QE near-term, the BoE is likely to keep this option firmly on the table if the UK economy fails to return to trend in the next six months.
Right or wrong, further central bank rate cuts still on the cards
Just over a year ago the Chinese central bank’s seemingly innocuous 2% devaluation of the renminbi versus the dollar sent global equity markets and emerging market currencies into a tailspin, with the threat of a rarely-defined “hard landing” in Chinese economic growth grabbing the headlines. Global risk appetite once again fell off a cliff four months later as markets fretted over the possible end of ultra-loose US monetary policy after the Federal Reserve had the audacity of suggesting that more hikes could follow its first-hike-in-a-decade.
It is somewhat pointless to debate whether markets were “right” or “wrong” to react to these events as prices are simply the by-product of supply and demand and can remain “right” or “wrong” for long periods of time (put differently markets are neither right or wrong, they just are). But it is fair to say that between August 2015 and March 2016 markets were particularly sensitive to any “negative” news from the US and China, be it weaker than expected data points or a suspect policy announcement.
Fast forward twelve months and markets have swung to the other extreme, desensitized to “bad” news and happy to amplify any “good” news. Global equities are up, volatility has collapsed, bond prices have surged and EM currency rallies have extended. The lack of volatility in currency, equity and bond markets, which I highlighted in It’s oh so quiet…for now (14 June 2016), was only briefly interrupted by the Brexit vote, terrorist attacks in mainland Europe and an attempted coup in Turkey. There are some tangible explanations for this. Read more