MacroScope

How big is the Fed’s communications gap? Six months, give or take

You have to give Federal Reserve Chairman Ben Bernanke credit for standing his ground on data-dependence. Despite widespread suspicions, including on this blog, that the central bank would begin reducing the pace of its bond-buying stimulus in September simply because the markets were expecting it, the Fed chose to hold off in the face of a still-fragile economy.

Here’s how Bernanke addressed the issue of the market’s surprise at the Fed’s decision at his press conference:

I don’t recall stating that we would do any particular  thing in this meeting. What we are going to do is the right thing for the economy. And our assessment of the data since June is that, taken collectively, that it didn’t quite meet the standard of satisfying our – or of ratifying or confirming our basic outlook for, again, increasing growth, improving labor markets, and inflation moving back towards target. We try our best to communicate to markets – we’ll continue to do that – but we can’t let market expectations dictate our policy actions. Our policy actions have to be determined by our best assessment of what’s needed for the economy.

Still, even some Fed officials themselves have by now admitted the central bank did a poor job in communicating its message to markets in advance of the last meeting.

So, how wide is the Fed’s messaging gap? To get a rough measure, we can look at how much market expectations differed from central bank guidance at various points in time.

Oh Silvio

Even before the vote on his political future, Silvio Berlusconi ordered his five ministers to quit Italy’s teetering coalition government over the weekend in an attempt to force fresh elections.

With markets already alarmed at the prospect of another self-inflicted political wound – the U.S. government budget shutdown – Italian assets could take a hammering today with investors finally waking up to the potential chaos looming.

Bond yields did climb a little last week but not to the extent that suggests the worst-case scenario is anything like priced in. Italian BTP futures have plunged by well over a full point at the open and the euro is on the skids. Let’s hope everyone still believes in the European Central Bank’s euro zone backstop.

It’s not just Brazil – Latin America’s infrastructure among the worst in the world

Brazil’s creaky network of roads and rails is once again in the spotlight after a much-awaited highway concession auction failed to draw any bids from private investors earlier this month.

The concession of the BR-262 highway was part of President Dilma Rousseff’s government 43 billion reais program to revamp the country’s roads. The stakes are high: without serious investment in infrastructure, Brazil risks a lost decade of mediocre economic growth — which would likely halt its recent progress in reducing economic inequality. A credit downgrade might be in the pipeline as well.

It’s easy to see why infrastructure is so key to Brazil with the following graphic prepared by HSBC with data by the World Economic Forum, which shows how far it lags behing other economies in that matter.

France on a budget

The French 2014 budget will be presented in full today with the government seeking to reassure voters with a plan that makes the bulk of savings through curbs in spending, having relied more heavily on tax increases so far.

The government has already said it expects 2014 growth to come in at a modest 0.9 percent, cutting its previous 1.2 percent prediction, and that after a 2013 which is likely to boast hardly any growth at all.

As a result, the budget deficit is expected to push up to a revised 3.6 percent of GDP from 2.9 next year. That puts Paris in line with IMF and European Commission forecasts but what Brussels thinks about the plan as a whole is another matter.

As election passes, German election keeps on chugging

Germany’s Ifo sentiment index is the big data release of the day and is forecast to continue its upward trajectory after the country’s PMI survey on Monday showed the private sector growing at its fastest rate since January.

Surveys have been strong through the last quarter, putting a question mark over the downbeat European Central Bank and German government forecasts for the second half of the year. The currency bloc as a whole looks set to pretty much replicate its 0.3 percent growth in the second quarter, nothing spectacular but a sign that recession is probably a thing of the past. The German economy rebounded strongly in the second quarter, growing by 0.7 percent. It might not quite match that in Q3 but it may not be far off.

After the Federal Reserve took its finger off the trigger, emerging markets have enjoyed some welcome respite. Hungary’s central bank meets today having cut interest rates by just 20 basis points in August, ending a run of successive quarter-point cuts stretching back into last year.

Angie ascendant

The ecstasy and the agony.

Angela Merkel scored a resounding election victory but by apparently falling just short of an overall majority, while her FDP coalition colleagues failed to get the 5 percent share of the vote needed for any parliamentary representation, she is probably going to have to turn to the centre-left SPD to form a government.

An SPD/Greens/left coalition is not impossible but having secured 42 percent of the vote, the tune is Merkel’s to call.

A grand CDU/SPD coalition is favoured by the German public, according to the polls, and could lead to some policy shifts, and certainly a lot of haggling over key positions in government (will Wolfgang Schaeuble remain as finance minister?) but is unlikely to lead to any seismic shifts, particularly in euro zone policy. The anti-euro Alternative for Germany (AfD) fell just short of 5 percent but having come from nowhere in just seven months, it has put down a marker.

Back from the brink

Pulling back from the brink. The Federal Reserve certainly has and so has Silvio Berlusconi (so far).

Not much to say about the Fed directly, except that it’s surely still only a matter of time, but it certainly takes the pressure off the central banks meeting in our region today. German Bund futures have leapt about 1-1/2 points and Italian bond futures are up more than a full point. We can expect emerging market assets to climb sharply too – the Turkish lira is up three percent, for example, giving its embattled central bank some breathing space.

Further out though, what this has done is create more uncertainty rather than giving investors a firm direction of travel. Presumably, Bernanke and co. are somewhat alarmed about the durability of U.S. economic recovery, which should give everyone pause for thought.

A market-dependent Fed?

It’s hard to shake the feeling that the Federal Reserve is about to begin pulling back on stimulus not just on the back of better economic data, but also because financial markets have already priced it in. The band-aid ripping debate over an eventual tapering of bond purchases that started in May was so painful, Fed officials simply don’t want to go through it again.

If anything, recent data have been at best mixed, at worst worrisome. In particular, August job growth was disappointing and labor force participation declined further.At the same time, inflation remains well below the central bank’s objective.

Argues Dean Croushore, a former regional Fed bank economist and professor at the University of Richmond:

Note to markets: it’s been September all along for the Fed taper

Now that the outcome of one of the most anticipated Federal Reserve monetary policy meetings in history is just hours away, most investors and traders have settled on the view that the central bank will announce a plan to trim the pace of its $85 billion in monthly purchases of government and mortgage-backed securities on Wednesday. We just don’t know which, if any, of the two asset classes it will focus on, and by how much it will taper what it buys each month.

What most probably don’t know is that for all the incessant talk in financial markets over the past few months about uncertainty, the timing hasn’t really been in question. The consensus of forecasters polled by Reuters has been pretty clear since Fed Chairman Ben Bernanke hinted in May that quantitative easing might have to slow later in the year.

from Sakari Suoninen:

Beer washes out German inflation angst

photo

Germans, many say, have inflation angst in their DNA. But there is one exception to that. Beer.

Although prices at Oktoberfest have been inflation-beating for years, consumption keeps rising. Average price of the 1-liter (35 oz) stein of beer will be 9.66 euros ($ 12.85), up 3.6 percent from last year's festivities, compared with German overall annual inflation of 1.5 percent.

Since 1985, the Wiesn Visitor Price Index has risen more than twice as fast as the country's overall inflation rate, Unicredit calculations show. But this has failed to stem the tide of more beer flowing down visitors' throats, with millions and millions of litres to be consumed again this year.