MacroScope

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.

The Swiss National Bank, Norway’s Norges Bank and the South African Reserve Bank all have policy meetings.

South Africa’s rand has not been hit quite as badly as the lira or rupee in recent months, but hit it has been. No change is expected in policy, particularly after the Fed sat on its hands, but also because the SARB doesn’t have the firepower to prop up the currency and inflation is running above six percent, too high to cut rates from an already four-decade low of 5.0 percent.

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.

ECB can claim one early victory for forward guidance

The European Central Bank can claim at least one early victory for forward guidance: forecasters have been persuaded by its promise to keep key interest rates low or lower for a long time.

While ECB officials have struggled to talk down rising money market rates that point to an undesirable early tightening of monetary policy, they have had more luck influencing market economists in Reuters polls.

That’s significant because both euro zone central banks and the Bank of England use Reuters polls as a measure of interest rate expectations.

Too early to call revival in Latin America manufacturing

It may be too early to herald a revival of Latin America’s manufacturing following a recent currency decline, according to a report by London-based research firm Capital Economics.

Increased competitiveness of local factories has been seen as a good side effect of the currency shock triggered by prospects of reduced economic stimulus in the United States. However, the data compiled by Capital Economics suggests there is still a long way to go before investors see any fireworks.

David Rees, emerging markets economist at Capital Economics, wrote in his report:

Banking union shift

For most of the year, the biggest question for the euro zone was whether the pace of reform would pick up after German elections which are now just six days away. Thanks to a Reuters exclusive over the weekend it appears the answer could be yes, at least incrementally.

Senior EU officials told us that Germany is working on a plan that would allow the completion of a euro zone banking union without changing existing EU law. Until now, Berlin has insisted the EU would have to amend its Treaty to move power to close or fix struggling banks from a national to a European level – a process which could take years.

In exchange, a cross-border resolution agency would only rule over the fate of 130 euro zone banking groups that will be directly supervised by the European Central Bank from the second half of 2014. That would leave Germany’s politically sensitive savings banks under Berlin’s control.

Fed doves becoming an endangered species

 

It’s official: Instead of policy doves on the U.S. central bank’s Federal Open Market Committee, there are now only “non-hawks.” A research note from Thomas Lam at OSK-DMG used the term in referring to recent remarks from once more dovish officials like Charles Evans of the Chicago Fed and San Francisco Fed President John Williams.

The implied message from the latest Fed comments (or reticence), namely from the non-hawks, is that policymakers are clearly assessing a broader spectrum of considerations – beyond data-dependence – when mulling over the prospect of tapering in September.

Lam neglected to mention the silence from arguably the most dovish Fed member of all, Boston’s Eric Rosengren. He and Evans were at the forefront of calling for continuous and aggressive stimulus in the form of asset purchases. But recently, the Fed as a committee has shifted away from its emphasis on balance sheet expansion toward forward guidance –  thus far with mixed success.

Euro chat resumes

After the summer lull, euro zone and EU finance ministers meet in Lithuania. The “informal Ecofin” can often be quite a big deal but with German elections only nine days away, it’s hard to see that being the case this time.

During the election campaign German Finance Minister Wolfgang Schaeuble let slip that Greece would need more outside help which would not include a haircut on Greek bonds held by euro zone governments and the ECB.

Since then, European Central Bank policymaker Luc Coene has said Athens might need two bouts of further assistance and Estonia’s prime minister told us yesterday the popular bailout fatigue he flagged as a danger last year had now faded and he was open to aiding Greece with a third bailout and helping other troubled euro zone nations too.

Has dawn broken over Britain’s economy?

Bank of England Governor Mark Carney said on Thursday he was wary of another “false dawn” for Britain’s economy, but economists polled by Reuters are generally more optimistic.

The poll, published on Wednesday and taken ahead of an unexpected fall in unemployment, said the economy would expand a relatively healthy 0.7 percent in the current three month period and then by 0.5 percent per quarter through to early 2015.

And that comes after better than expected 0.7 percent growth in the second quarter.