MacroScope

The Fed’s taper and the question of the “tag-along” $5 billion

By Ann Saphir

Federal Reserve policymakers are expected next week to trim their monthly purchases of bonds by another $10 billion, putting them on track to end the massive program by October or December. So – which will it be, October or December? Some Fed officials are pushing for an answer, and soon.

“I am bothered by the fact that I don’t really know what we are going to do on that,” Narayana Kocherlakota, the dovish chief of the Minneapolis Fed, told reporters last month. “It’s another signal that we are not being as clear about our policy choices as we should be.”

If the Fed continues to taper the program by $10 billion at each meeting, monthly bond purchases will be down to $15 billion by the time of the October policy-setting meeting. Richard Fisher, the hawkish head of the Dallas Fed, told Reuters in late May, “I will vote to end it in October.”

Alternatively, the Fed could simply taper by another $10 billion in October leaving the Fed buying a “tagalong” $5 billion each month until the following meeting, in December. ”If you’re sitting around buying small amount of securities, the market sees it as the program is over,” St. Louis Fed President James Bullard told reporters last week, adding that policymakers may discuss the “official end date” of the program next week. “From a committee communication point of view, we need to send a clear message one way or another.”

Whether the Fed ends bond-buying in October or in December is, on the face of it, a small matter; after all, it will do little to change the overall size of the program, which will total $1.6 trillion when all is said and done. Still, it would be an important milestone as the Fed steers monetary policy back to more familiar waters.

The Mark and George show

The Mansion House dinner in the City of London is one of Britain’s big set-pieces of the year featuring speeches by Bank of England Governor Mark Carney and finance minister George Osborne.

Carney will be speaking a week before the Bank’s Financial Policy Committee meets and is expected to road test its new tools to calm the housing market. Among other measures, the BoE could recommend caps on the size of home loans granted in relation to a property’s value or a borrower’s salary.

There have been some signs of demand for mortgages slowing of late but London – the real hotspot – is being fuelled by an influx of foreign money which does not require a home loan to buy. The FPC could also suggest the government curbs its “Help to Buy” scheme which helps Britons get on the property ladder.

Canada housing: This time it’s different, eh

AResults are in from the latest Reuters poll on Canada’s rampant property market from economists and market analysts, and the message is everything’s fine.

Prices will rise gradually over the next few years and there is very little risk of a crash.

But house prices in Canada have been rising in nearly a straight line for the better part of a generation, more than doubling, and taking household debt up with them.

EU’s top two — oh to be a fly on the wall

Who are the two most important people in the EU? It’s hard to argue against Angela Merkel and Mario Draghi and they meet today in Berlin.

It’s supposed to be a private meeting but of course we’ll be digging, particularly for any signs that the German leader is for or against the European Central Bank printing money if it is required to beat back deflation.

The German media responded negatively to last week’s measures, defaulting to the country’s historic fear of inflation stretching all the way back to the 1920s Weimar Republic although there is virtually no inflation in Europe’s largest economy at the moment. Merkel has given Draghi a fair wind in the past to initiate “unorthodox” policy measures.

Better U.S. growth and just muddling along both point to low rates for longer

UFaith that the U.S. economy may finally be at a turning point for the better appears to be on the rise, as many ramp up expectations for a better Q2 and second half of the year.

But that does not mean that interest rates are likely to rise any sooner.

Goldman Sachs’s Jan Hatzius, one of the most dovish economists on when the Federal Reserve will eventually raise rates, has lifted his growth outlook but stuck to the view that the first interest rate rise off the near-zero floor won’t come for nearly two years, in early 2016.

The latest Reuters poll of Wall Street dealers on Friday still points to the second half of next year at least before the Fed, which is still printing tens of billions of dollars monthly as it winds down the third installment of its QE program, will start raising rates from 0-0.25 percent.

ECB aftermath; how firm is opposition to QE?

After the European Central Bank opened its toolbox and deployed pretty much everything it had left, bar printing money, the question is if and when QE becomes a live possibility.

ECB chief Mario Draghi pointedly said at his monthly news conference that all policy options had not been exhausted.
German resistance to such a move will remain, however, and Draghi’s deputy, Vitor Constancio, has already intimated that it will take until late this year to judge whether the latest gambits have made a difference before moving onto the next stage.

Bundesbank chief Jens Weidmann is already out today saying the ECB has ventured onto new ground and that governments need to treat the move as a wake-up call to continue with economic reforms. He added that there was a risk that long-term inflation expectations could be de-anchored – ECB speak for deflation.

We need to talk about Juncker

Swedish Prime Minister Fredrik Reinfeldt will host Germany’s Angela Merkel, Britain’s David Cameron and Dutch premier Mark Rutte at his private residence over two days to discuss reforming the EU and ”achieving a more efficient EU that is focused on creating jobs and growth”. 

After EU elections delivered strong returns for far-right and far-left parties, EU leaders say they have recognized the need to refocus on what matters to their people. But at the same time, the orthodox camp is determined to keep bearing down on debt and the bloc’s heads are arguing over who should take the top jobs in Brussels which set the tone.

Cameron is publicly opposed to Luxembourg’s Jean-Claude Juncker, who he regards as an arch federalist, becoming European Commission President though as the candidate for the centre-right EPP group of  parties which came top in the election he is in pole position.

Euro needs the Fed, or QE, for the next leg down

EIt has become increasingly clear it takes a lot more than words to sink the euro.

The European Central Bank cut rates as low as they will go on Thursday and announced another round of cheap cash for banks, hoping the euro, which has helped knock down inflation in the fragile euro zone economy, will fall.

Yet the ECB’s efforts yielded little more than a lukewarm response from markets, suggesting that the only thing that will get the euro to fall any further in the very near-term is a change in the outlook for U.S. rates, and through that, a stronger dollar.

U.S. May non-farm payrolls may be a calmer affair after April shock

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The May U.S. non-farm payroll report on Friday may be a much less volatile affair than last month, when shock news of 288,000 new jobs topped even the most optimistic views.

This time, there is more certainty around a less spectacular but still solid outcome, based on an analysis of forecasts from the most accurate economists in Reuters polls on recent U.S. data.

The range of views among economists who were closest to reality in forecasting recent key releases on jobs, manufacturing activity, and the magnitude of the contraction in first quarter U.S. GDP is significantly narrower than the range in the wider Reuters poll.

India share bulls running mainly on hope, well ahead of peers

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Indian stocks have rallied sharply over the last two months, soaring to record highs, although the bull run that began with expectations that Narendra Modi will become the country’s next Prime Minister may soon run out of road.

India’s top equity index, the BSE Sensex, was trading over 24,850 on Tuesday, having shot up over 10 percent since mid-April alone, when polling began, despite economic growth languishing below 5 percent, along with high inflation and interest rates.

With growth at just 4.7 percent, only a marginal improvement from the 10 year low plumbed in the previous financial year, the market could struggle in coming months, especially if the economic data continue to disappoint.