MacroScope

A week to reckon with

The week kicks off with a G8 leaders’ summit in Northern Ireland. Syria will dominate the gathering and the British agenda on tax avoidance is likely to be long on rhetoric, short on specifics. But for the markets, this meeting could still yield some big news. For a start, Japanese prime minister Abe is there – the man who has launched one of the most aggressive stimulus drives in history yet has already seen the yen climb back to the level it held before he started. Abe will also speak in London and Warsaw during the week.

The financial backdrop could hardly be more volatile with emerging markets selling off dramatically since the Federal Reserve warned the pace of its dollar creation could be slowed. Berlin has said the G8 leaders are likely to discuss the role of central banks and monetary policy, and Angela Merkel will hold bilateral talks with Abe during the summit. President Barack Obama travels to Berlin after the summit for talks with Merkel.

The central banks of Turkey, Switzerland and Norway all have monetary policy decisions to make in the coming week and may have some interesting things to say about the revival of market turmoil after months of calm. The Norwegians have said interest rates are likely to stay at 1.5 percent for months to come and the Swiss National Bank is unlikely to loosen its cap on the Swiss franc which has served it so well, particularly given markets are now back in flux and traders are starting to talk about flight-to-safety moves again. The elephant in the room is the Federal Reserve’s latest policy decision on Wednesday, followed by a Ben Bernanke press conference.

The Turks are the hottest story of the moment on our patch with Prime Minister Tayyip Erdogan first saying his patience had run out after almost two weeks of anti-government protests, and then sounding more conciliatory, holding talks with protest leaders. How this ends will go a long way to dictating the investor view of Turkey and how its markets recover (if at all) from a drubbing inspired by a perfect storm of domestic and international factors – about $8 billion had fled Turkish markets from the beginning of May to last Wednesday and a gaping current account deficit doesn’t help.
The central bank has already come in to defend the lira and while it said it saw no need to raise the upper band of its interest rate corridor who knows what the next few days will bring. At its May meeting, it cut all its key rates by 50 basis points, but with the lira under huge pressure you can rule out a repeat of that. Indonesia was first out of the blocks in recent days, becoming the first central bank in Asia to raise rates since 2011. It’s early days but a repeat of the capital outflows that marked the Asian financial crisis of the late 1990s is an unpleasant reminder of the damage that can be wrought.

The euro zone bears watching as always, now we’re back into turbulent times.

Spain, France and Germany all hold bond auctions during the week with the benevolent bond market conditions of the first five months of the year now gone. Italian and Spanish borrowing costs fell for 10 months after European Central Bank chief Mario Draghi pledged to do whatever it takes to save the euro but have begun creeping up since Bernanke’s intervention. Both countries have frontloaded their funding for this year, so some of the pressure is off. Germany could start to benefit from safe haven status again so maybe France is the most interesting. Its economy is flatlining, the government is railing against exhortations from Berlin and Brussels to raise the pace of structural reform and yet it can still borrow for 10 years at not much more than two percent.

What’s in a (trend payrolls) number? The Chicago Fed paper that shook the markets, ever so slightly

      

Ann Saphir contributed to this post

The apparent conclusion from one of the most dovish regional Federal Reserve banks was rather surprising: The economy may actually need much smaller monthly job growth, of around 80,000 or less, in coming years in order for the jobless rate to keep moving lower. The immediate policy implication, it might seem, is that the U.S. central bank may have to tighten monetary policy much sooner than previously thought.

Andrew Brenner of National Alliance remarked that, while the report should be taken with a grain of salt, “this translates to lowering the bar to QE tapering.”

Right? Not necessarily, writes Goldman Sachs economist Jan Hatzius. Here’s why:

Yellen likely to replace Bernanke at Fed, but beware “overwhelming” top picks

Reuters has just published a poll of economists that shows Federal Reserve Vice-Chair Janet Yellen is the overwhelming favorite pick for President Obama to replace Ben Bernanke as Fed Chairman next year.

The poll conclusions are based on the collective thoughts of dozens of professionals who are not only paid to make these kinds of predictions, but who are also likely to have been in a conversation with people who ought to know.

But it is worth noting one spectacularly wrong call from recent history.

In a similar Reuters poll, this time just days before UK finance minister George Osborne reported that he had chosen Mark Carney, Governor of the Bank of Canada, as new Bank of England Governor, the overwhelming conclusion among forecasters was that outgoing governor Mervyn King’s deputy, Paul Tucker, would get the job.

Forget the ‘wealth effect’: real wages drive U.S. consumer spending

 

Federal Reserve officials have touted the ‘wealth effect’ from higher stock prices and rising home values as a key way in which monetary policy boosts consumer spending and economic activity. But according to the results of a recent survey from the Royal Bank of Canada, that ethereal feeling of being richer on paper is no substitute for cold, hard cash.

Here’s how Fed Chairman Ben Bernanke explained the benefits of rising asset prices to the real economy during a press conference in September.

The tools we have involve affecting financial asset prices and those are the tools of monetary policy. There are a number of different channels – mortgage rates, I mentioned corporate bond rates, but also prices of various assets, like for example the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more disposed to spend. If house prices are rising people may be more willing to buy homes because they think that they will make a better return on that purchase. So house prices is one vehicle.

Talking Turkey … and Greece

Yesterday was another day of turmoil for emerging markets and according to equity index provider MSCI, they have a new member.

For anyone who thought the euro zone’s debt crisis was over, MSCI lowered Greece to emerging market status last night. MSCI’s focus is the useability of the stock market – which it said fell short of developed market status – but its move casts a wider judgment on an economy still deep in recession, with unemployment at 27 percent and which will almost inevitably need a further debt writedown in the future.

An MSCI upgrade can attract a wider poll of investors who track its indices. The reverse is also true.

To ‘taper’ or not to ‘taper’? Fading the Fed semantics debate

Is Federal Reserve Chairman Ben Bernanke avoiding the word “taper” in order to temper expectations that the U.S. central bank will ratchet down its massive bond buying program? This is one view that’s been widely bandied about in recent days.

But then why is it that the Fed officials who are most eager to “taper” have pretty much stopped using the word, too?

The last time Dallas Fed President Richard Fisher used the “T” word in a public speech was in February. But there’s no evidence at all that he’s backing off from his support of the idea. He’s been adamant the Fed should not yank the punch bowl away (or, in his words, go from Wild Turkey to cold turkey) but should gradually reduce stimulus.

No relief in sight for millions of unemployed Americans: Cleveland Fed report

The new normal is getting old. And when it comes to America’s stuttering employment market, it’s not going to get much better any time soon, according to a new report from the Cleveland Fed.

The U.S. economy created 175,000 new jobs in May, while the jobless rate rose slightly. It was a neither-here-nor-there sort of report. In the Labor Department’s own words: Both “the number of unemployed persons, at 11.8 million, and the unemployment rate, at 7.6 percent, were essentially unchanged in May.” 

Unfortunately, this anemic pattern is likely to be long-lasting, write Cleveland Fed economists Mark Schweitzer and Murat Tasci.

Inflation, not jobs, may hold key to Fed exit

It’s that time of the month again: Wall Street is anxiously awaiting the monthly employment figures – less because of its interest in job creation and more because of what the numbers will mean for the Federal Reserve’s unconventional stimulus policies.

As one money manager put it all too candidly: “Bad news is good news in this market lately because it keeps the Fed buying bonds and interest rates low.”

Given that the Fed is the closest thing the world has to a global central bank, what happens at the Federal Open Market Committee doesn’t often stay in the Federal Open Market Committee. Indeed, emerging markets have become increasingly volatile since Fed Chairman Ben Bernanke said policymakers might curtail the pace of asset buys in coming months.

Mystery of the missing Fed regulator

It’s one of those touchy subjects that Federal Reserve officials don’t really want to talk about, thank you very much.

For nearly three years now, no one has been tapped to serve as the U.S. central bank’s Vice Chairman for Supervision. According to the landmark 2010 Dodd-Frank bill, which created the position to show that the Fed means business as it cracks down on Wall Street, President Obama was to appoint a Vice Chair to spearhead bank oversight and to regularly answer to Congress as Chairman Ben Bernanke’s right hand man.

For all intents and purposes, Fed Governor Daniel Tarullo does that job and has done it for quite some time. He’s the central bank’s regulation czar, articulating new proposals such as the recent clampdown on foreign bank operations, and he keeps banks on edge every time he takes to the podium. But he has not been named Vice Chair, leaving us to simply assume he won’t be.

MacroScope presents: ask the economist

MacroScope is pleased to announce the launch of ‘Ask the Economist,’ which will give our readers an opportunity to directly ask questions of top experts in the field. We are honored that Michael Bryan, senior economist at the Federal Reserve Bank of Atlanta, has agreed to be our first guest. In his role, Bryan is responsible for organizing the Atlanta Fed’s monetary policy process. He was previously a vice president of research at the Cleveland Fed.

The process is simple. We give you a heads up on our upcoming featured economist. You tweet us your question using the hashtag #asktheeconomist, or via direct message if you prefer. We select a handful of the most interesting queries this week, ship them over to our economist du jour. She or he will then answer each one in writing and we will post their response as a blogpost. And of course, you’ll be cited for asking the pithy question.

We look forward to your questions and thank you in advance for participating.

Let the games begin.