Tag Archive | "Federal Reserve Policy"

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Tapering No, Obamacare Yes

Federal Reserve Chairman Ben Bernanke surprised analysts on Wednesday by announcing there would be no tapering at this time. The announcement sent waves around the planet as global equities turned up sharply. US equities surged off the news and continued their upwards movement Thursday. It had been expected the Federal Reserve would announce initial tapering of between $10 and $20 billion per month.

Bernanke’s move was a pullback from his original tapering announcement in May, when he indicated a tapering in the $85 billion bond buying measure was likely in three months and that the program would end when US unemployment hit 7 percent, around the middle of 2014. Unemployment dipped to 7.3 percent last month but the progress is due to more people leaving the labor force and is not reflective of new job growth.

The Federal Reserve’s balance sheet is now at $3.6 trillion and growing every month. Bernanke’s decision not to taper will give the incoming Chairman, presumably Janet Yellen, a dove, greater flexibility to start and end QE3 according to her own standards. Further policy statements could be made at the October meeting but at this point it appears no trimming will take place before December.

Yellen will face major decision as soon as she takes the reins in February.

  • When to begin asset purchase tapering
  • When to halt the buying program
  • How much to taper
  • Whether to trim purchase of Treasuries or mortgage-backed securities first.

The announcement boosted equities and weakened the dollar. Yellen is due to make a high-profile speech in New York on October 1. Investors may get insight into future Federal Reserve policy at that time. President Obama may propose Yellen for confirmation as early as next week.

Canada And Mexico

Canada had one eye on the Federal Reserve decision and another on its weakening employment sector. However, August inflation fell to 1.1 percent from 1.3 percent in July. The Bank of Canada is expected to hold its interest rate at 1.0 percent, where the rate has been since September 2010.

On Friday, the Canadian dollar was trading at $1.0289 USD or at $0.9719, down from Thursday. The loonie had posted  significant gains immediately after Bernanke’s startling announcement. The benchmark 10-year Canadian bond held with a yield of 2.713 percent.

Board minutes from Mexico’s Central Bank showed the Board was divided over the lowering of interest rates earlier in the month. Mexico has reduced the interest rate to 3.75 percent, down 25 basis points. This marks the lowest  Mexican rates have been since before the recession in 2008.

Euro Watches German Elections

The USD moved up against a basket of currencies in early Friday morning trading. Immediately after Bernanke’s announcement on Wednesday, the dollar had slumped to 80.060. Friday morning, a slight comeback bumped the dollar to 80.37. Nervousness about an undefined Federal Reserve policy was weighing on the greenback.

All eyes in Europe are on the elections in Germany where Chancellor Angela Merkel is expected to win a third term. However, Merkel may lose control of Parliament as her centre-right coalition looks to be losing seats.

The euro was up 0.01 percent against the yen to 134.60. Against the USD, the euro was trading at $1.3545 Friday morning after striking a 7-month high on Thursday.

The dollar was flat at 99.39 yen. The yen endured a broad selloff on Thursday. The yen hit a 3-month low against the Australian dollar on Thursday and touched a 4-year low against the euro.

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Federal Reserve Uneasiness Weighing On Markets

Uneasiness about Federal Reserve policy and about the succession plan have sent equity markets into a tailspin and currency markets into a state of high volatility. On Monday, US equities posted their fourth consecutive losing day. In overnight trading, global shares again lost ground as concerns about the Fed weighed heavily on the global marketplace.

And, not to be overlooked is concern about who will replace current Fed Chair Ben Bernanke. President Obama has apparently narrowed the field to the two most popular candidates, former Treasury Secretary and former President of Harvard, Lawrence Summers, and current Fed Vice Chair, Janet Yellen.

As Obama considers his options and refines his choice, he seems to be adding additional weight to the job description. On Monday, the President addressed the lingering need for more legislation in line with the controversial 2010 Dodd Frank law. The President called upon regulators to move forward with much of the regulatory reform cited in the law that has been slow to develop. Only 40 percent of the new Dodd-Frank regulations have been implemented and some of the bill’s most protective regulations remain in flux, tied up between five groups of regulators who cannot agree on policy.

On Monday, the President called upon the Federal Reserve, the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau to more aggressively overhaul regulations and ensure protection against another meltdown similar to 2008.

The beleaguered Consumer Protection Agency has been leaderless since its inception. In July, the Senate finally confirmed long-time candidate Richard Cordray to lead the agency, which is charged with reforming a host of consumer credit products, including mortgages.

However, the new Fed czar will have to add tighter regulation to its list of primary responsibilities. For the past 5 years, Chairman Bernanke has concentrated upon jobs and inflation. With Obama’s new mandate, regulation will be a top priority. This announcement may give some insight into who the President favors to replace Bernanke.

Summers vs. Yellen

As the world watches this drama play out, the minutes from the last meeting are due out tomorrow. The Federal Reserve is also meeting this week at Jackson Hole. What markets want to know is when tapering will commence and to what extent. The lack of definition has created shifts in emerging economy currency markets and propped up British sterling and the euro.

However, global equity markets are uneasy fearing that money will become tighter in the world’s largest economy. Fiscal conservatives say a pullback from current stimulus spending is overdue. Less conservative economists believe there is nothing to fear and the Fed should continue its aggressive buying policy.

Conservatives are at peace with inflation and are content with the slow job growth. More liberal economists believe inflation is under control and there is no reason to halt bond buying until employment shows significant progress.

In the backdrop to the Summers – Yellen selection, the Federal Reserve will be closely watching the September bank stress tests. A spokesperson for the Fed said on Monday; “Large bank holding companies have considerably improved their capital planning processes in recent years, but have more work to do.” When the stress tests were applied in 2013, 18 banks were scrutinized. Beginning in September, 12 additional banks with assets of more than $50 billion will be added. In the round of testing concluded in March, JPMorgan Chase and Goldman Sachs were reprimanded. The spokesperson said that although 14 banks met Federal Reserve expectations, there were consistent issues with modeling techniques.

As the President considers the two possible new Fed leaders, Summers clearly has a higher profile than Yellen. However, many of Summers’ decisions and policies have been controversial and he has pulled back from many of his positions prior to the recession. Obama’s Monday declaration that regulation is an important part of the Federal Reserve may well shift the momentum to Yellen.

Summers, who served as Treasury Secretary under President Clinton, played an important role in overturning Glass-Seagall, which had restrictions between commercial and investment banking. This lack of regulation gave birth to the aggressive investment banking policies that helped create the financial meltdown and allowed for the creation of “Too Big To Fail “ banks.

Summers also supported a lack of regulation of the swaps market. The opposition allowed for the explosion of derivatives that were major causes in the collapse of the country’s financial institutions. Summers resisted and in fact is on record as scoffing at concerns that abuses in derivatives were putting the nation’s investment banks at risk.

Since 2009, Summers has reversed direction in keeping with Obama’s response to the challenges. As a trusted Obama adviser, Summers may have an inside track but his political history is muddled and unclear. Obama has consistently stated that regulators should not be politically connected. It would be difficult to distance Summers from politics.

During her tenure as President of the San Francisco Federal Reserve, Yellen saw the housing collapse coming before the actual meltdown. She spoke publicly about the risks and the exposure of the nation’s banks. Yellen warned that banks should be required to raise their capital requirements. As Vice Chair, Yellen has continued to call for higher standards.

If Obama can separate the politics from the mission at hand, Yellen appears the highly qualified choice. From a consistent policy standpoint and as an early advocate of tighter financial regulation, Yellen should be the candidate to take the reins from Bernanke. The possibility of her appointment and the undefined tapering policy are adding edge to the markets.

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US Equities Stalled, European Shares Brighter

US markets absorbed more negative data on Friday and the DOW JONES recorded a second consecutive week of losses as European markets trembled but looked for a brighter future. European shares slid for the second straight day but investors continued to take money for US markets and invest in European markets. Flows into European equities from US funds reached a two-month high in the week ending August 14, 2013. Trading has been light for most of August.

Federal Reserve policy is dictating market stability and speculation that tapering will commence next month weighs heavily on investors. Markets anxiously await the Federal Reserve policy meeting on September 17-18. US equities still show significant gains for the year but European markets are mounting a rally while th FTSEurofirst 300 and Euro STOXX 50 have gained about 8 percent year-to-date and posted gains for the second consecutive day.

By noon, the DOW was down 32.33 points, off 0.21 percent to 15,079.86. The S&P 500 Index was off 5.61 points or 0.34 percent at 1,655.71. The Nasdaq showed a gain of 1.67 points to 3,609.79, a 0.05 percent gain. The FTSAE Eurofirst 300 index jumped 0.03 percent. On Thursday, equities suffered the largest one-day drop since late June. On Friday, the MSCI’s road emerging equities lost 0.5 percent.

Friday’s economic data from the US was less than  encouraging.

On Thursday, a report indicated rising confidence among American single family property owners. The confidence level struck an eight-year high. However, the rapidly rising long-term interest rates has taken a tool on the resale marketplace.

New start for single family homes dipped 2.2 percent in July. However, starts for two-family home spiked 26 percent, completely reversing a downturn in June. July permits for multi-family homes increased by 12. 6 percent while approvals for single family construction slumped 1.9 percent. Overall, July permits climbed to 943,000 units, slightly below projections of 945,000. Housing starts reached an adjusted rate of 896,000 units.

The residential marketplace and new construction is one large factor in projections by JPMorgan and others that growth in the third quarter will reach 2.7 percent.

The overall consumer index reading from the Thomson/Reuters/University of Michigan survey slipped to 80.0, slight underneath July’s six-year high of 85.1. The August reading was the lowest in four months.

Currency Markets

US Treasuries have been volatile. Sparked by surges in British sterling and in the German bund, US notes have been erratic. The benchmark 10-year bond has risen by 1.6 percent since May. On Friday, the 10-year Tresaury was down 25/32 with a yield of 2.8564 per.

The climb in yields drove the dollar up against major currencies. Emerging currencies continued to slide. India’s rupee touched a record low a 62 per dollar. Year-to-date losses are 11 percent. The dollar rose to 97.62 yen. The euro slipped 0.1 percent to $1.3328.      

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Consumer Spending Up, Unemployment Flat

In the United States, the loudest response to political orchestrations may have come from the Commerce Department. Consumer spending increased 0.4 percent for July after no gains in June. After adjustments for inflation, the increase was the largest the largest since February. Domestic spending by consumers accounts for 70 percent of US economic activity.

The Thursday report from the Department of Labor showed unemployment virtually unchanged. The four week moving average for new claims rose 1,500 to 370,250. In August, jobless claims have increased by 10,000. The employment trend has been volatile. In June, 64,000 jobs were created but in July, the employment number increased by 163,000.

With Ben Bernanke set to speak at Jackson Hole, there is ammunition to trigger a stimulus round but also reasons to continue to monitor. The biggest reason to enter a third round of quantitative easing is unemployment which has remained above 8 percent for three years. If the Federal Reserve pulls the trigger, it will not be until mid-September.

Economists feel that despite positive trends, Bernanke and company have enough motivation to pull the QE3 trigger. The expectations about more easing are reflected in the volatile price of gold, which has gained traction in each of the last three sessions. Last week, the price of gold finished on the upper end of a four-month range at $1,640 per ounce. At the latest Federal Reserve policy meeting, notes indicated the possibility deploying stimulus that would significantly increase the gold prices.

The annual Federal Reserve’s Jackson Hole meeting was expected to answer many questions about how ECB President, Mario Draghi, sees the future of the euro zone. Hopes for any headway were dashed over the weekend as Draghi announced he would not be attending the assembly.

With the ECB scheduled to meet on September 6th, all eyes are on Bernanke and Draghi. The ECB president has pledged that the central bank would take action to stabilize euro zone member’s borrowing rates. However, Germany’s central bank, the Bundesbank, has publicly resisted this remedy.

Draghi is working diligently to coordinate actions of the 17 nation alliance. However, despite his good intentions, Germany has the clout. And, as it has been for four years, that Germany’s position is the fly in the ointment. And, a low euro is good for German exports.

In addition to how the US Fed will respond to the possibility of QE3, and the ECB meeting in early September, investors are even more concerned about the outcome of Germany‘s constitutional ruling about the possibility of bailout funds. The ruling is expected by September 12 and the euro zone ministers are set to meet September 14. That meeting can only be describes as critical to the euro zone and the US. The German ruling will have been rendered and the ministers will be considering Greece’s progress and if the country has made progress worthy of another release of bailout funding. That will be a close call because German Chancellor Merkel has never backed down from her stance that the country must be in compliance with the bailout terms.

In any case, the first decision will be rendered by Bernanke tomorrow or Saturday at Jackson Hole, Wyoming. Leading up to the Fed meeting, US trading in all markets has been light. Whatever Bernanke announces will cause a flurry of activity. The same can be said about Draghi’s September 6th conference.

Personally, there does not seem enough data to support another round of easing and dollar devaluation. The only reason to pull the trigger is the unemployment rate. While the Fed is apolitical, a round of easing would work against the resident and provide Republicans with new quantitative ammunition.


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U.S. Employment: The Worst Has Happened

In line with pessimistic “whisper” numbers, the U.S. non-farm payroll report has surprised to the downside.  Today’s results are particularly disappointing as recent economic data had previously sparked glimmers of hope that one of the worst recessions in decades may be abating.  However, now it seems that dreary days are ahead for the U.S. as a key driver for growth continues to remain under water.

According to the Labor Department, non-farm payrolls for the month of September dropped more than expected compared to expert estimates.  Previously, analysts had anticipated a decline of only 175,000.  However, the headline figure was far worse as the report showed that U.S. based companies had shed 263,000 positions in the last 30 days.  Moreover, the unemployment rate, as expected, rose to 9.8 percent (a fresh 26-year high).

This new release reinforces what Federal Reserve policy heads had stated earlier and now places concern on the sustainability of a strong economic recovery.  Last month, central bankers had noted that “economic activity has picked up”, however, overall consumption through households will likely remained subdued by “ongoing job losses” and “sluggish income growth”.

Taking a look at the reports details there is plenty of cause for concern:

  • Payrolls in construction and builders continued to decline as companies in the sector shedded 64,000 jobs following a subsequent 5-digit drop.
  • Service industry workers (including retailers and restaurants) saw a further drop of over 100 percent of last month’s figures.  The sector lost 147,000 workers in the last 30 days as establishments aren’t looking to carry costs into what could be a thin holiday season.
  • Specifically, retailers lost almost 5 times the amount of workers since last month.

The fact that most sectors are continuing to cut positions at a heady pace builds support for the case that the national unemployment rate may actually be understating the current situation.  Just yesterday General Motors had announced that further job cuts are likely as the American icon was unable to sell off its Saturn branch.  The closing will create 13,000 in job losses and close over 300 dealerships worldwide.  This picture will place more speculation on the fact that companies in October may be headed for further cost cutting in order to boost bottom lines in the fourth quarter.

Ultimately, this morning’s release will likely boost support for a U.S. dollar turn in the mid term given the fact that it is yet another sign that the world’s largest economy may be faltering.  Consumer spending continues to lag on slow job growth and economic expansion seems to be in jeopardy considering the widening national deficits.  However, given the rather dull action in the last 24 hours, suffice it to say that the worse number will likely keep risk takers in the game with market expectations already having been met.

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