Markets Fret About Rising Rates ...
The Dow closed down, the dollar moved up. Ten year bond yields moved higher by just three basis points. Not much of a taper tantrum, more of a milk shake than an earthquake. The Fed announced the policy decision mid week, effectively to do nothing.
It wasn't really making any changes. There would be no increase in base rates. The asset purchase program would continue at an eye watering $120 billion dollars per month. No real concerns about inflation. It remains always and everywhere a transitory phenomenon. The long run targets of 2% inflation and a return to maximum employment remain in place. The committee expects to "maintain an accommodative stance until these outcomes are achieved."
The Dow tumbled over 1,000 points. The S&P closed 2% down. The overvalued Nasdaq moved higher yet. The Dollar moved up against Sterling and the Euro. The mood is moving back in favour of the dollar. Sterling closed at $1.38, the push on $1.42 a move too far.
It was all about the Dot Plot. So what's a dot plot? Members of the FOMC mark, with a dot on a chart, expected base rate changes into the future. It's like pin the tail on the donkey but with financial futures, all eyes open. Policy makers signaled they expect to raise interest rates by late 2023, sooner than they had previously anticipated.
Sentiment took a further hit on Friday after Federal Reserve Bank of St. Louis leader James Bullard said he expects the first rate increase even sooner, in late 2022. Bullard doesn't actually have a vote.
Fed Chairman Jerome Powell affirmed, “rate increases are really not the focus of the committee” right now. “The real near-term discussion that we will begin, is about the path of asset purchases and when the central bank would be able to pull back on that".
Has the mood changed in the Fed? “It’s the end of peak dovishness,” said Bleakley Global Advisors chief investment officer Peter Boockvar. “It’s not going hawkish. It’s just we’re past peak dovishness. Ah yes peak dovishness, a new phrase for the monetary policy handbook on Planet ZIRP.
The Fed increased forecasts for US growth to 7% in 2021 and 3.3% in 2022. The reversion to trend at 1.8% is expected from 2024 onward. PCE inflation is expected to hit 3.5% this year slowing to 2.1% next. Unemployment is expected to slow to 4.5% this year and 3.8% next.
Fed officials discussed an eventual reduction, or tapering, of the central bank’s bond-buying program. The timing of such a move remains uncertain. Central bank largesse may have to continue (in the US and the UK), until the burden of borrowing falls within the capacity of the private sector.
Stocks and bonds fell after the Fed statements. The change in tone and new forecasts were “a wake-up call for the market” said Phil Orlando, chief equity-market strategist at Federated Hermes Inc.
It may well have been a wake up call. By the end of the week, the markets had pressed the snooze button. It was time time to push the NASDAQ higher. Inflation is always and everywhere a transitory phenomenon after all ...
CBI Forecasts Growth of 8.2% ...
Just when we thought our 7.5% call may be a bit over the top, the CBI upped the stakes with forecasts of 8.2% growth in 2021 and 6.1% next. The CBI expects a much lower peak in the unemployment rate at 5.5% in Q3 in the third quarter as a result.
Household spending is to be the linchpin of the recovery, driving just over a quarter of GDP growth in 2021, and 70% of growth in 2022. Actual retail sales slipped in May, food sales were down as shoppers went to the pub. The drop of 1.4% in the month contrasts with a near 25% growth year on year. Online sales slipped to 29% as a proportion of all retail activity.
It was a big week for UK economics. The Labor stats reported a fall in unemployment to 4.7%. Earnings increased by over 8%, with a 14% jump in construction pay. The number of vacancies increased to 758,000 in May. Recruitment difficulties are increasing. The pre lock down level will soon be within reach. Businesses are calling for a relaxation of rules on immigration. EU workers are reluctant to return.
The onset of the wage inflation spiral is the worry for policy makers. Inflation CPI basis hit 2.1% in May. We expect a rise to over 3% within months. Manufacturing prices increased by almost 5% as input costs moved to 11%. The manufacturing hike is in large part about oil prices. We had expected prices to fall from the $70 dollar level. The push on to $73 dollars this week is concerning.
The threat of inflation and a wage spiral suggests rates may have too rise sooner than expected according to some. Bank of America, Merrill Lynch and Credit Suisse have brought forward forecasts of the first rate hike to May next year ...
Really? This is life on Planet ZIRP ... don't get dotty about that dot plot ...
That's all for this week, we will be back with more next week, stay safe ...
The Saturday Economist
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