The big news story from the weekend has been the warning from the central bankers’ banker, the Bank For International Settlements (BIS), that financial markets have become “… detached from the reality of a lingering post-crisis malaise, as it called for governments to ditch policies that risk stoking unsustainable asset booms.” The BIS annual report warns about leaving ultra-low interest rates for too long a period. The Financial Times article reported what I consider to be the most significant piece of the report: “Particularly for countries in the late stages of financial booms, the trade-off is now between the risk of bringing FORWARD THE DOWNWARD LEG OF THE CYCLE AND THAT OF SUFFERING A BIGGER BUST LATER ON” (emphasis mine).
This is critical for U.S. monetary policy as the effort to bring consumer demand to boost the economy means that consumers will take on more debt to BUY NOW. But success in ramping up the economy today means that debt will have to be repaid in the future with ever higher rates (if the effort is in fact successful). This is why corporations are not investing in CAPEX as the fear of borrowing from future growth brings worries about capital over capacity. The BIS believes that central banks need to step off the liquidity pedal and seek other ways to create the environment for growth. It is significant that the BIS has issued this warning as it was the BIS chief economist Bill White who presciently warned about the impending credit crisis in 2006. The BIS has warned about the role of central banks: Do they lean or clean? Simply put, do the world’s banker preempt bubbles or wait to clean up the post crisis mess? Attention is and must continue to be paid.
***Last night the Reserve Bank of Australia announced its intention to hold the cash rate steady at 2.5 percent. As usual, Governor Stevens cited the historical relative strength of the Aussie dollar as one of the key reasons to hold the rate at historic lows. The end result for the markets is that despite the RBA‘s commitment to low rates and a lower Aussie dollar, the market desired the Aussie dollar and sent the currency higher. The yields on 10-year Australian notes is too rich at 3.6 percent in a yield-starved world.
***Tomorrow at 10 a.m. CST Chair Yellen speaks to the IMF in Washington. Do not sleep through this speech for Yellen has been widely criticized for the FOMC press conference. Listen for any sense that the FED chair backtracks on her response to Steve Liesman that the present inflation data is filled with noise. The IMF has been pushing for the major central banks to remain on a program of monetary ease–contrary to the BIS–so it may be the perfect forum for the FED chief to regain some inflation-fighting credentials. I would be very surprised by this but with an UNEMPLOYMENT REPORT on Thursday, which she probably knows, be alert to any “aggressive” language. Just be alert. The markets are presently looking for a NONFARM PAYROLL of 215,000, matching May’s job gains. The unemployment rate is expected to be 6.3% and the all important average hourly earnings are expected to rise 0.2%. A larger increase in average hourly earnings is what Chair Yellen desires to correct the massive imbalance in income distribution, which some on the FOMC vehemently believes is holding back U.S. economic growth.
Today’s strong rally in the SPOOS may be in anticipation of a strong gain in employment and wages. If there is an outsized gain in the jobs data the yield curves will tell the tale of the tape. If markets continue to think that Yellen will err on the side of wage gains and thus be reticent to raise rates, the YIELD CURVES WILL STEEPEN. Also, the precious metals will be critical. The recent rally in GOLD and SILVER has comes in the wake of Janet Yellen’s press conference and will a very strong unemployment number derail the rally? These will be our keys.