Whenever I have an appearance on CNBC with Rick Santelli, Europe proves itself as critical to U.S. monetary policy. The past five years have led to dialogue that questions the efficacy of ECB policy and the slight of hand moves by President Mario Draghi. As BUND yields drag all sovereign debt yields even lower, the central bank is struggling to find policies that will keep LOWER FOR LONGER going. It seems that the last play in the book is to provoke Jerome Powell to abandon any NORMALIZATION of interest rate policy regardless of the economic data reported by the U.S.
(Click on the image to watch me and Rick discuss Europe and monetary policy.)
Let’s discuss the concept of tariffs with a wider historical perspective:
The Bretton Woods system crafted at the end of World War II provided the U.S. with both an enormous privilege and an enormous burden (a blessing and a curse, if you will). The U.S. acted as the provider with massive amounts of global liquidity but it also became the repository of the FREE world’s excess capacity. The Marshall Plan and the Alliance For Progress acted to spread dollars to our allies in an effort to counteract COMECON and the influence of the Soviet Empire.
On the Santelli Exchange, me and Rick discussed the very weak ISM non-manufacturing and its impact on the FOMC. The surprise weakness sent PRECIOUS METALS soaring, the DOLLAR lower, BONDS AND EUROPEAN SOVEREIGNS HIGHER and EQUITY MARKETS moderately higher. The FED is under the microscope from so many analysts but the surprise of the day was the OP-ED piece by Professor Larry Summers in the Washington Post. Summers put an academic gloss on the erudite review of Jackson Hole but this sentiment is key: “My second reason for disappointment in Jackson Hole was that Fed Chair Janet Yellen, while very thoughtful and analytic, was too complacent to conclude that even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively. THIS STATEMENT MAY RANK WITH FORMER FED CHAIRMAN BEN BERNANKE’S UNFORTUNATE OBSERVATION THAT SUBPRIME PROBLEMS WOULD BE EASILY CONTAINED,” [emphasis mine]. This is a harsh assessment from a fellow academic, but more importantly it is a stinging criticism of the FED’s forecasting history.
(Click on the image to watch me and Rick discuss weak U.S. data, the Fed and G-20)
Two central banks announced interest rate decisions today: the Bank of Canada (BOC) and the Reserve Bank of New Zealand (RBNZ). The BOC left rates at 0.50% while the RBNZ SURPRISED markets by lowing its official cash rate by 0.25% to 2.25% as Governor Graeme Wheeler revealed concerns about a slowing Chinese economy and the ever-increasing global financial risks. There was no specific mention about the KIWI but Wheeler voiced concerns about the downward pressure on DAIRY EXPORT PRICES. The KIWI dropped 2 percent against the U.S. and Australian dollars following the surprise move but the explicit notation of slowing Chinese growth should be an alarm for those concerned about the impact of China on global commodity prices.
(Will the Collapse In Energy Prices Grease a Cut In Rates Or the Introduction of QE?)
Just some tidying up and refocus on things besides China, Iran and the debt of ingratitude to the fracking revolution. Tomorrow at 9:00 a.m. CST the Bank of Canada announces its overnight interest rate. The bank rate in Canada is currently 0.5% and consensus is calling for a rate cut of 25 basis points to 0.25%. Other market participants are suggesting that BOC Governor Poloz will announce a large-scale asset purchase program (better known as QE). I doubt the BOC will change policy at this time even as the Canadian economy suffers from the severe drop in fossil fuel prices and other commodities.
As Poloz articulated in a speech in Ottawa at a BIS BREAKFAST SERIES January 7 (regarding monetary policy divergence): “It is very important that we understand the reasons for these policy divergences. On one level, they simply reflect actions taken by central banks tailored to their own economies. But the underlying forces acting on the global economy are powerful, slow-moving and affect various economies differently. This means that the theme of divergence – both financial and economic – is likely to remain with us for some time to come.”
The Canadian real-estate market has run hot for too long and even though Canadian banks are not of the sub-prime model lenders, Mr. Poloz will not wish to just continue to inflate property values. It would behoove the BOC Governor to wait to see what the newly elected Prime Minister Trudeau puts on offer from a fiscal stimulus perspective before racing down the monetary stimulus track that many other central banks have followed with no proven success (except for counter-factual arguments).
As we reflect on the various speeches delivered over the last week there appears to be more questions than answers to the issues that weigh on the markets. Mr. Draghi was the one central banker that had the courage to ponder the issue: What if central banks have misjudged the strength of consumers and the effort to bring DEMAND forward to energize the economies of the developed markets may be flawed? Again, drawing upon the Draghi speech to the IMF on May 14:
“Secondly, there are always distributional consequences to monetary policy decisions. When monetary policy acts to stave off disinflation by lowering interest rates, this has inevitably a distributional effect by reducing the interest income of savers and lowering the debt burden of borrowers. But such interest rate cuts are necessary to raise aggregate demand by encouraging firms and households to bring forward spending decisions–that is, they discourage excessive savings and incentivize investment by lowering the cost of finance.”
1. The Bank of England will announce its rate decision at 6 a.m. CDT and look for the status quo. Governor Carney has been pleased that the U.K. economy is gaining traction and the Brits’ QE program has been tapered for a quite awhile, meaning that the BOE‘s balance sheet has remained at 375 BILLION POUNDS in asset purchases. Inflation has been lowered while growth has increased. The rise in housing prices will be a concern but Carney seems to be comfortable decreasing the lending program to private borrowers while continuing to keep loans flowing to small and medium businesses. The BOE will keep rates at 0.5% and probably use a cautious outlook in reference to Europe so as not to excite STERLING BULLS.
This reference is to Janet Yellen’s testimony in her Senate confirmation hearing as the chairman-to-be cited the benefits of the Fed’s policy of über low rates for the average household. While many Senators challenged the negative effects of the Fed’s policy for savers–financial repression in the words of Carmen Reinhart–Yellen noted that people were not just savers but also consumers. Thus, Fed policy may harm the return on savings, but households may receive the benefit of lower home and auto loans and the Fed’s QE policy may have had the ripple effects of getting their college graduate a job. So financial repression was a very difficult outcome to measure against the broad economic outcomes.
The Bank of Canada left interest rates unchanged and even maintained its “tightening bias” in the announced released this morning. It cited strengthening in the U.S. economy and the Japanese stimulus as positive global signs but noted that, “Europe, in contrast, remains in recession.” It is amazing that every central bank notes the weakness in Europe as a drag on global growth, but investors maintain a positive outlook on the European investment picture.” My glasses do not have a rose-colored tint and therefore I remain very skeptical about the ability of Europe to achieve any economic growth.
In post-Memorial Day trading the BONDS had a large selloff as yields on long-term debt rose dramatically. The U.S. DOLLAR followed the rate increase and rose against all major currencies. Let’s reflect: Equities are impervious to rising long-term interest but the DOLLAR attracts foreign investors in search of a little more yield. The fact that the short-end of the curve is anchored by the FED, the result is that the 2/10 U.S. yield curve is steepening and actually made 52-week highs today as it rose to 186 basis points. The STEEPENING YIELD CURVE is aiding financial stocks. The 2/10 has increased to 184 from 145 basis points during the last three weeks, which has helped banks and other financials to pick up 40 EXTRA POINTS in yield by selling the short-end and buying the longer end. This is an interesting situation for usually steepening curves will put pressure on a currency.
(Click on the image to watch me and Rick discuss Europe and monetary policy.)