Market Views For 2016 - page 15
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Here's why Janet Yellen might quit if Donald Trump wins
Donald Trump is not a fan of Federal Reserve Board Chair Janet Yellen.
The Republican presidential nominee said Yellen is keeping interest rates artificially low for political reasons — to support President Barack Obama through the end of his term.
The Fed has raised its benchmark interest rate just once since the financial crisis, arguing that low inflation warrants patience. And although Obama appointed Yellen and she was confirmed by the Senate, the Fed is mandated to act without political interference.
"There's probably a good chance that she may just step down and allow [Trump] to appoint somebody more in line with his thinking as opposed to try to work with the administration," said Bob Landry, a portfolio manager at USAA investments.
"He's been very critical of the Fed at times, and she may not want to deal with his criticism going forward as president. Maybe she would just decide to turn it over to somebody that he can work more closely with."
Landry added that some of Trump's choices for advisers, including Larry Kudlow and Judy Shelton, provide some clues on how he would approach monetary policy and who he would appoint as Fed chair. In a column for The Financial Times on Wednesday, Shelton wrote that "something has clearly gone wrong with the Fed's model; even when its own metrics have been attained, we are left to guess what happens next."
We're at a point where speculation about a 25-basis-point rate hike "carries the threat of igniting the world's next financial crisis," she wrote.
Alternatively, Yellen could ride out her term until it expires on February 3, 2018 — just over one year after the next president's inauguration.
The term of Fed Vice Chair Stanley Fischer will end on June 12, 2018, creating another important vacancy.
"While we expect Clinton to opt for continuity at the central bank as presidents have historically done, Trump's rhetoric suggests that he would try to change the composition of the Fed," Lisa Berlin and Michelle Meyer, US economists at Bank of America Merrill Lynch, wrote in a note on Thursday.
The duo say Trump's call to audit Fed policy decisions despite existing checks could damage the central bank's independence and have further-reaching consequences for the economy.
"In our view, curbing Fed independence could damage confidence in the dollar and hurt the special status of the US as the center of global capital markets," they wrote. "We believe there is a risk of similar legislation gaining support under a Republican sweep."
'Far Too Soon' For ECB's Taper Tantrum; EUR To Hold Well Vs G10 Ex USD
We do not think the EUR should draw sustained support from headlines Tuesday indicating that the ECB governing council have agreed that asset purchases should be tapered rather than stopped abruptly when the time comes to exit QE.
The news story is more about the ECB’s eventual exit strategy rather than any indication of the actual time frame for exit, and a subsequent comment from an ECB spokesman indicated the ECB has not discussed reducing bond purchases. With core inflation at only 0.8% and the ECB likely to have to revise down its inflation forecast in its December projections, we think talks of tapering are very much misplaced.
Our economists continue to expect the ECB to announce an extension of asset purchases in December, keeping any concerns about exit off the table for most of 2017.
We expect the EUR to hold up well vs. most G10 currencies this year, but lose ground vs. the USD as the Fed delivers a December rate hike.
source
Barclays on the ECB and tapering that's not tapering
Last nights ECB headlines on tapering have got the market in a tizzy
Barclays has put their take on the ECB tapering story that floated around late in the European day.
They say that the ECB is likely to put up "somewhat" optimistic" forecasts at their Dec meeting and that those forecasts will have factoed in considerable mon pol accommodation, including setting out QE through 2018.
They also broach the subject of tapering by saying that an extension of QE would see purchase at a lower level than the current €80bn
"If the ECB's macro scenario is correct, we would expect a time extension of QE with a reduction in the pace of monthly purchases: We expect the ECB in December to announce changes to the technical parameters and an extension of QE beyond March 2017, although we see a good chance that the new, reduced pace of monthly purchases is not announced until March 2017. We believe that in 2017, the ECB will choose to purchase less than EUR80bn per month, but it will need to manage communication carefully to explain that reducing the amount of monthly purchases while maintaining it for an undefined but long period is not tapering. Firmer QE forward guidance could help to address market perceptions of tapering."
In essence they see more QE for longer but at a lower rate, rather than a real taper. It's an interesting theory. They go on to say that the ECB may need to alter the parameters of QE to complete the €80bn per month quota by March 2017 and expect them to ease constraints on purchases by Dec.
"We expect QE technical parameters to be relaxed before year-end: To complete its EUR80bn of monthly purchases until March 2017, the ECB would need to relax some of its self-imposed QE constraints no later than December. Specifically, we think (from more to less likely): 1) the removal of the yield floor is very likely; 2) the issue share limit is likely to be relaxed for non-CAC bonds; 3) the issue and issuer share limit could be relaxed for AAA-rated countries; 4) purchases of bonds beyond a 30y duration is unlikely; and 5) the capital key is unlikely to be removed, even if it would allow temporary deviations from the rule."
Lacker's surprising comments on political pressure at the Fed.
President of the Federal Reserve of Richmond Jeffrey Lacker hs departed from the 'no political pressure' at the Fed mantra
- Governors
are appointed to staggered 14-year terms, a length intended to make
them independent from the political election cycle, but in practice
their tenure is typically less than half that
- "So
in practice the view of governors may not be as diverse as intended,"
he said. "By the end of a president's term in the White House, it has
typically been the case that the majority or every member of the Board
of Governors was appointed by a president of the same party."
Bloomberg have more here on this hot topic.GBP: 'Accident Waiting To Happen'; Turning More Bearish Sterling Targeting 1.22
Theresa May's weekend decision to set an end-March 2017 target for triggering Article 50 sent shockwaves through markets and has propelled GBPUSD to new multi-decade lows.
The earlier-than-expected announcement compels us to revise our 3m target* to 1.22 from 1.34 previously, while leaving our 12m target unchanged.
Our initial and unchanged 12m target had always been based on the idea that a) at some point over the next 12 months Article 50 would be triggered and b) there would be a poor GBP reaction given the high likelihood that this would happen before there are any certainties about the UK's future economic arrangements. We stick to this view. But previously we had not expected this announcement over a 3m horizon, and instead were concerned that fears about US politics ahead of November's presidential election would instead dominate the discourse.
May's announcement brings matters to a head ahead of schedule and we are changing our 3m forecast to reflect this. What is especially bad from an FX perspective is that the decision to emphasise freedom of movement limits and legal sovereignty raises the probability that markets and business interpret the UK government's decisions as a step towards "hard Brexit". In our view this acts as a possible supply shock to the UK economy, with very negative implications for medium-term investment.
source
An Oversold British Pound to Euro Exchange Rate is Due Some Relief Suggest Studies
Pound Sterling could see near-term relief against the Euro on the basis it is oversold but yet another noted analysts has joined the camp of those forecasters who see GBP/EUR falling to parity over the long-term.
GBP is soft at the start of the new week as the hangover from Friday's flash-crash linger.
Expect sell-offs to be deep and recoveries light.
"Rallies will now be seen as a response to immediate oversold readings only," says Lucy Lillicrap at AFEX in London, "initial support probably extends to 1.0950 or so but rallies face resistance at 1.1225 then 1.1325 as well."
However, it's not likely to be one-way traffic over coming days and some kind of consolidation will likely establish before any continuation in the broader downtrend.
Looking at the charts, studies do suggest a relief rally is due.
GBP/EUR has broken below the lower border of a downward sloping channel and formed a long-tail Hammer candle, which is often indicative of the downtrend reaching a point of exhaustion.
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BoE Saunders: Interest Rates Could Be Cut Further
In testimony to the Treasury Select Committee, recently-appointed Bank of England external MPC member Saunders broadly maintained the party line, although with a slightly dovish slant, which will fuel negative Sterling sentiment.
There were comments that the bank could cut interest rates to just above zero, but not below, which was in line with the statements issued after the August and September policy meetings.
Saunders was broadly agnostic on the value of Sterling, also commenting that he would not be surprised if the currency fell further.
He also remarked that the bank could look through the effect of Sterling weakness on inflation, possibly for years, if the economy slows very sharply.
According to Saunders, the amount of spare capacity within the economy was crucial in determining underlying policy trends. If the economy weakened sharply and there was evidence of a significant increase in spare capacity, there would be much less pressure to tighten monetary policy to combat rising inflation.
Given his recent appointment, Saunders will be wary of taking a notably independent stance in the short term. The comments overall, however, suggest that the bank will be more willing to take risks with inflation in order to support economic activity.
The commentary will tend to undermine Sterling, which remained under pressure following the remarks. The Euro held above the 0.9000 level, while GBP/USD dipped back below 1.2300 as the dollar gained wider support.
Gilts recovered some ground after heavy losses over the previous five sessions and the remarks will tend to lower short-term yields slightly, although the yield curve would be liable to steepen further if Sterling remains under pressure. The FTSE index was slightly higher on the day.
source
The mood in the EU to keep IMF in Greek program is weakening - MNI
Social media picking up some chatter from MNI sources
FOMC Minutes: Several voters thought rates should rise 'relatively soon'
Highlights of the minutes of the Sept 21, 2016 FOMC decision:
S&P comments on pound possibly losing reserve currency status being cited for earlier GBP retreat
AEP writes:Britain is in danger of misreading the political landscape in Europe and faces the possible loss of its reserve currency status if it fails to secure full access to the European single market, Standard & Poor's has warned.
The powerful US rating agency said the British government is treading into hazardous waters in negotiations with the EU and is risks serious damage to economy's future growth trajectory, with long-term implications for the debt profile and the country's credit-worthiness.
S&P fears that loss of unfettered access to the single market would have incalculable consequences for business, yet the Government so far appears almost insouciant about this.
Ravi Bhatia, the S&P director of sovereign ratings in charge of Britain says:
"There seems to be this view that 'we're a big important economy, the Europeans export a lot to us, so they have got to give us what we want', but is that really true?"
"Individually most of these countries don't export that much to the UK, and were seeing a hardening of attitudes,"
Mr Ravi said Britain has limited scope for a spree on infrastructure projects and is walking a fine line on budget policy. "Before Brexit, the trajectory was planned fiscal consolidation, but we're no longer certain we're going to see that,"
"If they ramp up fiscal spending they'll get a stimulus and that is good in one way as it will help boost growth, but they have to finance that spending; it will raise the deficit, and the debt stock is already high,"
Standard & Poor's stripped Britain of its AAA status immediately after the Brexit vote in June, slashing the rating by two notches to AA, although the move was well-flagged in advance. It described the vote as seminal event that would lead to a "less predictable, stable, and effective policy framework in the UK".
S&P will issue its next verdict at the end of October.
Full Telegraph article here