Central banks / bond markets

Fed: Key rates remain (for the moment) on hold

At the latest meeting of the Fed’s Federal Open Market Committee (FOMC), the target range for the fed funds rate was, as generally expected, left unchanged. The Fed had already expressed a good deal of optimism about the economic growth path in the previous FOMC Statement, and the tenor of the new statement from Dr. Powell and his team remains positive. For example, they have reaffirmed that momentum in the domestic economy is very strong. The unemployment rate is now said to no longer be “low” but to be “declining.“ Only business investment is perceived to have “moderated” from its rapid pace earlier in the year. It has also been pointed out that longer-term inflation expectations are unchanged. Overall, FOMC members have gone on record as saying that economic risks appear “roughly balanced,” adding that further gradual key-rate increases are warranted against this background. It is therefore extremely likely that…

Fed refuses to bow to the President’s dictates

US President Donald Trump has sharpened his criticism of the Fed’s monetary policy orientation. After initially saying only that he was unhappy with Fed policy, he went on to raise the tone, describing the central bank and its monetary watchdogs as “crazy.” With his latest statements the US President is again stepping up to the next stage of escalation. Not only has Trump said that he now regrets appointing Powell as Fed Chairman, but in response to a journalist’s question as to under what conditions he would fire the central bank Chairman, Trump also replied that he didn’t know. A few weeks earlier he had replied to the same question with the clear answer that he would not dismiss him. What’s more, Trump is now openly calling for lower key rates.   The power of the US President: He determines the Fed Chairman The most important question that financial market…

South African and Turkish investments are risky but attractive

The wind has shifted. While international investors still avoided financial markets in emerging markets this summer and scaled back significant investments, emerging market currencies have been able to stage a noticeable recovery in recent weeks. The South African rand and the Turkish lira have gained a good 4% and almost 19% respectively over the euro since the start of September. Turkey along with Argentina were at the heart of the emerging market turbulence during the summer months. Growing doubts about the central bank’s independence and concerns about further sanctions being imposed by the US, which would restrict the country’s access to international capital markets, generated considerable uncertainty among investors. Financial markets increasingly factored in a scenario whereby the situation could escalate, bringing about insolvency of many Turkish companies or even of the Turkish state. The portents of these two central factors driving the crisis have meanwhile turned. The Turkish central…

Fed Minutes: Moving in the direction of restrictive

The minutes of the Federal Reserve interest-rate meeting held on 26th September, published yesterday evening, reveal that the Fed’s top echelons have had an animated debate about whether to respond to solid growth momentum by raising key rates temporarily above the neutral fed funds rate. A number of FOMC members turn out to be advocating a temporary shift to a restrictive monetary-policy stance. Some of the other monetary custodians opposed such a move, arguing that the economy was not showing any signs of overheating and that a clear upward shift in inflation rates was not to be detected. Regardless of the monetary-policy target level at which the Fed will ultimately take aim, members of the Fed’s top policymaking committee agreed that further moderate key-rate hikes were called for in the coming months. Furthermore, the transcript offers a more precise explanation of why the sentence indicating that “the stance of monetary…

Capital market yields on both sides of the Atlantic likely to tend moderately higher over the year

The European monetary watchdogs have meanwhile returned from their summer breaks and confirmed the direction of monetary policy. Starting in October, monthly bond purchases under the ECB’s asset purchasing programme (APP) are to be reduced to EUR 15bn, with net new purchases expected to be concluded by the end of the year. Even if this means that the European central bankers are taking another small step towards monetary normality, the monetary stimulus is still far-reaching. The ECB’s forward guidance shows that key interest rate hikes are not an issue for the time being. We only expect the ECB to allow the deposit rate to carefully head upwards over the year as a whole. We do not envisage the first „real“ interest rate hike being made before the end of next year at the very earliest. While the ECB monetary watchdogs are clearly finding it hard to seriously depart from their…

Investors still clinging to monetary policy

Investors still clinging to monetary policy There is no shortage of flashpoints at present. Whether Italy, Trump, Turkey, the fast-approaching Brexit or the simmering trade conflict, investors don’t have very far to go to find good reasons for taking a defensive stance. Nonetheless, the aversion to risk on the market is actually low. The global equity markets are still performing well, Bund yields have risen again while periphery spreads have tightened recently, and there is no sign of an increased risk aversion on the currency markets. The financial markets seem thoroughly relaxed in spite all of these flashpoints. There are of course some exceptions, such as a few of the emerging market currencies, whose devaluation is, however, primarily due to local factors (the fact that these are not reflected in the broader EM spectrum and with the consequent absence of any major contagion effects even confirms how relaxed the market…

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