Yellen and the new direction dilemma
- Jackson Hole summit sees Fed chair Janet Yellen take centre stage
- The central-bank jamboree needs to show some good ideas
- Global monetary policy as a tool reaching exhaustion levels
It's Axl, they're Guns and Roses and he's asking the question. Photo: WikiCommonsMedia
“Where do we go now?” — Guns N’ Roses, Sweet Child of Mine
At Jackson Hole this weekend, the core debate entitled, “Designing Resilient Monetary Policy Frameworks for the Future”, would perhaps be more aptly named “Has anyone got any good ideas?”.
Amid a global contagion of low interest rates, low inflation and low growth, central bankers are seemingly becoming more attuned to the hidden costs of zero (or negative) interest rates. Despite the fact that firms have access to record low funding levels, the very same yield curve move has led to a near doubling of the cost to fund pension liabilities.
The move has widened inequality, or the wealth gap, and raised questions of all (percentage) fee-based businesses. As Bill Gross said recently, “Capitalism does not work at zero interest rates”, a sentiment with which we would wholeheartedly agree.
Current extreme monetary activism was intended to give a positive shock to national and global economies. The problem is that the longer this monetary ‘medicine’ is taken, the lower the benefits and the higher the risks.
Ironically, the focus of the broad financial markets today is on any indication from Federal Reserve chair Janet Yellen on the timing of the next rate rise, when in all likelihood, any hawkish rhetoric is likely to be accompanied by (and essentially negated by) indications of a lower equilibrium level for real interest rates
The highlight for the rest of the weekend is a “General Discussion” panel tomorrow involving Benoit Coeure of the European Central Bank and Bank of Japan Head Haruhiko Kuroda. I for one am hoping that someone at Jackson Hole does have a good idea.
“Progress is man’s ability to complicate simplicity” — Thor Heyerdahl
Since we last wrote, markets have been very quiet as the summer holidays enter their peak and the global data calendar remains thin or, as in the case of US and UK GDP prints for Q2, backward looking and less relevant than future policy expectations. There has, however, been some increased rhetoric from OPEC and individual nations about a push to attain a more sustainable price level. Earlier today the OPEC Secretary General claimed that there is an “increased understanding among OPEC members for a move to manage production”.
The data that we have had has shown 1) a strong bounce (biggest in three years) in UK consumer confidence after the Brexit armageddon fears recede, in addition to further signs of consumer resilience in retail sales strength 2) improvements in the services and manufacturing PMIs in the Eurozone, married with falling consumer confidence 3) a big jump in US new home sales in July and 4) an interesting contrast in the Q2 GDP breakdown between Germany and the UK, where German figures show that the 0.4% quarter-on-quarter rise was largely a function of government expenditure at the expense of business investment and domestic demand, and the opposite was true of the UK’s 0.6% q/q.
“The suspense is terrible. I hope it will last” — Oscar Wilde
The old equity market adage “Sell in May and Go away. Come back after Labor Day”, would not have been a fruitful strategy this year, with US markets rising 4-8% since the end of May. However, with a long weekend in the UK coming and the long Labor Day weekend in the US the following week, we would anticipate this period being a significant watershed for the resumption of liquidity, participation and correlation of markets and asset classes (in line with economic fundamentals) - factors which have been unreliable at best for a long while, and exaggeratedly so over the summer months.
Over the rest of Q3, we expect economic fundamentals to reassert themselves on both asset class correlations and market trends. The tone that Yellen sets this afternoon may well be an early warning sign for the direction of trends, but we would caution against a short-term focus on the timing of the next rate hike over the more significant implications on the pace of tightening and the medium-term equilibrium level of real rates.
Either way, we feel that global monetary policy is at its base or at least in every practical sense, exhausted in its usefulness. As the Jackson Hole meeting searches for any good ideas on monetary policy, the broader focus of global stimulus is likely to increasingly turn to fiscal and structural measures.
While the longer-term implications for global growth on this front are positive, we would expect the transition away from monetary stimulus to generate some significant themes in FX markets and to be increasingly negative for both equities and bonds.
— Edited by Martin O'Rourke
Neil Staines is head of trading at ECU Group