Tags: fed | economy | growth | investors

Searching the World Over for a Source of Global Growth

Searching the World Over for a Source of Global Growth

By    |   Wednesday, 28 October 2015 08:37 AM

The Federal Open Market Committee (FOMC) statement will be the highlight of the day.

While consensus still doesn’t expect a Fed rate hike in 2015, a rate rise this year remains fully underpriced in the markets.

I don’t think it’s an overstatement to say that a continuously “dovish” Fed is putting its credibility at risk. Nevertheless, it’s also a fact the divide between economists and markets about the forward path of the fed-fund rates remains significant.

Maybe it could be somewhat enlightening to review the FOMC voters’ recent views on the Fed’s policy settings.

For now, the only thing we can be sure of is that Richmond’s Fed President Jeffrey Lacker will dissent again for the FOMC letting Fed policy unchanged. 

Comparing the new statement with the one of September 17, it will be interesting to see how the FOMC will keep or change its wording: “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.” 

For investors who have interests in where the dollar could move over the short term (please take care here we aren't talking about the dollar’s long-term path that remains simply “up”), it will be important to see if the Fed keeps a clear “cautionary stance” about “developments abroad” and “inflation developments.”

If that would be the case, investors shouldn’t be surprised seeing:

  • A relative important unwinding of speculative long-dollar positions, which remain, notwithstanding their recent run down, at historical elevated levels according to the U.S. Commodity Futures Trading Commission (CFTC).
  • Speculative investors becoming tempted once again for using a “weaker” dollar as their “funding currency” for taking positions in- and even among what’s called “high yielders” (carry trade).

For getting an idea at what level high-yielding 10-year sovereigns were early today compared to the 10-year U.S. Treasury yielding 2.03 percent: India was at 7.60 percent; Greece at 7.42 percent; New Zealand at 3.25 percent; Australia at 2.58 percent, etc.

Long-term investors have no other choice than to keep an eye on China, where consumption remains a main concern.

Meanwhile, the Westpac MNI China Consumer Sentiment Indicator tumbled 7.2 percent to 109.7 in October, which was its lowest value since 2007 when the survey started. All components of the indicator showed "pessimism" making a comeback with was the most for business conditions, but also household conditions came in weaker.

The Shopping Expenditure Indicator also moved well below the break-even 100 level, indicating shoppers are planning to spend less.

China won't become the global growth engine again any time soon and the big question will remain: "Where is growth going to come from?"

Elsewhere, the yields on U.S. Treasury bills that mature on November 12 yielded a negative -0.01 percent, which means you will lose (charged) a little bit for holding these “real” cash-equivalent Treasury bills until their maturity.

The bills that are due on November 5 yielded a negative -0.0025 percent.

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China will not become the global growth engine again any time soon and the big question will remain "Where is growth going to come from?"
fed, economy, growth, investors
Wednesday, 28 October 2015 08:37 AM
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