Tags: fed | guidance | investors | brexit

Fed's Guidance Seems to Be Trapped in a London Fog

Fed's Guidance Seems to Be Trapped in a London Fog
Janet Yellen (AP)

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Monday, 20 June 2016 07:01 AM Current | Bio | Archive


The EU referendum campaigns in the United Kingdom have restarted with weekend opinion polls showing the race effectively a dead-heat.

It is relatively common for opinion polls to show an increase of support for the status quo immediately before a referendum as undecided voters issue uncertainty.

Nevertheless, markets clearly expect, at least for now, the remain camp to win and went full risk-on with the British pound jumping and equity markets fully in the green all over the globe.

Interestingly, in the U.K., 10  winners of the Nobel prize for economics have written to the Guardian newspaper, suggesting that the economic arguments are clearly in favor of remaining in the EU.

It is worth noting that opinion polls suggest remain supporters cite economic arguments as the main reason for remaining while leave supporters cite immigration. So, economic arguments, however valid, are perhaps less likely to shift a leave supporter to the remain camp.

Besides all that and probably not a top concern on many investors’ watch lists, but nevertheless important enough for taking notice of is the fact the Indian rupee fell sharply by 60 paise to 67.68 per dollar on the news that the Governor of the Reserve Bank of India Raghuram Rajan will not be re-appointed for a second term in September.

Governor Raghuram Rajan published a letter implying that he would have been willing to take a second term if offered.

The announcement follows criticism from within the governing party that Raghuram Rajan was, quote, mentally not fully Indian and his departure is therefore not wholly unexpected.

The early announcement of the departure of Raghuram Rajan, who has been credited with restoring the India’s macroeconomic stability, does seem to be sending negative signals to the market about the future commitment of the Reserve Bank of India to price stability.

Now, if that were to occur it would have a destabilizing effect on the whole region.

Some investors could perhaps ask why this event at the Reserve Bank of India could be of any importance to their investments that are for a big part located in the West. The answer is relatively simple and at the same time extremely complicated.

In that region of the world we have already China that is experiencing a soft landing while globally, investors are hoping it doesn’t turn into a hard landing, which would put global growth completely on its head, of course in the negative sense.

In Japan we get continuously confirmations that Abenomics  is not working and the country remains obviously trapped in a two decade long stagnation situation.

In the near term, and this is very important for investors, Japan could be tempted to intervene in the foreign exchange markets to weaken the Japanese yen, and such a kind of intervention, especially at this moment in time, could lead to a currency war, which would be a lose-lose situation for everyone without exception.

By the way, Japan’s exports fell by 11.3 percent y/y in May, which was its largest decline in 5 months and the 8th in a row while imports slide by 13.8 percent. Exports to China fell by 14.9 percent y/y and US-bound shipments fell 10.7 percent; exports to Asia, which accounts for more than half of Japan's shipments, fell by 13.0 percent and EU-bound shipments fell by 4.0 percent.

So, if India would turn out becoming another big concern of uncertainty and when we compile that to what we already have then this would be simply bad news. It’s as simple as that. 

From the Euro area, German producer price inflation (PPI) came in fractionally higher than expected, but still far below its pre-crisis levels.

The increase in wage settlements in Germany is starting to raise cost pressures for German corporates and the question is whether this will then translate into higher prices.

For German exporters there is also the issue of the stronger euro that has risen by about 6.7 percent over the course of the last 7 months,  which in a world of pricing to market means lower euro export producer price inflation.

Finally, we have Minneapolis Fed President Neel Kashkari who is scheduled to speak, which could be of some interest in the wake of the flip flop approach of the Federal Reserve to policy and market guidance last week and before Fed Chair Yellen will deliver today and tomorrow her Semiannual Monetary Policy Report to the Congress in Washington DC.

Let’s hope we’ll learn a little bit as at present the Fed’s forward guidance seems to be trapped in something like a London fog.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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The EU referendum campaigns in the United Kingdom have restarted with weekend opinion polls showing the race effectively a deadheat.
fed, guidance, investors, brexit
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2016-01-20
Monday, 20 June 2016 07:01 AM
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