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Let's Hope We Finally Learn Something From Fed's Talking Heads

Let's Hope We Finally Learn Something From Fed's Talking Heads

 (Dollar Photo Club)

By    |   Tuesday, 21 February 2017 06:54 AM

Today, there is a mix of events that do not really matter and some things that are more meaningful.

Leading the list of the things that do not really matter are the purchasing managers’ indices – PMIs or opinion polls.

Opinion polls do not have the best of track records in predicting anything as of lately and in the sphere of economics they hey are simply not based on the underlying fundamentals.

Nonetheless, markets as well as investors regard PMIs with a reverence.

Eurozone surveys, which are in fact opinion polls, give an interesting, but contradictory picture today.

First, we had the European Commission’s own consumer confidence index that fell in February more than expected to -6.2 points from -4.8 points in January and that was caused by the highest rate of inflation in more than 4 years.

Then we had the Euro area IHS Markit’s PMI survey that came in at its highest level in almost 6 years and that suggests that if the current trend could be maintained, the Eurozone’s GDP could grow by 0.6 percent this quarter.

In simple words, investors should better not get too excited about these surveys as they are not based on basic economic data and only reflect opinion polls taken in an Euro area that is getting ready for general elections in the Netherlands in March, French elections in May and German elections in September while Italy remains a dangerous wildcard.

So, political events could, but hopefully not, play a damaging role in the Eurozone’s economic performance.

So, in France we had some political opinion showing right wing candidate Marine Le Pen losing the second round of the presidential election, but support levels increasing in the first round.

The opinion polls themselves are perhaps of little use in assessing investment risks.

It’s also a fact that the track record of opinion polls so far in the French primary campaigns has bordered on the abysmal. The movement polls to date should be considered with an enlarged margin of error therefore. Nonetheless, Marine Le Pen’s anti-establishment plans continue to worry investors.

Investors could do well keeping in mind that on February 5, Marine Le Pen has declared that if elected she will restore the competitiveness of France by abandoning the euro and re-create the French franc and that she would pursue a policy of ‘intelligent protectionism’ and “re-industrialization.”

In terms of things that really do matter in the near term there is Greece that is back in the media.

The EU and Greece failed to agree on an extra disbursement of aide, although that was not a surprise. However, the language of the EU negotiators is more suggestive of a compromise with the IMF position and talks are ongoing, which is more positive than investors had supposed.

On top of that, there is a nice number of central bankers on the world stage. 

Governor Carney of the Bank of England is before the UK Parliament. This is an opportunity to defend the independence of the Bank of England, to comment on the recent slowdown of economic data and perhaps hint at policy direction, although the last is perhaps less likely in this forum.

Meanwhile, President Draghi of the ECB is in Brussels. Draghi’s comments is somewhat muted by the fact that he ECB has pre-announced its policy to satisfy Draghi’s addiction to monetary easing, but the rise in Euro area inflation may damage that commitment.

But today, it’s the Fed that is really going overboard on communication.

Philadelphia Fed President Patrick Harker has already given comments to the media suggesting that a tightening is possible in March, but without committing to it. He is also scheduled to speak today together with Minneapolis Fed President Neel Kashkari and San Francisco Fed President John Williams.

There is clearly a debate within the Federal Reserve about not just the timing of any policy tightening, but about the mechanism of any policy tightening. Quantitative policy tightening is an issue that is featured in more and more public comments of Fed officials.

In addition, there is also the need to defend the Fed from challenges to its independence from Congress.

This makes these Fed speeches even more interesting, especially for investors.

Let’s hope we learn something that we didn’t know already.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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There is clearly a debate within the Federal Reserve about not just the timing of any policy tightening, but about the mechanism of any policy tightening.
fed, investors, opinion, economy
Tuesday, 21 February 2017 06:54 AM
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