The sell-off in bonds and equities that started after Boston Fed President and FOMC voter Eric Rosengren said there was a risk the U.S. economy could overheat if policy makers waited too long before tightening (which raised the bets on an interest-rate hike at next week’s FOMC meeting on September 20-21) seems to give no sign of abating.
At present, markets are still pricing in a probability of well below 50 percent of a September rate hike.
All that could change as markets will probably mainly focus on what Fed Governer Lael Brainard, who is known of being a dove, is a voter, but who, interestingly, voted for the December 2015 rate hike, is going to say.
In case she’d sound less dovish or a little bit more hawkish than what could be expected from her, then we could see, among other things, volatility rising further from Friday’s already substantial up-move whereby the VIX index of volatility spiked 50 per cent after, which is interesting, hitting a two-year low on Thursday.
If that were to continue, that would be negative for both bond and equity prices.
It might be worth noting that on Friday, before U.S. stocks started trading they were above 20x annual earnings, which was one of the highest multiples since the dot-com bubble 1997-2000.
Yes, that’s another serious warning sign we could be heading for a rough ride in the not so far future, especially when next week the Fed should raise rates, albeit by only 0.25 percent.
It might be helpful to keep in mind there are divisions at the Fed that go well beyond the binary “rates-up; rates-down” divisions, but that are instead more complex intellectual divisions over the approach of policy. This is compounded by the fact that the central bank’s policy is no longer a mono-culture. There is monetary, quantitative and regulatory policy to consider in multiple possible combinations.
Over in Europe there is some political noise rumbling around. The Danish Prime Minister suggested that the United Kingdom should not have a competitive advantage after leaving the European Union.
The telling point about these comments was that the suggestion was about reducing UK competitiveness and not about improving EU competitiveness after the UK-EU divorce. That does rather sum up the problems, which are huge, that is facing the EU at the moment.
Germany has suggested that it might find a way to increase competitiveness by making it easier to fire bankers, although this may be seen as a means of improving labor flexibility, but the cost of firing bankers is only a small part of the labor markets overall competitive position.
This looks more like a possible gesture than a possible reform.
Finally, in China, the People’s Bank of China (PBoC) economist Ma has said that that the housing market required measures to prevent it being a bubble.
This might be important, were it not for the relatively junior role that the PBoC has in Chinese policy decision making. The housing market represents a mechanism to stimulate employment and the government may weight those attributes about concerns about a leveraged financed price rise.
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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