Following the murder of the British Member of Parliament (MP) Jo Cox, all campaigning in the British referendum on the EU membership has been suspended for a second day.
The scheduled publication of opinion polls have also been postponed.
in its just released comments on the Eurozone expresses concern that the increase in political risks (yes, in plural) might threaten economic recovery: “The euro area is at a critical juncture. Growing political divisions and Euroscepticism have weakened prospects for collective action, leaving the euro area increasingly vulnerable to a number of risks at a time when there is little policy space.”
The IMF's Christine Lagarde
said in Vienna, Austria: “Right now, too many Europeans are worried about their cultural identity, their security, their jobs, incomes, and living standards. And too many of them are led to believe that things would be better if only Europe returned to closed borders and economic nationalism.”
I think there is very little chance her words will be in any way be effective, which is of course regrettable.
Therefore, long-term investors should better remain extremely vigilant about what will probably occur in the Euro are over the next 12-24 months and be prepared to switch (hedged if possible) parts of their portfolios at any time. Not easy to do, but not impossible either…
Coming back for a moment to the vacillations of the Federal Reserve
this week, it was interesting to see the Fed acknowledging that the forthcoming U.K. referendum on the European Union had an influence on its decision to leave interest rates unchanged.
No doubt, there is serious concern about the potential for disruption beyond the U.K.’s borders in the event that the U.K. electorate were to vote to exit.
It’s also a fact, the global financial system is not as interlinked as it was back in 2007, but there is still sufficient globalization of capital to be cautious about contagion.
Besides that, on the labor market the Fed
was perhaps too cautious, in my opinion at least. No doubt, the payrolls number was weak.
Nevertheless, it remains a serious debatable point as to whether this is due to a shortage of skilled labor supply leading to too few payrolls because there is no one to hire, or whether it is due to the absence of labor demand. It could of course be both.
In my view we have a developing skills mismatch in the labor market, where there is an absence of low-skilled labor demand alongside an absence of high-skilled labor supply.
Besides, and this is extremely important, the changes of the global economy that will take place in the coming 20 years are likely to emphasize the importance of labor, but at the same time create disruption in the labor markets as required skills will change dramatically.
Those economies that lack sufficient flexibility may fall short of structural change and therefore encourage political reactions that prevent change and work against adapting to the new economic environment.
As to inflation expectations I also saw a too cautious Fed.
We know that consumer inflation expectations are:
- Useless at predicting inflation.
- Should only be a concern if they actually change consumer behavior.
That said, at present inflation is all over the place and the latest CPI
less food and energy, which represents about 80 percent of the CPI, has risen by 2.2 percent y/y.
Anyway, overall it looks like we shouldn’t expect a Fed rate hike at the earliest until September while markets expectations, as shown in the Fed Funds futures, diverge substantially (lower) from the FOMC's own median forecasts.
One thing is certain, we live in an uncertain financial world.
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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