The tragic events in Brussels provoked a very short lived risk-aversion trade in financial markets.
Interestingly, the British pound saw a somewhat stronger reaction because of speculation that the terrorist actions may impact the EU referendum debate. Both sides of the referendum have made security a key issue.
What’s for sure is the market reaction implies uncertainty about the way U.K. public opinion will react.
Also related to the Brussels’ terror attacks are U.K. politics that may further impact financial markets.
In London we have the weekly “Questions to the Prime Minister” session after:
- The recent resignation from the government of the Work and Pensions Secretary Duncan Smith, which is a leading Euroskeptic;
- We have a contested UK budget;
- A telephone opinion poll carried out by ICM showing a small advantage for the “Leave Campaign” in the upcoming EU referendum, so there may be more interest in today's “Questions to the Prime Minister” than normal.
That said, in the U.S. St. Louis Fed President James Bullard will speak and any comments in the general field of inflation could be of interest.
In the U.S.
- Chicago Fed President Charles Evans said: “The continuation of a wait and see monetary response is appropriate to ensure economic growth continues, labor markets strengthen further, wages begin to increase more, and all of this supports an eventual increase in currently low inflation right back up to our 2 percent objective.”
- Philadelphia Fed President Patrick Harker said: “If the economy continues to evolve as I forecast, barring some unforeseen headwinds which are always possible, then I think it’s appropriate to consider every meeting live ... and to consider another 25 basis-point rise if the data play out as we expect.” Harker noted that oil prices have seemingly bottomed out or stabilized ... so I feel reasonably confident that we are moving toward that 2 percent inflation target."
The Fed is perhaps inevitably "not of one mind" at present, such as the differences in intellectual approaches to the economy and policy measures, and therefore it is worth paying more attention to individual comments to help to understand the nuances of policy in the future.
Finally, when Harker says he is reasonably confident that we are moving toward that 2 percent inflation target because he thinks oil has bottomed out while the dollar remains relatively stable and oil does manage to sustain a little more strength into the summer, there are 2 questions we could ask ourselves, firstly, what does this do to capital flows and secondly, what does this do to inflation.
Low oil prices have led to capital repatriation flows from several oil producers as shortfalls in their domestic fiscal positions and indeed personal income levels for higher income groups have led to liquidations and repatriation of assets that were and remain mainly biased towards dollars.
In theory, a higher oil price may moderate that desire to liquidate and repatriate, although the current level of the oil prices is unlikely to make a significant difference, in particular as demands for increased spending including military spending have not abated.
Therefore, the impact on inflation is not entirely clear.
The decline in oil prices has of course impacted inflation rates and oil prices still remain pretty much the only global inflation driver in the world economy today.
However, crude oil price declines have not been passed through to consumer oil prices at 1-for-1. Only between 20 and 50 percent has been passed through on average depending on the domestic economic structure. Therefore, we should not necessarily expect a 1-for-1 pass-through if oil prices rise, but there is a greater chance that a "higher proportion" of oil price increases passes through to consumer oil.
In simple words, a rise in oil prices will push at least the core CPI higher and that will impact Fed policy.
We aren’t there yet, but we could put it on our watch list.
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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