Tags: fed | economy | jobs | labor

US Poised to Enter New Era of 'Diverging' Monetary Policies

US Poised to Enter New Era of 'Diverging' Monetary Policies
(Dollar Photo Club)

Monday, 09 November 2015 08:53 AM Current | Bio | Archive

Friday’s monthly employment report has boosted odds of a December Fed rate hike.

The non-farm payrolls during October increased by an impressive 271,000, which was the largest increase since December 2014.

Maybe the most important point in the data was average earnings rose by 2.5 percent year-on-year, which was a six-year high. The total unemployment rate declined further to 5 percent.

Goldman Sachs, Citi and Barclays now see a rate hike in December.

The Chicago Mercantile Exchange (CME) FedWatch indicator gives a 70 percent probability of a 0.50 percent rate hike on December 16.

Maybe a good part of investors still don’t realize the day the Federal Reserve starts raising the fed funds rate, the world will enter a new era of “diverging” monetary policies among the Central Banks of the U.S. and the U.K. on one side and the ECB, Bank of Japan (BOJ), and others of less importance on the other side, which will have consequences on currencies, commodity prices, fixed income vehicles, equities and so on.

We could do well keeping in mind the day the Fed starts raising rates again, it will their first effective rate hike since June 2004, which will be its longest period in time since WWII wherein it didn’t raise rates. 

We could ask ourselves by example what to expect from the euro/dollar price relation going forward:

  • Indications are growing by the day the FOMC is closing in on starting to raise rates on December 16. In this context, San Francisco Fed President John Williams, who will vote at the FOMC for the last time this year and is known for his ‘centrist’ stance said:  “I do think it makes sense to gradually remove the policy of accommodation that helped get the economy to where we are.”
  • ECB President Mario Draghi has made it crystal clear the ECB is prepared to consider easing policy further at its coming December 3rd meeting, where we could have (1) further QE and (2) another decrease in the ECB's already negative deposit rate that at present stands at negative -0.2 percent.
  • As of lately, and especially during this fourth quarter, we have seen risk aversion easing, which in this context, the logic of using the euro as funding currency for carry trades should come to the forefront again.
  • Finally, the euro/dollar pair seems definitively on its way for a sustained move lower after months of a somewhat “limited/timid” strength of the euro against the dollar, or to say it in another way of indecision where the dollar was supposed to go, which became clear on Friday, when after the U.S. employment numbers came out, the euro literally fell out of bed against the dollar.

Please keep in mind that everything, as well on the way up as on the way down, doesn’t move in a straight line.

Goldman Sachs from its side has reiterated they see the euro falling below parity in 2016 on the back of the coming “divergence” in monetary policies between the ECB, which will be obliged to ease and stimulate further, while the Fed is definitively bound for normalization, which means rising Fed fund rates are on their way.

Goldman Sachs wrote, “It remains our expectation that EUR/USD will reach 1.05 ahead of the December ECB meeting and parity by year-end.”

Investors could do well keeping in mind the people at Goldman Sachs further expect the euro to fall to about $0.95 per euro over the next 12 months, which would represent a decline of 11.5 percent from current levels of about $1.070 per euro. If this works out as they expect it to do, this would represent a non-negligible negative impact on euro-based investments.

Finally, I can’t help it, but with what’s going on today, I must think back at what "then" Dallas Fed President Richard Fisher said in early June 2013, “We’ve had a 30-year bull bond market … At some point secular markets change … this will not go on forever”

Probably this time around could be a better time than in 2013 for keeping Fisher’s words in mind.

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Please keep in mind that everything, as well on the way up as on the way down, doesn’t move in a straight line.
fed, economy, jobs, labor
Monday, 09 November 2015 08:53 AM
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