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Investors Await Trump's Sway Over Fed Board Appointments

Investors Await Trump's Sway Over Fed Board Appointments
(Dollar Photo Club)

Tuesday, 06 June 2017 04:55 PM Current | Bio | Archive

As markets still seem convinced about the Federal Reserve hiking the fed-funds rate by 0.25 percent next week on Wednesday, June 14, it also is interesting to see that markets then expect only a light tightening path, especially for 2018 and 2019.

Meanwhile, the Institute for Supply Management’s Manufacturing ISM report revealed that the U.S. overall economy expanded for the 96th month in a row.

The most surprising element in the ISM report was the jump of the employment measure from 52 in April to 53.5 in May. That single tidbit confirms the full employment situation, and which is clearly at odds with Friday’s weaker than expected employment report.

Beside that, nonfarm business sector labor productivity, which measures hourly output per worker, was unchanged during Q1 of 2017, but was better than a preliminary estimate of a 0.6 percent drop. Both output and hours worked increased 1.7 percent from the fourth quarter. Compared with the same period of 2016, productivity rose 1.2 percent, reflecting a 2.5 percent gain in output and a 1.3 percent increase in hours worked.

Wages increased to $22 an hour in May from $21.96/hour in April while unit labor costs in the nonfarm business sector increased a seasonally adjusted annualized 2.2 percent on quarter in Q1 of 2017, which is down from a 3 percent gain in the preliminary estimate and a downwardly revised 4.6 percent drop in the previous period.

It is the highest gain in three quarters, reflecting a 2.2 percent increase in hourly compensation.

We can say that the U.S. economy continued to expand at a solid pace in May. 

Taking all this into account, it will be really interesting to see what the Fed will tell us next week after the Federal Open Market Committee (FOMC) meeting in its summary of economic projections and during the press conference by Fed Chair Janet Yellen.

Let’s hope the Fed will give investors a somewhat better view on its planned tightening path and where interest rates could be headed.

Savvy investors should keep an eye on what will come from yesterday’s decision by Saudi Arabia, the United Arab Emirates, Egypt, Bahrain, Yemen, the Maldives and the eastern government in divided Libya to cut ties with Qatar.

Directly, the decision impacts travel, Qatari nationals living abroad and with that the efficiency of the economy in the region.

There is also a somewhat broader context than direct trade flows as the Qatari banking system has become more involved in regional financing in recent years and it must be considered to be impacted by this.

Oil and gas trade is unlikely to be too severely disrupted. Therefore, only a modest reaction in the oil price reflecting shifting political tensions, rather than constrains in supply is probably appropriate. So far, the Brent crude price seems having no reaction at all.

For his part, President Donald Trump has pledged to help resolve the crisis. 

Trump’s diplomatic skills haven't been evident. It’s also a fact that domestically, Trump has other issues to focus on with fiscal and central bank policy both of interest.

Trump has decided that the debt ceiling should be raised before the traditional August Congressional recess

On the issue of central bank policy, media stories are now suggesting that the Trump administration is coming up with a number of names for possible Fed governors.

Trump has not been that rapid in proposing senior government positions to Congress for ratification. The president has yet to get around to proposing names for the overwhelming majority of senior appointments.

Markets probably care more about Fed appointments than they do about many of the other positions at a time when quantitative policy is set to tighten further.

The direction and independence of the Fed is by many investors seen as critical, especially when Yellen’s four-year term as chair, though not as Governor, is due for renewal on February 3, 2018.

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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Markets probably care more about Fed appointments than they do about many of the other positions at a time when quantitative policy is set to tighten further.
trump, fed, board, appointments
Tuesday, 06 June 2017 04:55 PM
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