The Global Markets Weekly – 4/17/14

Posted April 17, 2014 by rvillareal

FOMC Reaction Function

The concept of a fed “reaction function” has been prominent lately, both in a conspicuous mention in the latest FOMC Minutes and , second, as the central subject in the manifesto for Chairwoman Yellen’s term represented by her Economic Club of New York speech.[private]

Yellen avoided use of the technical phrase, but her discussion of the policy ideal of a well-understood relationship between data results and FOMC responses corresponded exactly to the mathematical concept—dear to Fed PhDs—of fixed relationship between any set of values of input variables and a unique output value.

She emphasized that a relationship well understood by the public—allowing the policy response to unforeseen shocks to the economy to be properly anticipated—would impart an “automatic stabilizer” property to the economic system.

Problem is, disagreement still exists within the FOMC as to the current values of the input variables, a topic which Yellen discussed extensively, and which did seem to be evident in the Minutes.  At one point in the March meeting, “a number” of officials expressed concern that the “overall upward shift” in the federal funds rate dot-scatter chart “could be misconstrued as indicating a move by the Committee to a less accommodative reaction function,” but “a number” of others responded that, effectively, the first group failed to perceive a change in an input variable, pointing out that the dot-shift “was arguably warranted by the improvement in participant’s outlooks for the labor market…”

• U.S.: There is little high impact economic data this week. Instead, company earnings reports will be the market-movers, at least in terms of scheduled data, with 159 S&P 500 companies reporting.
• Eurozone: There may be even keener interest in the array of survey numbers due, as markets assess whether the Eurozone real economy may actually be developing a little added momentum. In particular, April PMI Flashes (Wed) will be examined all the more acutely.
• UK: Amidst what seems to be growing market concern about rising house prices, mortgage approval data from the British Bankers’ Association (Fri) may be the most important data release this week.
• Japan: Work on the BOJ’s semiannual Outlook report, due April 30, continues apace, and key data releases this week—the merchandise trade balance (Mon), and the CPI (Fri), might still impact thinking on the current motion in the economy, and on the outlook.
• Emerging Markets/Regions:  In China, the only item of significance the HSBC PMI, expected to stay below the 50 mark, but moving slightly towards it. For Korea, Q1 real GDP arrives.  The (reasonable) expectation is for a high annual rate of expansion (Consensus: 3.8% Y/Y; DE: 3.9% Y/Y). In Mexico, Banco de Mexico meets. The almost certain decision is to keep interest rates at present levels.  In Turkey, the TCB meets (Thu) to decide on interest rates.  Consensus expects a hold decision.  That is not an unreasonable expectation based on fundamentals. However, there have been strong indications that the odds of a rate cut are high (40%-to-50%).

gmw_0417[/private]