The Global Markets Weekly – 10/19/15

Posted October 19, 2015 by rvillareal

Leaking Outside the Tent[private]

Silence is golden, particularly from Federal Reserve Board members who are not the chairman or the vice chairman.  That long-standing rule was broken in a big, big way this week with dissenting comments from two of the three available members. Both Brainard and Tarullo expressed considerable dissatisfaction with calendar based policy guidance.  Both members were concerned that inflation was too low and in Brainard’s case, she worried about the international situation placing further downward pressure on inflation.

An opinion on the macro economy can be expected from a formal economist like Brainard  but for a trained lawyer like Tarullo, with little experience in economics or markets before he joined the Fed, to speak out is truly extraordinary.  Both suggested that a FOMC rate hike this year would be viewed with displeasure and might prompt a formal dissent.

Unlike the regional bank presidents who are (in)famous for their frequent (hawkish) dissents, formal dissents from Board members are extremely rare.  The last came in 2002 and was a dovish dissent by both a Board member and a regional president in favor of an immediate rate cut. One has to go back to 1993 to find two Board members dissenting at the same time-and in favor of an immediate rate hike, which was actually carried out in 1994.

Adding to the mix were comments by Dudley, the one FOMC member who has followed the indicators for a living, saying that growth was slowing because of a high dollar and falling inventory investment.  The chances of Fed action by year-end seem increasingly remote, even if the indicators perk up.  A rebound in hiring to well above 200K and steady consumer spending and confidence are unlikely to alleviate Brainard’s and Tarullo’s worries about sagging inflation.  And if Yellen sticks to her guns and advocates a rate hike in December, she risks having three dissents-two from board members and one from the dovish bank president, Evans.  We doubt if Yellen is willing to go public with three dissents and would back down and leave policy unchanged.

• U.S.:  The data flow slows with only housing starts (Tu) of interest.  Housing starts should be going sideways.  And after the various bombshells from FOMC members this week, we will be surprised if Powell or Dudley say much of note at a technical markets conference (Tu).
• Eurozone:  The ECB Council meeting on Thursday has, of course, taken on a clearer profile given the increased downside price risks that the central bank highlighted last time around (ie early-September). However, while hinting that it could enlarge or extend it bond purchase program at the last meeting, the ECB then stressed it needed more time to assess whether recent developments will have a lasting impact on the inflation outlook. The ECB is likely to repeat this view, aware that the run of economic data in the last few weeks have hardly corroborated the more downbeat economic backdrop and outlook it pointed to in September.  PMI data (Fri) may corroborate this still solid economic backdrop.
• UK: An alternative insight in the economic backdrop will come from the Public Sector Borrowing data (Wed), the swings in public revenue revealing much about the nominal and real economy.  Some further improvement is on the cards.
• Japan:  In a light data week, tertiary industry performance may contradict the BOJ’s steady-growth outlook.  This reflects the growth stagnation that different parts of the service sector experienced in August.

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