The Global Markets Weekly – 6/19/17

Posted June 19, 2017 by rvillareal

FOMC Says the Show Must Go On

Despite some grumbling backstage, the FOMC kept to the script last week, lifting the funds rate to a 1% to 1.25% range. The Committee also outlined its plan for the balance sheet, indicating it will gradually taper back reinvestment in Treasury and Agency/MBS securities, starting at a pace of $6B and $4B per month, respectively, ratcheting that up to a $30B/$20B pace of respective runoff over the course of 12 months. There is no endpoint given for a “normal” balance sheet size, only one that is above pre-recession levels, but below recent years’ levels. Lest officials suggest runoff is set-it-and-forget-it, they provide an out in that the pace may be adjusted if conditions warrant, and make clear that fresh purchases may happen in the future, if the funds rate on its own proves insufficient to cushion the economy.

The post-meeting narrative was that this was a hawkish decision, which is correct in the sense that investors have grown accustomed to a Fed that backs off tightening at any hint of economic weakness. With a jobless rate near 4%, members are looking through modest growth and waving away soggy inflation as due to transitory factors. Quality-adjusted cellphone plan prices are a convenient scapegoat, but aren’t wholly satisfying in the context of inflation that continues to undershoot the Fed’s target on the core measure. Inflation breakevens (and forward measures) continue to decline, and at already low levels, suggesting markets aren’t fully convinced.

Median and trimmed mean measures of inflation, and forward-looking inflation expectations have moved lower. Other long-term drags include aging populations and disruption across different sectors of the economy due to technology. The business model for many high-profile disruptive firms in recent years has been to grab market share first, make profits later. Investor backing can mask unattractive economics for some for some time, and cost-conscious consumers applaud and seek out pockets of value where they can, all made transparent by the internet. Amazon’s foray into grocery storefronts announced Friday is rather unlikely to add to inflationary pressures over the long-term.

Still, contained out-of-pocket inflation stands against continued rises in asset prices including equities and housing, none of which have been all that disrupted during the first 100 bps of hikes. In that context, for a Fed that believes it is simply removing accommodation, not becoming restrictive, the show will go on unless data more firmly suggest otherwise.

• S.: A light week features just existing (Wed) and new home sales (Fri), but also a number of scheduled Fed speeches including the NY Fed’s Dudley (Mon), Chicago’s Evans (Mon), Vice-Chair Fischer (Tue), Boston’s Rosengren (Tue), plus Bullard and Mester (both Fri).
• Eurozone: The highlight will surely be the flash June PMI data (Wed), after having hit a multi-year high at 57 in May on the manufacturing side, while the services PMI inched higher to 56.3. Motion is firmer than in the U.S..
• United Kingdom: Last week saw a modest hawkish surprise out of the BoE in that 3 of 8 members voted for a rate hike, but underlying growth dynamics suggest an actual change in policy is still a long way off.
• Japan: May trade data (Mon), and a June Manufacturing PMI (Fri) are due, the latter also showing much-improved momentum in 2017.
• China: May property prices (Mon) will be watched for further slowdown supported by moderating loan growth.1919

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