After sticking to their guns in telling markets that we will most likely get another rate hike this year (belief in the Phillips Curve is still alive), “relatively soon” is the next question to answer as to when quantitative tightening will begin. Janet Yellen gave us that semi-guidance in the press conference and it sounds like something that happens before December. Maybe it happens coincident with the September hike or maybe it comes alone in September and the rate hike follows in December. One thing is for sure though, the Fed is doing their best to prep us and the markets for this in order to cushion the market impact. I still have to ask again however, just because we know that it’s going to happen and likely when, will the impact be any different than if we didn’t know at all? I don’t think so. Just as each quantitative easing was a euphoric period of time for markets (certainly not for the actual economy), why should we not expect a contra effect when we experience quantitative tightening. It may not be symmetrical in the impact but we have asset prices at levels built on sands of QE and negative real rates. Philly Fed President Patrick Harker said QT will be like “watching paint dry” but if QE was like watching market fireworks fly upwards, which was the stated intention, can we be so lucky? QE and the epic size it has became globally is not free because if it was, why ever stop.
With inflation a problem in the UK relative to wages, we now have 3 BoE members that want to hike rates vs 5 that voted to keep them unchanged. The pound immediately spiked higher after the vote total was released and the 2 yr note yield is up a sharp 10 bps to .19%. The 10 yr yield also jumped by 10 bps and yields across all of Europe are also higher. Highlighting their current dilemma is right out of the central bank book of the 1970’s, albeit on a much lesser degree of course: “Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth.” They however did say, “the continued growth of employment could suggest that spare capacity is being eroded, lessening the trade off that the MPC is required to balance and, all else equal, reducing the MPC’s tolerance of above target inflation.” They finished by giving us the “gradual pace” verbiage on the progression of rate hikes whenever that might be. The BoE should at least be taking away their emergency post Brexit rate hike because it actually made things worse for the consumer and their purchasing power.
I’ll say for the umpteenth time, 2017 marks the 1st year since 2007 when all major central banks in some fashion are reversing course. DO NOT IGNORE the implications this has for asset prices, particularly stocks.
The Hong Kong Monetary Authority followed the Fed and raised its base rate by 25 bps to 1.5% as they import our monetary policy due to the peg. The Hang Seng fell 1.2% overnight.
The REAL wage squeeze impacting the UK citizenry was reflected in May retail sales ex fuel oil which fell 1.6% m/o/m, more than the estimate of down 1%. The y/o/y gain slowed to a gain of just .6% vs the forecast of up 1.9% and is the slowest pace of gain in 4 years. A UK ONS statistician said “Increased retail prices across all sectors seem to be a significant factor in slowing growth.” The sales decline was across the board and even online sales fell m/o/m. Also of note today on this subject, DFS Furniture PLC (“UK’s leading retailer of upholstered furniture”) is down 21% after lowering guidance due to “significant declines in store footfall leading to a material reduction in customer orders. We believe these demand effects are marketwide, in line with industry indicators, and are linked to customer uncertainty regarding the general election and the uncertain macroeconomic environment.” Its own form of stagflation has hit the UK.
The China proxy that is the Australian economy reported a much better than expected May jobs number. They said 42k jobs were added, well more than the estimate of up 10k and the unemployment rate fell two tenths to 5.5%, the lowest since early 2013. Adjusting this job gain for population, it would be like the US adding 560k jobs in a month. With the US dollar mostly higher against all currencies, the Aussie $ is at least unchanged. The ASX though was lower by 1.2% along with broad equity weakness.