April 25, 2018
Powell’s Policy Gambit Bets Job Market Stays Hot, Inflation Not
Federal Reserve officials are sounding increasingly confident they can run the U.S. economy hot without a harmful rise of inflation, a risky gamble for Chairman Jerome Powell with unemployment low, price pressures edging higher and fiscal stimulus about to goose growth. An improving outlook for inflation has helped push 10-year U.S. Treasury yields to a four-year high of 3 percent. Yet policy makers are expected to leave interest rates on hold at their meeting next week and signal no change to a gradual tightening path that’s penciled in two or three more 2018 hikes. Their caution, shaped by the post-crisis years in which they struggled to lift inflation, is a departure from the preemptive strategies of U.S. central bankers in past business cycles to stay abreast of the economy’s turns. That contrast has not escaped the attention of Fed officials, who remember the lessons of history. “Sometimes I wonder if I risk having my Ph.D. revoked for being seduced into amnesia about the Great Inflation of the 1970s,” Chicago Fed President Charles Evans said on Friday. “We have the opportunity to more patiently read — and react to — the incoming data.” It’s not just the doves who sound relaxed. Loretta Mester, the more hawkish head of the Fed Cleveland, said last week that she doesn’t expect inflation to pick up sharply and “this argues against a steep path” of rate hikes. John Williams, the San Francisco Fed president who shifts in June to run the New York Fed, said he doesn’t “see signs of anything I look at, or others do, of inflationary pressures really building.” The Fed’s laissez faire response is an experiment that carries big risks and rewards. The central bank forecasts keeping rates at a stimulative setting — below the so-called neutral level that neither supports nor hinders growth — until the end of next year. Only in 2020 do they project a policy stance that would be tight, with rates seen at 3.4 percent by year-end compared with a neutral estimate of 2.9 percent.
Euro Area’s Growth Picture Shows Why ECB Unfazed by Slowdown
European Central Bank policy makers are starting their two-day meeting in Frankfurt on Wednesday relatively relaxed about what appears to be a sharp euro-area slowdown. A close read of the numbers suggests they’re right.Bloomberg calculations show the ECB’s prediction for a 2.4 percent economic expansion this year already factors in weaker underlying momentum. That helps explain why officials including President Mario Draghi have done nothing to counter market expectations that their bond-buying program will end this year, despite a raft of data that has missed economists’ estimates. Draghi’s optimism is backed by Bloomberg analysis that breaks economic growth down into two components. The underlying rate of expansion this year is estimated at 1.4 percent, down from 1.7 percent in 2017. That’s still above the bloc’s long-term potential rate of about 1.2 percent, meaning spare capacity will be eroded and inflationary pressures will eventually pick up. The balance is a statistical quirk known as the carryover, which reflects real growth but is carried over from the previous year. Because of the euro area’s exceptional performance in 2017, that measure is the highest in a more than a decade. The IMF is also apparently sanguine about the euro zone’s surprise slump in production and confidence in the first quarter. Its economic outlook this month raised the prediction for 2018 growth to 2.4 percent from 2.2 percent. The ECB will update its own projections at its June policy meeting. Alternative measures show that the slowdown, while real, isn’t dramatic. Comparing fourth-quarter gross domestic product with same period in the previous year avoids the carryover effect.
China Quotas for Outbound Investment Trials Hit $10 Billion
China’s currency regulator more than doubled quotas for outbound investment in Shanghai and Shenzhen, allowing fund companies to invest a total of $10 billion in assets overseas. The State Administration of Foreign Exchange boosted the Qualified Domestic Limited Partnership and Qualified Domestic Investment Enterprise trial programs in the two cities to $5 billion each, the currency regulator said late Tuesday. SAFE raised the quota from $2 billion for the QDLP program in Shanghai and $2.5 billion for QDIE in Shenzhen, according to a note from United Overseas Bank Ltd. “In recent months, Chinese authorities have stepped up efforts to grow the two-way flow of both inbound and outbound investments in their on-going effort to further liberalize China’s financial markets and open up China’s capital account,” UOB said. China’s leaders unveiled a series of steps earlier this month aimed at opening their financial system and more fully integrating into global capital markets. Foreign firms are watching to see whether People’s Bank of China Governor Yi Gang was serious in his pledge to move quickly to level the playing field with domestic financial companies. The currency regulator is also set to allow bigger investments overseas under the Qualified Domestic Institutional Investors program, which was halted for three years. The moves come after pressure on the yuan — and for potentially destabilizing capital outflows — diminished. The onshore yuan had its biggest gain in nine years in 2017 against the dollar, while the Bloomberg Dollar Spot Index is trading near its lowest level since early 2015. Foreign holdings of onshore Chinese bonds rose to a record this year, more evidence of the yuan’s appeal.
Rate-Hike Risks, Rupiah Send Indonesian Stocks to December Low
Indonesian equities dropped the most in Asia, with the benchmark gauge sinking to its lowest level since Dec. 15, on concern that Bank Indonesia may raise interest rates for the first time since 2014 to defend the currency, which is already hurting economic growth. The Jakarta Composite Index fell 2.5 percent to 6,073.02. Banking stocks slid the most on the prospect of higher borrowing costs crimping loan growth and the economy. The Jakarta Finance Index dropped 4.1 percent as all nine industry groups on the benchmark retreated. PT Bank Central Asia lost 4.8 percent, the most since November 2015, while PT Bank Mandiri, the country’s biggest lender by assets, plunged 7.8 percent. “The Jakarta Composite Index may fall further, probably testing the 6,000 level,” said Harry Su, managing director at PT Samuel International in Jakarta. “Investors can start accumulating some shares at this point.” He recommends Bank Central Asia and Mandiri. Analysts from PT BNI Sekuritas, PT Ciptadana Sekuritas Asia and PT Mirae Asset Sekuritas Indonesia said the depreciating currency, which sank to a two-year low against the U.S. dollar today despite “sizable” central bank intervention, has raised the odds for a higher benchmark seven-day reverse repurchase rate as early as next month. Indonesia’s next monetary policy decision is scheduled for May 17. “First-quarter results from Unilever suggested that our economy growth was still weak,” according to John Teja, a director at Ciptadana, referring to the Indonesian unit of the Netherlands-based consumer goods maker. “A weaker rupiah and rising oil price could lead to higher inflation and all of these factors combined could slow loan growth in the banking industry.”