The Fed Has a Problem at the Heart of Its Battle to Spark Inflation
There’s a flaw at the heart of central banking’s approach to inflation targeting that’s become a hot issue for the Federal Reserve as it takes a long, hard look at its strategy. For decades, central bankers have pursued price goals while saying financial stability risks are better curbed by regulation. The contradiction is that monetary policy is often the most powerful fuel for asset bubbles as central bankers hold interest rates low to try and lift inflation that remains weak despite solid growth and rising productivity. That describes the U.S. today, with stocks trading at record highs and financial conditions easy. As central bankers meet Tuesday and Wednesday, they’ll see an economy growing strongly while the core inflation rate slowed to 1.6 percent last month. That’s well below their 2 percent goal and continues a persistent undershoot which has prompted a year-long review of the Fed’s price strategy. “A big part of the policy rethink has to be making the costs and benefits of these trade-offs more rigorous and explicit,” said Julia Coronado, founder of MacroPolicy Perspectives LLC in New York. “How much signal do they want to take from the turn down in core inflation given the growing leverage in the corporate sector that could make the next recession deeper?” Central banks elsewhere have wrestled with striking that balance and the conflict resulted in the resignation in Sweden in 2013 of Riksbank Deputy Governor Lars E.O. Svensson. He stepped down after his colleagues ignored his calls for deeper rate cuts because they were worried about fueling unsustainable credit growth. Just last month Fed officials were divided over whether to raise a capital buffer on the largest banks. They’ll include a panel on financial stability at a Chicago conference in June on the conduct of monetary policy. “If financial conditions ease, growth will be higher and monetary policy should respond” with tighter policy, said former Fed Governor Laurence Meyer. Yet central banks’ response to financial risk is often a story of “not yet, not yet, not yet – too late!’’ U.S. central bankers sound intent on getting inflation higher, after missing their target almost continually since adopting it in 2012. Officials worry that if they can’t hit 2 percent inflation amid strong growth and low unemployment they may never get there.
Euro Area Savors Growth Spurt as Italy Shakes Off Its Recession
Europe’s economy began 2019 with an unexpected growth spurt as Spain outperformed and Italy shook off a recession, easing pressure on the European Central Bank to add stimulus. The 0.4 percent increase in euro-region gross domestic product during the first quarter reported by Eurostat was twice the pace at the end of last year and more than economists predicted. Strong investment in Spain, buoyant consumer spending in France and a faster-than-anticipated rebound in Italy gave a fillip to expansion in the 19-nation currency bloc. The euro strengthened after the data on Tuesday, trading up 0.3 percent at $1.1212 at 12:02 p.m. Frankfurt time. While the region’s growth rate was below the average of the past five years, it marks the second quarterly acceleration since a downturn in trade and factory activity pulled the economy close to a standstill last summer. The current company reporting season in Europe is also shaping up to be fairly bullish — Airbus SE’s earnings surged in the first quarter on higher output of its A320 narrow-body jet. Italy’s rebound in the quarter was a highlight, with the 0.2 percent expansion exceeding the 0.1 percent median forecast of economists. Officials said agriculture, industry and services all saw growth. The region’s third-biggest economy spent the second half of last year contracting. Germany is the only one of the region’s four biggest economies not to report first-quarter figures on Tuesday. The euro-zone outcome includes some German data provided to Eurostat by the country’s national statistics office. Official numbers there will be released on May 15. Business confidence continued to soften in April, and the ECB has already said it won’t raise interest rates this year. Policy makers have expressed mixed feelings about whether a rebound initially pencilled in for the second half will pan out. More evidence of weakness across the region could force them to make recently announced stimulus tools more accommodative to support growth.
Italy Exits Its Slump as Output Grows More Than Forecast
Italy emerged from a recession in the first quarter as output rose more than economists had forecast, in a much-needed boost to the populist government in Rome. Output expanded 0.2 percent from the previous quarter, a report by statistics agency Istat showed on Tuesday. That’s above the median estimate of 0.1 percent in a Bloomberg survey of 30 analysts. The quarterly growth “is the result of an increase of added value in agriculture, in the industrial sector, and in services,” Istat said. In the three-month period there was also a positive contribution from exports, the statistics bureau said. Italy was the only euro nation to fall into a recession at the end of last year as faltering global trade and souring business confidence caused two straight quarterly contractions of its gross domestic product. Industrial production rose both in January and February, prompting hopes of a return to economic expansion. Italian bonds erased declines as demand rose at a 5-year debt sale and after the nation’s gross-domestic-product beat median estimates. The 10-year spread between BTPs and equivalent German bunds narrowed 4 basis points to 254 basis points as of 1:07 p.m. Rome time. Deputy Premiers Luigi Di Maio from the Five Star Movement and Matteo Salvini from the League said the GDP report showed that their economic policies supporting domestic demand are bearing fruit, with Salvini urging what he called a “necessary tax reduction.” Earlier this month, Prime Minister Giuseppe Conte’s government cut its target for output growth in 2019 to 0.2 percent from 1 percent previously. On Friday, S&P Global Ratings said the Italian economy will likely “stagnate this year.” On the same day, the nation’s main business lobby Confindustria said it expects the economic situation to remain fragile and uncertain during the second quarter. The euro-zone economy expanded 0.4 percent quarter on quarter, compared with an estimate of a 0.3 percent expansion, Eurostat in Luxembourg reported earlier.
Alphabet’s Miss Aside, U.S. Tech Has Topped Asia
Google parent Alphabet Inc.’s surprise sales disappointment overnight has been one of the few stumbles so far in an otherwise stellar showing for U.S.-listed technology giants, underscoring a growing divide with their more hardware-focused Asian peers. Shares of Alphabet tumbled more than 7 percent in post-market trading in New York Monday, after first-quarter revenue fell short of expectations and Google’s advertising revenue rose at the slowest pace since 2015. Futures contracts on the Nasdaq 100 slumped as much as 0.4 percent. Until we see how that plays out during regular trading hours on Tuesday, there’s another deviation happening: The NYSE FANG+ Index is up 25 percent this year, outstripping the MSCI Asia Pacific Information Technology Index as the biggest names in the Asia region benchmark including Samsung Electronics Co., Taiwan Semiconductor Manufacturing Co., SK Hynix Inc. and LG Display Co. — all hardware makers — have fallen short of analysts’ expectations so far this earnings season. “Asia is the place that builds everybody’s machines that people use on an everyday basis, and that’s the divergence you’re really seeing,” said Jeffrey Halley, senior market analyst at Oanda Asia Pacific Ltd. in Singapore. “The U.S., for example, has moved into software and service, and Asia is still building the boxes that house it all.” Despite the earnings disappointments at Alphabet and electric car maker Tesla Inc., outperformance among other key names including Microsoft Corp., social media giants Twitter Inc. and Facebook Inc., as well as streaming service Netflix Inc. and online retail behemoth Amazon.com Inc., have helped picked up the slack. The FAANG stocks overall remain key contributors to the S&P 500’s ongoing push to new highs. By contrast, Asian hardware makers are working in tighter margin industries and struggling with changing market dynamics. The move to cloud-based services and streaming has reduced the demand for more storage, while more expensive devices and a lack of game-changing innovation means consumers are holding onto their gadgets longer, Halley said.
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