June 7, 2018
Fed on Track to Raise Rates Regardless of Emerging-Market Woes
Emerging markets struggling with higher U.S. interest rates are likely to get little sympathy from the Federal Reserve. Currencies of such nations have been hammered in a spreading selloff amid worries that their economies won’t cope with higher U.S. borrowing costs. That’s prompted central bankers in India and Indonesia to raise interest rates and urge Fed caution, while officials in Brazil are bracing for challenging times too. There are few signs such concerns will steer the Fed away from its course for at least two and possibly three more rate hikes this year, including a move at its policy meeting next week. Chairman Jerome Powell explicitly pushed back against criticism early last month in Zurich, saying the role of U.S. monetary policy on foreign domestic financial conditions was “often exaggerated.” His colleague, Governor Lael Brainard, mentioned emerging markets in a May 31 speech, but spent far more time discussing the upside risks posed by fiscal stimulus. “I don’t think they can change policy based on fear,” said Bricklin Dwyer, senior economist at BNP Paribas in New York. Emerging-market turmoil “is noise right now, justifiable noise. But does it shift the outlook for the U.S? The answer is, not yet.” The U.S. economy is powering ahead, adding over a million jobs in the first five months of 2018. Inflation is at the central bank’s 2 percent target, and the Atlanta Fed’s gross domestic product tracking model suggests the economy grew a strong 4.5 percent in the second quarter.
Europe Stocks Extend Gains as U.K. Market Opens After Delay
European stocks extended their gains after the U.K. equity market started trading following a delay by one hour. The Stoxx Europe 600 was up 0.4%, with the FTSE 100 gaining as much as 0.6% after the delayed opening, which the exchange said was due to a technical issue. The rally in European shares on Thursday mirrored strong gains on Wall Street, led by advances for financial stocks. European cyclical sectors paced the gains, with banks, autos and tech outperforming as the German bund yield rose back to above 0.5%. European stocks extended their gains after the U.K. equity market started trading following a delay by one hour. The Stoxx Europe 600 was up 0.4%, with the FTSE 100 gaining as much as 0.6% after the delayed opening, which the exchange said was due to a technical issue. The rally in European shares on Thursday mirrored strong gains on Wall Street, led by advances for financial stocks. European cyclical sectors paced the gains, with banks, autos and tech outperforming as the German bund yield rose back to above 0.5%. “For now, the situation in Brazil and Turkey is mostly background noise, not enough to really to unsettle European equity markets,” Stephane Ekolo, equity strategist at TFS Derivatives, says by phone. “What seems to be a game changer is the ECB’s message yesterday on the potential end of QE, this could change all the scenarios we have.”
Turkey Central Bank Is Latest to Surprise With Big Rate Move
Turkey joined a string of emerging-market central banks that surprised investors with large interest-rate increases, tightening on Thursday for the third time in less than two months. The lira surged and the nation’s bonds rallied. The decision came three days after an inflation report showed consumer prices rose 12.15 percent in May from a year earlier, with the worst core reading on record and producer prices advancing more than 20 percent. Investor expectations were building for another increase after central bank Governor Murat Cetinkaya and Deputy Prime Minister Mehmet Simsek met investors in London late last month to reassure them that policy makers were willing to act if necessary. But no one in a Bloomberg survey expected an increase of the magnitude Turkey delivered, raising its one-week repo rate by 125 basis points to 17.75 percent and signalling that it’s willing to stand up against political pressure and fight double-digit inflation. “Is this the start of a new era of Turkish central bank policy — actually moving ahead of the market? Let’s hope so,” said Nigel Rendell, a senior analyst for EMEA at Medley Global Advisors. “Positive impact on the lira is seen as the repo rate rises. How things develop on both the policy front and for the lira longer-term will depend on events after the June 24 elections and whether Erdogan gives the CBRT latitude to act independently.” A combination of a rising dollar, spiraling inflation, widening budget and current account deficits, and political pressure for lower rates spurred a flight from lira assets in May. The central bank responded to the rout by first raising its late-liquidity window by 300 basis points at an unscheduled meeting, and then announcing a decision to to simplify its interest-rate regime, setting the one-week repurchase rate as its main funding tool. The bank didn’t publish any information on its other rates on Thursday, a move that seemed to be in line with its earlier announcement that it was simplifying policy.