Recap :

Commentary:

  • Regarding yesterday’s note, note that Nikkei noted that in the most recent monthly survey, a quarter of respondents now expect no additional easing, up from 9% previously.
  • However, historically, substantive Yen repatriation flows have not occurred without a catalyst. Which suggests the possibility that the short USDJPY call may be too early.
  • Dudley seems to also espouse the view that the equilibrium real Fed Funds rate is well below 4%. He noted that
  • “I expect that the level of the federal funds rate consistent with 2 percent PCE inflation over the long run is likely to be well below the 4¼ percent average level that has applied historically when inflation was around 2 percent.” He also said
  • “As typically applied, the Taylor Rule assumes an equilibrium real rate of interest of 2 percent. This seems much too high in the current economic environment in which headwinds persist, and somewhat too high even when these headwinds fully dissipate.”

Obviously the words “much” and “somewhat” can mean various things, but my take is that these statements are consistent with real rates below and around 1%, respectively – which is roughly what 30y TIPS are yielding.

Notable:

  • RBA Minutes:
  1. Members discussed the staff forecasts for the domestic economy, noting that average GDP growth over the forecast period was little changed from the February Statement on Monetary Policy
  2. Although employment growth was anticipated to strengthen, this was not likely to exceed population growth consistently for some time as the improvement in the labour market was expected to be relatively protracted.
  3. Given this outlook for the economy and the significant degree of monetary stimulus already in place to support economic activity, the Board considered that the current accommodative stance of policy was likely to be appropriate for some time yet.

RBA’s DeBelle Speech on Capital Flows:

  1. Turning to the resources sector, the investment phase of the resource boom has peaked, and a number of resource projects are moving into the production phase. As foreign investors have played a large part in the financing of this investment, a move to the production phase should result in reduced capital inflows. At the same time, the increase in resource export volumes should increase the resources sector’s export revenue. The combination of higher revenues and lower capital expenditure outlays could be expected to lead to an increase in resources sector profits and, particularly, an increase in the share of these profits that are paid out as dividends to investors. Given that the resources sector is largely foreign-owned, this would be accompanied by an increase in dividend payments to foreign investors (an outflow on the net income component of the current account).
  2. Although the resources sector’s transition from investment to production will likely result in a reduction in net capital inflows to the sector, the effect on the Australian dollar is more nuanced. While capital inflows to the resources sector may be expected to fall (and thus reduce demand for Australian dollars), this will also be associated with declining imports to the sector, as resource investment has relied heavily on imported capital and labour. Moreover, the balance of payments records these notional foreign direct investment flows as capital inflows (and imports on the current account) even though the respective flows may have been predominantly in US dollars. The (still substantial) part of the capital inflow that represented an actual transaction in Australian dollars was that needed to pay for their workforce in Australia and the often small share of the assembly done locally.
  3. Additionally, to the extent that resource firms’ revenues are primarily denominated in US dollars and their shareholder base chooses to be paid dividends denominated in US dollars, these flows will have no net direct influence on the exchange rate. Only those flows needed to pay for the operations in Australia, to pay dividends to the Australian shareholder base and taxes to the Australian Government will result in purchases of Australian dollars. The net result of all of this is that we might expect to see reduced capital flows and reduced demand for Australian dollars as the resources sector moves into the production phase.
  4. the net implication of these developments is that one might expect to see reduced capital inflows in the period ahead, with the possibility of a consequent further decline in the Australian dollar.

UK CPI rose to 1.8% vs 1.7% exp and 1.6% prev

Expectations for further BOJ easing are falling according to a new survey published in the Nikkei; 24% of respondents now expect no additional easing, up from 9% in the April survey. 31% of the respondents expect further easing in July, down from 46% the previous month. For those who do anticipate the BOJ doing more, incremental action isn’t likely until the fall (instead of the summer). Nikkei

Japan – corporations increasingly anticipate experiencing an uptick in business activity following the recent consumption tax hike-induced weakness; companies also are more willing to raise wages than before. 37 percent were willing to raise income levels for workers, up from 8 percent in November. Reuters

Fed’s Dudley:

  1. 2 percent (inflation) is definitely not a ceiling.
  2. If the response of financial conditions to tightening is very mild—say similar to how the bond and equity markets have responded to the tapering of asset purchases since last December—this might encourage a somewhat faster pace. In contrast, if bond yields were to move sharply higher, as was the case last spring, then a more cautious approach might be warranted.
  3. In terms of the level of rates over the longer-term, I would expect them to be lower than historical averages… slower growth of the labor force due to the aging of the population and moderate productivity growth imply a lower potential real GDP growth rate as compared to the 1990s and 2000s… changes in bank regulation may also imply a somewhat lower long-term equilibrium rate. Consider that, all else equal, higher capital requirements for banks imply somewhat wider intermediation margins. While higher capital requirements are essential in order to make the financial system more robust, this is likely to push down the long-term equilibrium federal funds rate somewhat… Putting all these factors together, I expect that the level of the federal funds rate consistent with 2 percent PCE inflation over the long run is likely to be well below the 4¼ percent average level that has applied historically when inflation was around 2 percent… The fact that the equilibrium real federal funds rate is likely to be lower for a long time underscores the need for caution in applying the benchmark Taylor Rule as a guide to the appropriate stance of monetary policy. As typically applied, the Taylor Rule assumes an equilibrium real rate of interest of 2 percent. This seems much too high in the current economic environment in which headwinds persist, and somewhat too high even when these headwinds fully dissipate.
  4. Also, I think that the language in the June 2011 exit principles with respect to reinvestment needs to be revisited. The exit principles state: “To begin the process of policy normalization, the Committee will likely first cease reinvesting some or all payments of principal on the securities holdings in the SOMA.” There are two considerations that suggest to me that ending the reinvestments prior to lift-off may not be the best strategy. First, such a decision might complicate our communications regarding the process of normalization. Ending reinvestments as an initial step risks inadvertently bringing forward any tightening of financial conditions as this might foreshadow the impending lift-off date for rates in a manner inconsistent with the Committee’s intention. Second, when conditions permit, it would be desirable to get off the zero lower bound in order to regain some monetary policy flexibility. This goal would argue for lift-off occurring first followed by the end of reinvestment, rather than vice versa. Delaying the end of reinvestment puts the emphasis where it needs to be—getting off the zero lower bound for interest rates. In my opinion, this is far more important than the consequences of the balance sheet being a little larger for a little longer.
  5. early results suggest that the overnight RRP facility will set a floor under money market rates. Treasury repo rates have generally traded no more than a basis point or two below the overnight RRP rate.

Fed’s Williams says rate hikes aren’t likely until H2:15; “Everything depends on what happens, but I don’t see it as appropriate given where inflation is, where the labor market is, given the various risks to the outlook, I don’t think it’s appropriate to start raising interest rates until the second half of next year” – WSJ

According to Citi, you could’ve made 9% if you were long the EUR during US hours only: via WSJ

Bank-loan ETFs – worries are rising that a sharp outflow of money from bank-loan ETFs could cause massive disruptions in that market – WSJ

China’s Debt Risks Come to Fore in Housing Project – WSJ

Upcoming Data:

  • Tue: Japan Trade Balance,
  • Wed: BoJ, BoE Minutes, UK Retail Sales, Dudley Speaks, Yellen Speaks, Fed Minutes, EU Consumer Confidence, Japan PMI, China HSBC PMI
  • Thu: EU PMI, UK GDP, Turkey CBRT, Canada Retail Sales, US Jobless Claims, Existing Home Sales, South Africa SARB
  • Fri: German IFO, CanadaCPI, US New Home Sales
Advertisements