From Marc to Market:
Last week, some market participants were
giving more credence to what seemed like dovish FOMC minutes than to NY Fed
President Dudley's remarks that accused investors of complacency over the
outlook for rates. Yesterday, Vice-Chairman of the
Federal Reserve Fischer seemed to echo Dudley's sentiment,
and this has underpinned the dollar and
is the major spur of today's price action.
Although
Fischer's speech was focused on the
slowdown in productivity, he reaffirmed that the Federal Reserve was close to
meeting its objectives. He expected growth to strengthen in
the coming quarters. He pointed to the "remarkable" resilience
of the labor market and anticipates
stronger investment going forward.
Our approach to
the Federal Reserve has been to consistently put
more weight in the signals from the Fed's leadership than the regional
presidents. We quickly recognized Dudley's
comments to reflect the Fed's leadership, and anticipated that Fed Chair Yellen
would offer a broadly similar assessment at Jackson Hole later this week.
Although some observers do not accept our heuristic approach, Fischer's
comments are harder to shrug off.
Dudley and
Fischer's comments underscore one side of the divergence, while developments in
Europe and Japan play up the other side
of the divergence. Reports suggest that the ECB's negative interest
rates are finally being passed on the some (mostly large)
depositors. There are press reports that Irish and German banks may have
begun to charge large depositors, while a UK-based bank will also reported pass
through negative rates.
Separately,
BOJ's Kuroda acknowledged that there was technically room to lower rates
further. The
coverage of his remarks seemed to emphasize
what was translated a "sufficient chance" to ease next month.
It is not clear that Kuroda is tipping his hand, but that is the way the market
responded. The yen was sold.
Government bonds and stocks were bought.
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