Monday, August 22, 2016

"Fischer Joins Dudley; Waiting for Yellen"

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.