It’s halftime and so far "Helicopter" Ben has packed “no punch nor any surprises.” The Fed chairman’s prepared semiannual monetary policy testimony was as expected, decidedly dovish in tone. Perhaps most significantly, the chairman did not take the idea of a September tapering of asset purchases off the table and repeated that the FOMC “expected to continue to reduce the pace of purchases in measured steps through the first half of next year, ending them around midyear.” A point that he was adamant to make was that the Fed’s “asset purchases depend on economic and financial developments, they are by no means on a preset course.”
The “nothing new” comments have had a calming effect for any investor that may still be harboring concerns about a near term end of the U.S. easing policy. Very few have been persuaded to change their initial thought that the FOMC will slow the size of its monthly asset purchases at its September meet. The committee may be convinced to “pause for a meeting or two to gauge the progress of the recovery and observe the negotiations over the debt ceiling and other fiscal matters.” Further tapering may not occur until we have entered the New-Year. If nothing else, thus far, Ben’s comments have reassured the market that the central bank was keeping monetary loose in the near term, which has allowed global equity markets to rise.
"Helicopter" Ben gets to appear before the Senate Banking Committee later this morning, with the hearing scheduled to begin at 10:30 EDT. The tone of Bernanke’s prepared testimony yesterday should be played out again today, which essentially should keep a lid on any USD gains.
Ever since we hit the depths of this world recession, financial markets and global growth have received support from the Fed’s massive large-scale asset purchase program and China’s credit boom. However, the continuation of said programs is now beginning to be called into question. With respect to the Fed, economic downside risks have very much reduced, such that Bernanke and his fellow cohorts now feel that they are in a position to contemplate beginning to pull back on their monthly stimulus or taper bond purchases. Assuming that U.S. labor conditions improve, the Fed believes they could be in a position to end asset purchases around the mid of next year.
Across the globe to China, the world’s second largest economy, authorities there now believe that with the ratio of private debt/GDP exceeding the levels both in the U.S. and Europe, that a modest further economic slowdown would be “less destabilizing” than a major new credit stimulus aimed at restoring real GDP growth above +8%. Both policy makers and governments alike are wondering if this slowdown has now run its course and can they now concentrate on growth objectives?
China has been the market's and investors' economic beacon of choice. It’s not unusual to see Chinese authorities being "coy" and "sleight of hand" with recent economic rhetoric. There has been much discussion of the move away from “economic growth” as their key policy objective. Chinese Premier Li Keqiang said the nation would seek to keep economic growth, employment and inflation within limits, avoiding “wide fluctuations.” It’s no surprise that Chinese authorities have not yet elaborated on what they deem acceptable.
Despite all this, the IMF is beginning to sound their alarm bells. Officials there believe risks are increasing and that China’s economic growth this year will fall well short of the lender’s earlier forecast. The organization is urging the world’s second largest economy to follow through on policy reforms to sustain expansion. Policy makers believe that the Chinese economy is becoming “increasingly vulnerable to risks from an expansion of non-traditional sources of credit and borrowing by local governments.” It has been reported that China’s Commerce ministry has submitted a report to the State Council outlining measures to support foreign trade. Plans could be unveiled as early as late-July. Until further notice, perhaps foreigners need to accept softer data as the new norm until told otherwise?
U.K. retail sales rose sharply in Q2 this morning (+0.9%, q/q), adding to a growing pile of evidence that a British economic recovery that started in Q1 is not letting up so far. The result is expected to contribute +0.1% to economic growth in Q2 and follow the +0.3% growth recorded in Q1. Analysts believe the rise reflected the warmer weather in June that attracted shoppers. U.K. department stores happened to record the fastest month-to-month rise in sales in over a year. All of this will have little implication for monetary policy. The focus for Carney and the BoE remains on making sure that they get their forward guidance script worked out and that they are capable of clearly communicating their stance. Cable is eyeing some mooted offers north of 1.5210, with further offers touted at 1.5240 and 1.5270 (yesterday’s high).
New Bank of Canada Chief, Stephen Poloz kept his predecessor’s mild tightening bias intact yesterday in the BoC policy statement release. The “considerable monetary policy stimulus currently in place will remain appropriate. Over time, as the normalization of these conditions unfold, a gradual normalization of policy interest rates can also be expected, consistent in achieving the +2% target.” Despite the new governor bringing a different style to the bank, there is no real change to the substance of its view. Core inflation remains stuck near +1% and growth is struggling to get much more above that zone. The banks three conditions:
- Degree of Slack
- Core Inflation
- Household debt
These three bank conditions will provide the guidepost on any changes in timing. The market continues to look to sell the loonie on USD pullbacks, believing that the market will retest the dollar highs, north of 1.0600 again sometime soon.
For the 17-member single currency, The EUR’s right hand side progression has been rather slow, so much that the short-term bias is beginning to focus on the 200-DMA at or near 1.3079 below. The market has repeatedly failed to sustain the break above the 1.3165 levels on top. Despite a stronger dollar, summer trading remains subdued in this North American heat, with tight ranges and market participants unwilling to put on any big bets ahead of Ben’s second testimony- the risk/reward is just not there.