- ECB - Rate Outlook Hinges on Trichet?s Commentary
- US Fed - Steady As She Goes
- BOJ - Little Hope For Hikes
Yield Spread Analysis 05/29 - 06/05
Optimistic global growth outlooks have sent long term yields surging higher, with Australian and New Zealand bond rates seeing some of the biggest gains. This is not entirely surprising since the commodity-exporters look to benefit the most from expansion - especially in China. Short term rates in Canada continue to rise steadily as strong economic data raises the stakes for a July hike by the Bank of Canada.
Meanwhile, the yield curve for the Euro-zone has steepened quite a bit, as bond prices have taken a hit amidst expectations that the ECB will continue to hike beyond 4.00 percent. However, markets will have to await ECB President Trichet?s press conference at 12:30 GMT on Wednesday in order to hear the most useful evidence, as the central bank?s transparency has given way to verbal cues on future policy moves.
ECB - Rate Outlook Hinges on Trichet?s Commentary
There is little doubt that the European Central Bank will raise rates on Wednesday, but the key factor traders will be looking at is whether ECB President Trichet signals additional tightening beyond 4.00 percent:
Jean-Claude Trichet, European Central Bank President
“Recent economic developments in the Euro-zone are very encouraging but the bloc has no scope for complacency.” - June 4, 2007
Klaus Liebscher, European Central Bank Governing Council Member
“Strong wage gains and credit growth require the European Central Bank to be vigilant in its battle against inflation?The ECB will continue to watch inflation developments very closely and act in a firm and timely manner if necessary?The world economy is developing very robustly at the moment. In the Euro-zone too we see very good growth for this year and next.” - June 1, 2007
Axel Weber, European Central Bank Governing Council Member
“Low inflation levels do not allow for complacency on our part. Instead, we will continue to do our utmost in order to keep long-run inflation expectations solidly anchored.” - June 4, 2007
Meanwhile, French President Nicholas Sarkozy is still up in arms regarding the value of the euro. Italian Prime Minister Romano Prodi may be on Sarkozy?s side, but most members of the European Union, including export-dependent Germany, believe structural reforms are a better solution to improve demand from foreign countries:
Nicolas Sarkozy, French President
“How can you continue to export if the euro is the only currency in world that is overvalued compared to the dollar, the yen and the yuan.” - May 29, 2007
Peer Steinbrueck, German Finance Minister
“Germany sees little problem with the current strong euro exchange rate because its exporters are less sensitive to price fluctuations than some other euro-zone countries.” - May 31, 2007
US Fed - Steady As She Goes
For good reason, the slowdown in the housing sector remains a hot topic for the US Federal Reserve, and while Chairman Bernanke sounds confident that it will not affect other sectors, traders may be skeptical:
Ben Bernanke, Federal Reserve Chairman
“Of course, the adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected. Thus far, however, we have not seen major spillovers from housing onto other sectors of the economy.” - June 5, 2007
“In addition, we at the Federal Reserve, other regulators, and the Congress are evaluating what actions may be needed to prevent a recurrence of these problems. In deciding, we must walk a fine line: We have an obligation to prevent fraud and abusive lending; at the same time, we must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers.” - June 5, 2007
Nevertheless, weakness in the housing sector nor dismal GDP are considered factors for Fed decision making, and with inflation risks remaining high, US rates are likely to stay at 5.25 percent for quite some time:
Randall Kroszner, Federal Reserve Governor
“Economic activity was held down in the first quarter, in part, by several factors that seem likely to prove transitory.” - June 1, 2007
“I believe that the risks to the inflation outlook are primarily to the upside?the high level of resource utilization continues to have the potential to put additional upward pressure on inflation. And, of course, higher oil prices and the possibility of further increases also pose an upside risk to inflation.” - June 1, 2007
BOJ - Little Hope For Hikes
Much to the dismay of government officials, carry trades are still fully in play as the Japanese yen has done nothing but weaken over the past week. However, with CPI still signaling deflation, capital spending slowing from the fourth quarter, and wages remaining tepid, perhaps the national currency really does match fundamental data:
Toshihiko Fukui, Bank of Japan Governor
“Our current assessment is that the Japanese economy as a whole is recovering gradually, although the degree of the recovery varies depending on different sectors, company sizes and regions.” - June 5, 2007
“The BoJ’s stance is that - we’ve never said we ignore recent developments in prices - we will project a future path based on the current prices, and if we can expect such desirable probability, we will take monetary policy actions to implement it in a necessary timing.” - May 29, 2007
Kiyohiko Nishimura, Bank of Japan Board Member
“But overall gains in base wages and unit labor costs are expected to be more pronounced gradually and as the virtuous cycle of production, income and spending gradually spreads to different sectors and regions and becomes synchronized in light of progressing structural reforms, the economic expansion will be sustained. I believe this will help the consumer price index, a lagging indicator, show steady gains toward the end of the current fiscal year (to March 31, 2008) to the next fiscal year. This outlook is not so different from the view held by the majority of market participants.” - May 31, 2007
Hiroko Ota, Japanese Economics Minister
“While corporate investment has been confirmed to be strong by the data, production is still weak, and I’d like to monitor its impact on the economy in the coming month or two.” - June 5, 2007
“The (domestic) conditions are continuing where a tighter job market has not resulted in higher wages. Although I think the tight market will eventually lead to rises in wages, I’m a little perplexed as to why it’s taking such a long time.” - June 1, 2007