The Kansas City Fed’s annual symposium in Jackson Hole yielded some interesting comments from several central bank officials. Fed Chairman Ben Bernanke garnered the most attention, however, as he tried to reassure investors that the central bank will be supportive of the financial markets but also said that they are not prepared to ‘bail out’ investors with a rate cut quite yet. Given Bernanke’s notation that the Fed will be watching the ‘timeliest’ indicators, we have to assume that he is referring to labor market data. We will get our next taste of it this Friday when non-farm payrolls for the month of August will be released. Current estimates of 108K look fairly optimistic, as job losses in the financial sector leave this week?s market numbers likely to disappoint. The question is: will it be enough to convince the Fed to cut rates?
This Week in Central Bank Speak:
US Fed: Dismal NFP?s Could Be the Key to a September Rate Cut
BOJ: On the Path to Rate Normalization?
Yield Spread Analysis 08/28 - 09/04
As volatility has cooled throughout the markets last week, government fixed income instruments have followed suit and have sent bond yields rocketing higher. However, the gains were focused mainly on the short-end, leading many yield curves to invert quite a bit. The reason? Bonds with shorter maturity times are more sensitive to changes in monetary policy and have reacted to the fact that many central banks have turned from holding a hawkish stance to either neutral or slightly dovish stances following the spike in volatility. For example, the European Central Bank was widely expected to raise interest rate on September 6th once ECB President Jean-Claude Trichet reinserted the phrase “strong vigilance” back into his rhetoric. However, he has since backpedaled, noting that he said that before the shake up in the markets. While interest rate futures are still pricing in one more 25bp hike before year end, there is a good chance that Trichet will defer it until October.
Looking ahead, traders should remain keenly aware of risk aversion trends, as this has been the main driver of price action in equities, bond, and forex markets. However, multiple central bank meetings this weekcould add substantial volatility, and Australian, Canadian, European, and UK bonds could be especially susceptible.
US Fed: Dismal NFP?s Could Be the Key to a September Rate Cut
The Kansas City Fed’s annual symposium in Jackson Hole yielded some interesting comments from several central bank officials. Fed Chairman Ben Bernanke garnered the most attention, however, as he tried to reassure investors that the central bank will be supportive of the financial markets but also said that they are not prepared to ‘bail out’ investors with a rate cut quite yet. Given Bernanke’s notation that the Fed will be watching the ‘timeliest’ indicators, we have to assume that he is referring to labor market data. We will get our next taste of it this Friday when non-farm payrolls for the month of August will be released. Current estimates of 108K look fairly optimistic, as job losses in the financial sector leave this week?s market numbers likely to disappoint. The question is: will it be enough to convince the Fed to cut rates?
Ben Bernanke, Federal Reserve Chairman
“Developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.”
“It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions.”
“Inevitably, the uncertainty surrounding the outlook will be greater than normal, presenting a challenge to policymakers to manage the risks to their growth and price stability objectives. The Committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.”
“Although this episode appears to have been triggered largely by heightened concerns about subprime mortgages, global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans.”
“?economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation. Consequently, we will pay particularly close attention to the timeliest indicators?”
Meanwhile, Fed Governor Mishkin reiterated his view that officials should only respond to the effects of asset prices on the outlook for economic growth and inflation in a paper at the same conference:
Frederic Mishkin, Federal Reserve Governor
“As long as monetary policy authorities watch carefully for harmful effects stemming from the bursting bubble and respond to them in a timely fashion, then the harmful effects can probably be kept to a manageable level.” - September 1, 2007
“The overall financial system appears to be in good health, and the U.S. banking system is well positioned to withstand stressful market conditions.” - September 1, 2007
BOJ: On the Path to Rate Normalization?
We are already well aware that Bank of Japan Governor Toshihiko Fukui is anxious to continue on with rate normalization. It appears that there are other hawks waiting in the wings, as the sole member to vote for a rate hike in July and August, Atsushi Mizuno, suggests that Japan?s low interest rates may have contributed to the global subprime-mortgage crisis. Furthermore, even the typically-dovish Kazumasa Iwata cites the risk of land price growth. However, with capital spending growth slowing dramatically in Q2, Fukui may hold off until October before attempting to garner more support for a rate increase:
Atsushi Mizuno, Bank of Japan Board Member
“We cannot say our country’s low interest rate policy had nothing to do with subprime problems and the resulting sharp swings of the yen.” - August 30, 2007
“The underlying financial market turmoil was evidence that maintaining interest rates at levels deviating from fundamentals could destabilize financial markets.” - August 30, 2007
Kazumasa Iwata, Bank of Japan Deputy Governor
“Today, we observe that land prices have bottomed out with a significant rise in the price of commercial land, while the core consumer price index hovers around zero against a background of rising capacity utilization and a tightening of labor market conditions.” - September 3, 2007
Written by Terri Belkas, Currency Analyst of DailyFX.com