The annual meeting of the world’s central bankers agreed on several points: employment and inflation are still concerns and the communication coming out of Wyoming should be seen as the measure for how central banks will respond to rates over the coming year.
However, the severity of employment and inflation issues globally vary strongly and all bankers believe that a divergence is coming. It is more likely that the likes of the Federal Reserve, the Bank of England – and even possibly the Bank of Canada and RBA – will move rates higher over the coming year.
The ECB and Bank of Japan acknowledged they might have to lower rates further (negative rates) and deploy stimulus. This clear divergence again positions pairs such as EUR/USD, USD/JPY and EUR/GBP as the key currency trades over the coming year.
But the starkest talk out of the meeting was from Fed chair Janet Yellen, who returned to her long-standing narrative around employment. She continues to highlight very clearly that the health of the US employment market is more than just the headline unemployment figure and pointed to the emphasis the board has on its labour market conditions index.
The US participation, employment mix and wage inflation rates are still showing significant slack and collectively remain a threat to demand. Her views have not varied or altered, and remain the default thinking of any speculation around the Fed’s funds rates.
However, like Philly Fed President Charles Plosser, there are still several hawks on the board pushing the view that rates are too low. St. Louis President James Bullard reiterated his call that tightening will happen sooner rather than later. Kansas City President Esther George, a well-known hawk and a dissenting voter, stated in her interviews with the press that employment gains suggest the economy is strong enough to weather increases to the Fed funds rate.
Countering this was Atlanta President Dennis Lockhart, suggesting that conclusions around the strength in the US economy have to be taken tentatively. He sees rates on hold till the middle of next year. San Francisco President John Williams backed Lockhart’s and Yellen’s comments and expects rates to stay on hold ‘til late 2015.
What I see from the news out over the weekend is playing the ‘lower for longer’ theme remains the right strategy. However, the diverging views on the board are increasing, which may muddle the Fed’s well-drilled communication to the market.
This reminds me of the lead-up to the tapering program, where the market tried twice to pre-empt the Fed and jumped early at the prospect of rates moving early, creating jolts. It’s likely to begin again come the beginning of 2015, and therefore we should expect volatility to return, having seen it spike in the lead-up to tapering. Navigating the communication issue will require some skill form Yellen and Co., and the more they diverge, the more the market will speculate.
Ahead of the Australian open
The ASX again couldn’t punch through 5650 on Friday and, despite a new six-year closing high of 5645, there are slightly bearish tones in trade at the moment. It looks like bears are defending positions above 5650 vigorously. Based on Saturday’s close of the futures market, we’re currently calling the ASX 200 down a handful of points to 5636. However, it’s the fall in iron ore that is likely to play on investors’ minds as it teeters on the edge of US $90 a tonne.
With most stocks turning ex-dividend over the next 10 trading days, their ability to maintain the top-of-the-cycle prices may come under pressure and is likely to prove a drag on the overall market.