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- AM Notes: Yellen Moonwalks
AM Notes: Yellen Moonwalks
Yellen's comments yesterday got a lot of attention, but sadly she didn't moooooonwalk.
She 'walked her comments back'.
Either way, the message really didn't deserve the amount of attention it got...
It was purely who the messenger was/is, rather than the message itself...
āIt may be that interest rates will have to rise somewhat to make sure that our economy doesnāt overheat, even though the additional spending is relatively small relative to the size of the economy,ā
The same could have been said by any Fed official in recent weeks (similar comments have been made) & Goldman noted that the comment came pretty near the lows in any case...
This increasing two-way volatility is likely to be a feature in the coming month or so.
Aside from the reopening/rotation narratives, there's also the 'are the Fed going to hike yet?' narrative.
Some seem convinced the Fed will blink early, others think that the Fed really do mean it, and won't even start to taper until full employment is achieved.
My best guess š
Start tapering or start hiking?
I agree on hiking rates but think they will start tapering once 6 to 7 million of those jobs are recovered.
Meets definition of āsubstantial progress towards...ā imoā š Transitory Tim š (@VolaTim) May 4, 2021
One thing we can all be certain of?
Lots of people will be wrong.
June is shaping up to be an interesting month ahead of the next Fed decision on the 16th and further talk of a potential agreement on a united approach to China's economic coercion at the G7 meeting (11th-13th June)
āOur purpose is not to contain China, to hold it back, to keep it down,ā Blinken said in a interview with CBS Newsā ā60 Minutesā that was broadcast on Sunday. āIt is to uphold this rules-based order that China is posing a challenge to. Anyone who poses a challenge to that order, weāre going to stand up and defend it.ā
The EU seems to be waking up to the threat China poses, there's no appetite to ratify the investment deal and they have now added legislation to try and protect European firms from unfair competition by China's state subsidised entities.
The German election could be pivotal too.
Germany has typically looked 'beyond' China's indiscretions and prioritised 'doing business' over all else, but with this new-found awareness that China is a systemic rival, plus the potential for a strong showing from the Green party (who have called for joint action on China and their āblatant human-rights violationsā), the relationship could deteriorate further.
Back in the 'now', re-opening looks to be taking centre stage again...
Crude oil prices gained slightly on Wednesday, trading near 2-month highs in early deals as reopening efforts and vaccination efforts across the globe underpin hopes for a return to normal demand in the worldās largest economies.
Price was further supported after API data showed the US crude inventories went down 7.7 million barrels last week, marking the biggest draw since October.
Global oil markets were already basking in the glow of improved demand sentiment, with OPEC expecting a robust recovery in consumption in the second half of the year.
Adding to the optimism, the EU Commission outlined plans to allow travellers who are fully vaccinated to travel within the EU. On Tuesday, WTI crude rose 52 cents to $66.23 per barrel, while Brent crude added 57 cents to $69.49 a barrel, near its highest since mid-March.
NZ employment data out overnight showed continuing improvements...
Labour market conditions continued to improve in the March quarter, with the unemployment rate dropping from 4.9% to 4.7%.
The result reinforces the sense that the New Zealand economy is past the worst of the Covid-19 shock, and that the unemployment rate of 5.2% in the September quarter last year will prove to be the (surprisingly low) peak in this cycle.
The result was better than our forecast of a flat outturn, and the Reserve Bankās forecast of an increase to 5.0%. The implication is that while weāre still below what the RBNZ would consider to be āmaximum sustainable employmentā according to its mandate, the gap is gradually narrowing.
While the unemployment rate fell, the broader underutilisation rate rose for the quarter. However, even that reflects an underlying recovery story. Unemployment rose by more for women than for men during the Covid shock; now weāre seeing more women move from unemployment to part-time work, even though they would prefer more hours.
Underutilisation was also relatively high in Auckland during the quarter, due to the temporary increases in Covid alert levels.
NZD gained ~25 pips on that announcement
The RBNZ also said that they are prepared to tighten lending restrictions further to rein in the housing market
āIf required, we are prepared to further tighten lending conditions for housing using LVR requirements or additional tools that we are assessing,ā RBNZ Deputy Governor Geoff Bascand said in a statement.
āA high proportion of new lending has had high debt-to-income and loan-to-value ratios.
This makes recent borrowers more vulnerable to a rise in mortgage rates, and exposes households and the financial system to a decline in house prices.ā
āIn terms of new tools, our assessment is that a debt serviceability tool would be the best option for supporting financial stability and sustainable house prices over the medium term,ā
Australian building approvals shooting for the moon
The consensus was for a 3% gain...
Australian building approvals rose by 17.4% in March, following a 20% gain in February.
Approvals are now at their second highest level on record and have increased 47% over the past year.
Good result for construction #ausbiz pic.twitter.com/pwP2vN9Mrcā Callam Pickering (@CallamPickering) May 5, 2021
A construction boom is good for employment. In 2019 ~1.1 million jobs were in the construction industry according to Statista (roughly 9% of total jobs).
The employment recovery is leading to wage pressures according to Stephen Koukoulas
āI canāt find the workers I need to expand my business.ā
āI am having to offer higher pay to attract talent.ā
āI need to start thinking about incentives to retain my existing experienced staff before they are lured away by a competitor ā I have to pay them moreā.
This means one thing - private sector wages growth is about to take off.
The trajectory of those wage rises is difficult to pin point, but within the next few quarters, donāt be surprised to see annual private sector wages growth easily exceeding 2.5 per cent and be squarely on its way to 3 per cent and more.
In the pre-COVID environment, many firms would look overseas for workers and talent. In 2021, this is no longer a source of labour for them. International borders are closed.
Questioning the tightening timeline...
Seems too soon to me. The RBA are as committed as the Fed to really stimulating wage growth and sustained inflation before thinking about hiking.
Looking ahead, broad sentiment looks constructive with European indices called to open higher...
European Opening Calls:#FTSE 6962 +0.56%#DAX 14981 +0.84%#CAC 6280 +0.44%#AEX 703 +0.92%#MIB 24166 +0.79%#IBEX 8910 +0.90%#OMX 2213 +0.85%#STOXX 3953 +0.71%#IGOpeningCallā IGSquawk (@IGSquawk) May 5, 2021
Final PMI's should line up with the flash readings, and the ISM Services PMI is expected to show continued improvement as the economy reopens.
Rate hikes are on the table in Brazil this evening, with the BCB expected to hike by 75bps to 3.5%.
