DXY slumped last night. CNY was soft. EUR rose:
The Australian dollar blasted off versus DMs:
But was mixed against EMs:
Gold broke out:
Oil keeps falling:
Metals keep laughing:
Miners were soft:
EM stocks firm:
Junk fell with oil:
Treasuries rampaged:
With bunds:
Aussie bonds were bid:
Stocks rebounded from losses:
Westpac has the wrap:
Event Wrap
Manufacturing sentiment in the Philly region rebounded strongly in July, the Philadelphia Fed general activity survey surging to a one-year high of 21.5 from 0.3, exceeding even the most bullish forecasts; orders, shipments and employment all saw solid increases. The Conference Board’s US economic leading index fell 0.3%, weaker than expected. US jobless claims hovered down near general lows for yet another week; +216k from 208k the prior week.
UK June retail sales surprised with an outsized rise against expectations for weak sales. Headline sales rose +1.0%m/m and +3.8%y/y (est. -0/3%m/m and +2.6%y/y) whilst ex fuel rose +0.9%m/m and +3.6%y/y (est. -0.2m/m, +2.6%y/y). The gains were across all sectors except for department stores. The share of internet sales unexpectedly slipped due to the rise being predominantly across bricks and mortar sales.
EU’s Barnier and Irish PM Varadkar both indicated a degree of willingness to negotiate once the new UK PM is confirmed, suggesting that they were open to alternatives around the Irish border and even a further extension to the current 31 October deadline.
UK Parliament voted to block moves towards a no-deal Brexit with the House of Commons voting 315-274 for the block due to a series of Conservatives abstaining or defying the Party Whip.
Event Outlook
Japan: Jun CPI is expected to show headline inflation holding at 0.7%yr.
US: Jul University of Michigan consumer sentiment (preliminary) is anticipated to remain above average at 98.4. Fedspeak involves Bullar
d on technology and the future of the financial system and Rosengren sits on a panel on central bank independence at an event at Columbia University.
New York Fed President John Williams gave the most dovish speech I can remember from a Fed governor:
My wife is a professor of nursing, and she says one of the best things you can do for your children is to get them vaccinated. It’s better to deal with the short-term pain of a shot than to take the risk that they’ll contract a disease later on.
I think about monetary policy near the zero lower bound—or ZLB for short—in much the same way. It’s better to take preventative measures than to wait for disaster to unfold.
Today I’m going to talk about three things: first, the heightened relevance of the ZLB for monetary policy; second, the strategies designed to mitigate the effects of the ZLB in an economic downturn; and finally, why these strategies are so important for achieving our monetary policy goals.
I’ve already referred to monetary policy several times. So, before I go any further, I need to give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System.
…Our current estimates of r-star in the United States are around half a percent. That’s actually now lower than at any time before the Great Recession. We’ve seen similar declines in r-star in other advanced economies, including in Japan and the euro area.
As shown in Figure 1, the weighted average of estimates of r-star for Canada, the euro area, Japan, the United Kingdom, and the United States is now also half a percent, nearly 2 percentage points below where it stood at the turn of this century.
These very low neutral rates are a result of long-term structural factors slowing growth. They’re driven by demographic changes and slow productivity growth, which are unlikely to reverse any time soon.
Low r-star implies that many central banks will be grappling with the challenges of life near the ZLB, which is why it’s so critical to consider how the ZLB alters strategies related to monetary policy.
And that’s exactly the question we looked at around 20 years ago. In a paper and subsequent FOMC briefing in January 2002, my colleague Dave Reifschneider and I evaluated the effects of the ZLB on the macro economy and examined alternative monetary policy strategies to mitigate the effects of the ZLB.
This work highlighted a number of conclusions based on model simulations. In particular, monetary policy can mitigate the effects of the ZLB in several ways:
The first: don’t keep your powder dry—that is, move more quickly to add monetary stimulus than you otherwise might. When the ZLB is nowhere in view, one can afford to move slowly and take a “wait and see” approach to gain additional clarity about potentially adverse economic developments. But not when interest rates are in the vicinity of the ZLB. In that case, you want to do the opposite, and vaccinate against further ills. When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.
This brings me to my second conclusion, which is to keep interest rates lower for longer. The expectation of lower interest rates in the future lowers yields on bonds and thereby fosters more favorable financial conditions overall. This will allow the stimulus to pick up steam, support economic growth over the medium term, and allow inflation to rise.
These first two conclusions featured in my paper with Dave Reifschneider from 2000. In that paper, these ideas were described as modifications of an otherwise standard Taylor rule for monetary policy. The “forward-looking adjustment” to the Taylor rule illustrated the idea of moving in advance of a downturn to provide timely stimulus. The “backward-looking adjustment” illustrated the idea of keeping interest rates lower for longer.
Finally, policies that promise temporarily higher inflation following ZLB episodes can help generate a faster recovery and better sustain price stability over the longer run. In model simulations, these “make-up” strategies can mitigate nearly all of the adverse effects of the ZLB.
One particular benefit is that such strategies can be highly effective at keeping inflation near the target on average, thereby anchoring inflation expectations at the desired level.
…One reason it’s been hard to sustain inflation at the target rate is that persistently low inflation due to policy being constrained by the ZLB can feed into inflation expectations. If inflation gets stuck too low—below the 2 percent goal—people may start to expect it to stay that way, creating a feedback loop, pushing inflation further down over the longer term.
The lower average level of inflation translates into a lower level of interest rates cuts available during a downturn, making it even harder for policymakers to achieve their goals.
…This downward slippage of longer-run inflation expectations, if it persists, implies that in the future central banks start further from their inflation goals and have even less room to maneuver, making the problem of low r-star and the ZLB even more difficult.
…The key lessons from this research hold today and in the future. First, take swift action when faced with adverse economic conditions. Second, keep interest rates lower for longer. And third, adapt monetary policy strategies to succeed in the context of low r-star and the ZLB.
These actions, taken together, should vaccinate the economy and protect it from the more insidious disease of too low inflation.
Markets are now pricing a greater chance of a 50bps than 25bps cut for this month’s FOMC meeting:
That still seems a desperate move to me but it’s hard to disagree with this kind of uber-dovishness emanating the Fed.
So long as that holds sway then AUD has little choice but to rise. Given the chart breakout the path of least resistance is higher in the short term. That said, I still don’t see it getting overly far as the ECB joins in, the PBOC follows, bulk commodities fall, the RBA cuts again, and US growth and inflation still out-performs everywhere else.
