Analysts are predicting a positive 2017 for European equities, not least because they are currently undervalued compared with US stocks. But there are risks on the horizon due to political instability (elections in France, Germany and Holland, plus the effects of Trump and Brexit), and uncertainty over the timing of the Fed’s rate hikes.
The Fed has increased its daily interest rate to 0.75%, saying it predicts three further hikes in 2017. This is called active and persuasive monetary policy. But the central banks are no longer the masters of the economy, whipping it into a place they want.
Natixis AM | The Fed decided On Wednesday to increase its main rate by 25 bp. The US central bank had mentioned so many times this hike that it has to do it. But what will happen now?
J.L.M. Campuzano (Spanish Banking Association) | Many argue that the conditions are not there for an uptick in inflation on a global scale. Well, that’s true: weak world growth, globalisation and a still negative output-gap in many developed countries (and emerging ones). But are we not being carried away to some extent by the disinflation inertia of the last few years? All eyes will be on the US Fed’s decision on interest rates and its forward guidance at this week’s meeting.
BoAML | We believe that nominal US rates are biased lower heading into a period of policy uncertainty including the US Presidential contest, European elections, and continued negotiations over Article 50. We continue to think that there may be a re-pricing of uncertainty premium over the next month.
Investors do not expect the Fed to move on rates at today’s’ meeting. There is only a slim 20% support for this view, as hopes for a strong recovery were dashed by recent disappointing data. The widely expected hike may have to wait until the Presidential Elections are over.
J. L. M.Campuzano (Spanish Banking Association) | During one of the conferences at last week’s Jackson Hole meeting, ECB council member Benoit Coeure analysed the extreme monetary measures taken by the ECB (in reality by all the main central banks) during the crisis. His opinion was that the neutral interest rate equilibrium is now very low (the product of a combination of low potential growth and low inflation expectations) which explains the remainder of the exceptional measures implemented.
J. L. M.Campuzano (Spanish Banking Association) | Fed deputy chairman Fisher said last Tuesday that any future decision on interest rates will depend, in the end, on the data. The market is now awaiting the US August jobs figures, due out tomorrow. This will be the key indicator anticipating a September rate hike. They say that more than 150,000 new jobs will be a sufficient trigger for the Fed to take its decision this month. And the necessary condition? That the rest
At Jackson Hole, Janet Yellen dwelt extensively on the challenges raised by low neutral rates, recognizing the need to broaden the unconventional toolkit for compensating for the subdued impact rate cuts might have in future. By hinting the Fed should reinforce its weaponry, just in case there is an unexpected and most unlikely bout of recession, Janet Yellen is sending the wrong message.
On the eve of the Jackson Hole Fed gathering, the San Francisco Reserve Bank Chairman, John Williams, has launched an enlightening debate on the challenge raised by protracted natural interest rates. The so-called r-star would rank now close to zero in the US and below that threshold in the Eurozone.