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Yellen’s comments suggested that policymakers are far more concerned about the global economic slowdown than the generally steady state of U.S. growth and led the market to conclude that near-term Fed rate hikes will not happen.
In fact, the Fed funds futures aren’t even factoring in a hike until December of this year, indicating that the June meeting will be yet another non-event.
Let’s look specifically at how Yellen’s comments have affected two of the currencies we’ve been watching very closely — the Aussie and New Zealand dollars.
The so-called carry-trade currencies, the Aussie and the kiwi, were the immediate beneficiaries of this change in sentiment, as both soared on forex markets.
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| Were Yellen’s comments actually a lifeline to the People’s Bank of China? |
Both currencies find themselves at multi-month highs against the greenback despite the fact the countries’ central banks have consistently tried to jawbone the currencies in an attempt to keep the exchange rate competitive.
Although neither of the central banks has yet to resort to intervention, that scenario is not out of the realm of possibility if the carry-trade flows push the Aussie through the key 80- cent level and if the kiwi pops above 70 cents.
Both central banks could also resort to further rate cuts, eliminating the carry premium, but monetary authorities are loath to make any dramatic moves for fear of destabilizing the housing and credit markets. Still, recent market moves have completely upended central bank policies and authorities will be forced to act if this trend continues.
But the two Anglo-Saxon economies across the Tasman Sea were the furthest thing on Yellen’s mind. Her uber-dovish stance may have taken the currency market by surprise, but it makes more sense when looked through the prism of the yuan rather than the dollar.
Indeed, the Fed’s recent moves look more like a rescue line to the People’s Bank of China rather than a concerted effort to manage domestic policy. By maintaining a weak dollar stance, the Fed has taken enormous pressure off the yuan, allowing China to maintain a loose monetary policy and restore liquidity to its damaged banking sector.
The key question going forward is whether the present posture will provide enough time for Chinese authorities to reorganize the bad debts of the financial sector and contain the capital outflows.
If Chinese demand could stabilize and resume growth, the Fed would have dodged another bullet and rebalanced the global economy without the need for a severe correction.
However, it remains to be seen if such a rosy scenario could take place given the pressures that still exist in the system. For now, the risk on appetite clearly has control of the market, but the buck’s weakness is sure to evoke reactions elsewhere if it continues unabated.
Best wishes,
Boris
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The Asian Development Bank cut the economic growth forecast for developing Asia this year, with weakening China the main reason for the slimmed-down outlook. Developing Asia will grow 5.7% this year and in 2017, the ADB said. In the December outlook, it had forecast 2016 growth at 6%. The region consists of 45 countries; with 5.9% growth last year. The ADB said growth in China would slow to 6.5% this year from 6.9% in 2015, its weakest expansion in a quarter of a century. Growth is forecast at 6.3% in 2017.
Are you more confident these days? The numbers say you are. The Conference Board said that its U.S. consumer confidence index rose to 96.2 in March after falling to a revised 94 in February. The assessment of current economic conditions did fall a bit, but consumers’ outlook for the future improved modestly, analysts say, by a recovering stock market. This month, 28.7 % of consumers said they expected stocks to rise over the next year.
Home values in 20 U.S. cities continued to rise in January, as the limited supply of available properties pushed prices higher. In January, the Standard & Poor’s/Case-Shiller 20-city home price index rose 5.7% from a year earlier, a slight increase from the 5.6% annual increase in December. Denver, Portland, San Francisco and Seattle registered double-digit annual price rises. Home values increased in all 20 metro area markets, which account for about one-half of the housing stocks in the U.S.
California is looking to help make its residents’ golden years a little more secure by creating retirement-savings accounts as a near-universal benefit for workers with a plan that lawmakers hope will help ease an expected massive shortfall in retirement savings.
The Los Angeles Times reports that a state board sent a set of recommendations to the Legislature calling for the creation of the California Secure Choice Retirement Plan — essentially a 401(k) plan operated by the state and open to private-sector workers whose employers don’t offer a retirement savings plan. Workers of any company with at least five employees would be eligible to participate. In the plan, eligible workers would be signed up automatically by their employers and have 2% to 5% of their wages invested in the plan, unless workers opt out.
Are you more confident about the economy going forward, as the survey seems to indicate? How do you feel about the housing market? Are you looking to buy or sell a home – how’s that going for you? Do you have enough for retirement? Should other states do like California and put in place new retirement plans? Add your comments below.
The Money and Markets team
{ 36 comments }
If 28.7% of Americans expect the stack markets to rise over the next year, that means that 71.3% Expect them to fall, or remain even. That doesn’t seem to reflect much confidence by consumers in this country. How many investors will remain active in the markets if they are that pessimistic?
Also, the markets rose earlier, in part because the Fed said things were becoming all , hunky-dory, and they could start to bring rates back toward normal. Now, they are hesitating, and saying conditions are not so good after all. That is not calculated to give investors a lot of confidence.
large investors will remain happy in a flat market with a 3% dividend.
The California plan sounds kinda like the fox in the hen house. California is spending gazillions of bucks it doesn’t have on a multi decade toy train building scheme called hi speed rail. (By contrast the Central and Union Pacific spanned half a continent in six years and did it with hand picks and shovels and in CP’s case a lot of nitroglycerine). Sounds like a slick way to finance the toy trains. The question is when it comes time to pay out will it be there? Or will it be down the track laden rat hole? State spending in California has a way of becoming a bottomless pit, speaking from experience, my family members way back when got here when it was Spanish California. You will notice the employees are automatically signed up, unless they are paying attention and opt out. Sneaky-sneaky.
Hey Ted
Its the old government Ponzi scheme take the hard working peoples retirement money to spend and give them an I.O.U. Wimpy would be proud of this one.
The housing market in New Mexico is busy but still many foreclosures in 2016.
Californication retire plan subject to outright confiscation,by state or Federal,especially in event of “emergency”.
Aren’t all retirement plans, including 401k’s, subject to the “emergency” treatment?
Since when is the US central bank supposed to be concerned about the economy in any other country other than US? Why is this fraud Yellen basing policy on China??? The Fed, like socialism, has over a century of failure and yet it bumbles on, doing everything they can to keep the banks afloat, no matter the damage to the ordinary American. End the Fed!
The Fed has NOT been a failure at it’s primary job – which is, a Joe said, “doing everything they can to keep the banks afloat, no matter the damage to the ordinary American.”
say it like a true american truth is things are not as bad or as good , it totally depends on who you asked the question and really ultimately their emotional state , so i dont put a lot of credibility to these polls , america still offers the most sound and stable markets in the world , god bless america
And God bless the national debt that you are so on love with. Are you ready to fork over you current share? Federal debt per person is about $58,871,
Yes get on the government tour bus and they will make sure you have a good view of things.
The Cat is playing with the meeces. How does it feel being one of the mice??
Believe the comments by the Fed were pre-planned with the Bank of China, in an effort to assist the yuan
The global economy is completely dependent on central bank intervention.
I think the Fed is just delaying the inevitable….we are going to have a crash worse than ’07 and ’08 this year through 2017. I’m putting my money where my mouth is as just bought more of going long the VIX (TVIX). When will it start again????? Who knows but May is usually very negative, isn’t it?
Brad A
Crashes usually occur in September or October and historically in years ending in 7. The market does fall into the summer usually beginning in mid May – hence the saying “Sell in May and go away.”
I had the impression that by this time it was fairly common knowledge that a “secret” meeting was held after the recent G20 meeting at which it was agreed for Europe and Japan to implement QE, which their central banks did shortly after; and for the US to hold steady, which the Fed did in the same week as the other two. This effectively gave China a much needed devaluation without having to upset the masses; and it gave the Fed the chance to kick the can down the road, they hope, past the elections. So why beat about the bush at this stage in time? Yellen didn’t just “might have tried” to weaken the dollar; she intented to do so.
The U.S. and other global economies are debt-fueled by artificially low interest rates…that is, running on fumes, especially the fumes coming out of Yellen’s mouth. If your balance sheet looked like the Fed’s, you would be flat broke and passing that debt to your heirs to the end of their lifetimes.
There is no such thing as a “solid stock”. You forgot that bondholders are paid first when a company liquidates. That’s not bullshit.
I dare say the overwhelming majority of contributers here on this site think and act for themselves. Jim
most these people will never make any money. but there are a few bright spots worth listening too. mike larson, dr weiss, you, and a few others.
…and boris. you’re insights are magnanimous, jim. keep it up.
Everything is not OK with business as usual just around the corner. One of the most reliable and accurate indicators of worldwide economic activity is the Baltic Dry
Index. Volume determines pricing. In 2013 the index stood at 2300. Last month it was 500. Jim
years ago, i looked at the baltic as a measure of world economic activity. seems to me it was more about eurocentric, and europe is a mess right now. no doubt europe’s problems could affect us all, but the converse is true also. a healthy american economy will eventually lift the tide worldwide, especially in europe and china. i’ll place my bets on europe and china about the time america goes into recession. one seems to follow the other.
Economic students learn that supply and demand determines prices and value but the fact that 95% of traders lose money brings this conventional wisdom into question. Why when they all sell together they all lose money together?
Perhaps a shift in perception will reveal the truth that supply and demand should instead be viewed from the Market Makers perspective, that when all traders sell, the market maker buys (demand) and the more the MM buys (increasing demand), the more the prices increase. So when traders sell, the prices increase!
1.      Too much debt (both public and private).
2.      Obamacare (the “job growth†in the economy is primarily due to full time jobs converted to parttime…1 job becomes 2). Oh by the way, Obamacare spending counts in our GDP so without it we would have no growth whatsoever. GDP would be negative without Obamacare…can you imagine that spending is counted as growth?
3.      The Federal Reserve finding new mandates every 10 seconds (inflation, unemployment, etc.). They keep moving the bar for raising interest rates. Last year they were going to raise rates several times…they did it exactly once by the smallest unit they usually use (1/4 point) and as late in the year as possible. Now they are walking back their talk about 4 hikes this yearl. This makes rates too low and punishes investment. It also makes rates unpredictable…too much money is sitting on the sidelines due to fear.   No investment = no growth.
Again, the only problem with capitalism is that it has never been tried.
The aging of the population is reducing consumption (since older people have already bought what they want and save for a rainy day), but Japan was growing just fine with an aging population until “Abenomics.â€Â The same thing goes for Europe and the stuff Mario Draghi is pulling. The fastest growth in US history came at a time that people didn’t consume hardly at all. Carnegie began to build his empire on his savings. All low rates have done is increase consumption (borrowing) and allowed the banks and corporations to make some money through financial engineering.
Fortunately the government has begun to deal with the public debt problem by faking the CPI (which has already caused social security checks to be about half what they should be and to stifle wages attached to the CPI…mostly union pay). Go to shadowstats on the web and read what they have to say about government statistics… Realize the debt is too high, growing too fast, the the Fed is out of control etc. The last time they talked like this it was “stagflation†under Carter. Clinton had the advantage of being forced to work with a Republican congress during the later part of his presidency (the part where we had growth). Now that both parties are screwed up and the situation is so far out of control one wonders if anyone can fix it without some real pain first. What politician is selfless and patriotic enough to be willing to dish out real pain?
Why is our government trying to prop up a government’s economy, who is attempting to destroy our economy ?
mike larson and boris schlossberg are the best thing that every happened to this website. but currency guys like boris see currencies affecting everything else, but i really think it’s the other way around. everything else affects currencies. currencies really have no affect on anything. they’re like a thermometer is to the temperature, nothing more.
Dear frank. You got it right, the government simply cannot afford interest on the debt. Facts are very stubborn issues with which to coupe.
The number of Baby Boomers retiring far outnumbers the people well below retirement age coming along behind them, is a growing problem. A major asset these retirees have is their home. A lot, if not most, want to sell their present home in order to buy a home that fits their retirement plans or their health situation. As they are putting more and more homes on the market with fewer people with the ability or desire to move up to that level of home, the housing market will have a glut of high priced houses that are not selling. This could make for a new debt crisis or a big deflationary force. Ageing at home may be the best answer.
I think the ability to write an IOU , for any amont of money, and have it accepted as equal to any money that was previously in existence , is the most powerful clout possible , and that is exactly the clout central bankers created for themselves. Is it a wonder that Thomas Jefferson said that the creation of a central bank was more dangerous to the American People than a foreign army on the street cornors.
You all are risking your money, take a risk and vote for Trump. Our do nothing Congress isn’t about to do anything.
my name is Joseph Maroa, my aim in life is to help the needy as much as I can. I have a church that helps widows n orphans in our community. But this is a collective aim that we cant manage alone. Thus why we have patnered with Church of God under the guidance of Bob to achieve this dream.
Show me where Yellen has helped the yuan “devalue” by pressuring the dollar? Evidence says the exact opposite. The yuan has only gotten stronger with both the non-hike of the dollar in march and her stunt at the Economic Club 2 weeks later. The yuan has gone from 6.52 (march 15) to as high as 6.46 (march 30).