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.
|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.
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