Month: September 2016

A top Federal Reserve official repeated his call for gradual interest rate hikes, evidently unfazed by a slowdown in US job gains and sluggishness in the services sector that now has traders betting against any rate hike at all this year.

In his prepared remarks Williams did not address the release of data on Tuesday that showed activity in the US services sector had hit a six-and-a-half-year low, or government data last Friday that showed US employers added fewer jobs than expected in August.

Williams said the economy was in “good shape,” and he forecast unemployment, now at 4.9 percent, to fall to 4.5 percent in the coming year and inflation to rise to the Fed’s 2 percent target in the next year or two.

Longer-term, however, Williams made it clear he is far from comfortable with the Fed’s current approach to monetary policy.

Targeting low inflation, as the Fed and many other central banks currently do, simply will not work well in a world where economic growth and interest rates are likely to be persistently lower than they were in the era before the Great Recession, he said. A low inflation target, he said, gives the Fed too small a buffer to fend off future shocks.

The Fed could raise its 2 percent inflation target to 3 percent or even 4 percent, or shift away from inflation targeting altogether and instead target a nominal level of national economic output, Williams said.

He said that because it will take time to figure out which approach will work best when faced with future downturns, the Fed needs to get cracking.

“Time is not on our side,” Williams said.

Williams first raised the idea of ripping up the Fed’s monetary policy playbook last month, when he also began advocating more strongly for a rate hike.

Fed Chair Janet Yellen said last month that the Fed was not currently actively considering any of the strategy shifts that Williams had argued for, and it is not clear how much traction his ideas have gained.

Asian shares opened mixed on Wednesday, shrugging off Wall Street’s higher close on “bad news is good news” as weaker-than-expected US ISM services data lowered the chances the Federal Reserve will hike rates.

The dollar/yen pair fell to 101.33 at 9:35 a.m. HK/SIN time, below the 103 levels it had held for the past three trading sessions. That move came as the dollar weakened amid lower prospects for the Fed to hike interest rates at its September meeting.

“Without the Fed around to support the heavy lifting in September, that is to raise rates, the market is less than convinced that any standard Bank of Japan policy will be effective at this stage. Look for probes lower” for the dollar/yen pair, wrote Stephen Innes, senior trader at OANDA, in a note.

“That said, the BOJ could still make a splash by pulling out some unconventional policy measure, but pressure is certainly mounting for some kind of action,” Innes added.

Down Under, the S&P/ASX 200 traded higher by 0.39 percent, buoyed by its materials subindex, which was higher by 0.78 percent and financials subindex gaining 0.42 percent, offset by the energy sector falling 1.07 percent.

Chinese mainland markets were higher early trade, with the Shanghai composite up 0.11 percent and the Shenzhen composite gaining 0.2 percent. In Hong Kong, the Hang Seng index was flat.

In South Korea, the benchmark Kospi was up 0.15 percent.

In the US on Tuesday, data showed the US Institute for Supply Management (ISM) non-manufacturing purchasers manager index (PMI) index fell to 51.4 last month from 55.5 in July. While levels above 50 still indicate expansion, it was the lowest reading since February 2010.

The miss, along with Friday’s disappointing nonfarm payroll data, likely spurred traders to step away from expectations of a September Fed hike.

“The [ISM] number is a serious miss and all but wipes out the chance of a Fed rate hike in September. If data continues to weaken, we will see the chances of December rate hike fall sharply as well,” Anthony Darvall, chief market strategist at trading platform easyMarkets, said in a Wednesday note.

In the currency market, the dollar fell more than 1 percent against the yen, euro, pound, Australian dollar and other major currencies during the US Tuesday session. The dollar index was trading at 94.899 in early Asian trade, down from levels over 96 last week.

The Australian dollar was trading at $0.7666 during Asian trade, up from levels under $0.75 last week, getting a boost from waning expectations for a September Fed hike and after the Reserve Bank of Australia on Tuesday kept interest rates on hold. Analysts parsing the RBA statement noted that the central bank appeared to be signaling concerns that further rate cuts might overheat the housing market.

Australia’s gross domestic product (GDP) for the second quarter rose 0.5 percent on-quarter, just a smidgen below expectations of 0.6 percent growth from a Reuters poll, data released Wednesday showed.

In Japan, internet company Rakuten’s shares rose 6.83 percent after the announcement it would be included in the Nikkei Average, Reuters reported.

South Korea’s Hanjin Shipping won a US judge order extending bankruptcy protections so its vessels can dock at US ports without fear of creditors trying to seize the ships, Reuters reported. The troubled container shipper saw shares gain 10.07 percent, extending Tuesday’s 29.91 percent surge.

US crude oil futures traded lower by 0.27 percent at $44.71 a barrel, while Brent futures shed 0.13 percent to $47.20, on receding hopes of an agreement between Saudi Arabia and Russia to freeze output.

Markets were watching for China’s August foreign exchange reserves, Malaysia’s central bank rate decision and the US Fed Beige Book.

“We think that Bank Negara Malaysia’s meeting this time may be a close call between a 25 bps rate cut and a policy hold,” said Cynthia Jane Kalasopatan from Singapore Treasury Division at MIzuho Bank, in a Wednesday note.

“In the event the central bank decides to maintain policy rate at 3.00% at this policy meeting, it will be a matter of time before further easing,” she said.

US markets had initially turned lower shortly after the ISM data was released, but managed to rise again as the odds of a September rate hike were lowered. The Dow Jones industrial average ended up 0.25 percent, the S&P 500 closed up 0.3 percent and the Nasdaq closed up 0.5 percent, posting a new all-time high at 5,275.91.

Ireland’s Cabinet agreed on Friday to join Apple in appealing against a multi-billion-euro back tax demand that the European Commission has imposed on the iPhone maker, despite misgivings among independents who back the fragile coalition.

With transatlantic tensions rising, the White House said President Barack Obama would raise the issue of tax avoidance by some multinational corporations at a summit of the G-20 leading economies in China this weekend.

Paradoxically, Ireland is determined not to accept the tax windfall, which would be equivalent to what it spent last year on funding its struggling health service.

Finance Minister Michael Noonan has insisted Dublin would fight any adverse ruling ever since the European Union began investigating Apple’s Irish tax affairs in 2014, arguing that it had to protect a tax regime that has attracted large numbers of multinational employers.

The US Federal Reserve might need to cut interest rates to as low as negative 2 percent, far lower than levels other global central banks have tested, a former Fed economist said.

Goodfriend, who is currently a professor of economics at Carnegie Mellon University, pointed to data on the eight recessions in the US since 1960.

“In eight of those recessions, the Fed had to push the short rate 2.5 percentage points below the long term rate. Today, the 10-year rate in the US is 1.5 percent,” he noted, saying that would indicate that during the next recession, the Fed would need to cut rates as low as minus 1 percent at a minimum.

“In five of those recessions, the Fed had to push the federal funds rate 3.5 percentage points below the 10-year bond rate,” he said. “So if that happens this time around, we would have to push the federal funds rate to minus 2 percent.”

That’s well below where any other central banks have ventured so far. Sweden’s central bank, an early adopter of negative rates, has set its benchmark at negative 0.5 percent. The Bank of Japan’s rate was set at minus 0.1 percent earlier this year, while the European Central Bank, which first moved its rates into negative territory in 2014, currently has a deposit rate of negative 0.4 percent.

The Fed funds rate has remained in positive territory, with the US central bank last increasing interest rates in December of 2015, its first hike since 2006. That raised the Fed’s target rate to a range of 0.25 to 0.5 percent.

To be sure, Goodfriend didn’t expect the Fed would be headed there anytime soon, noting that he believed the central bank should actually raise rates before the end of the year.

“The US has near full employment and inflation is moving up toward target,” he said. “My own feeling is that the Fed needs to show the flag against inflation, if only to move rates up only slightly, to show that it’s on the job.”