Posts Tagged ‘Monetary Policy’

Bloomberg Briefs’ Global Central Bank Monitor

March 24th, 2011 Michael McDonough Comments off

To subsribe please go to {BRIEF <GO>} on your terminal , or visit


Morgan Stanley Expects Strong Tightening from Canada

March 8th, 2010 Michael McDonough Comments off

Sophia Drossos, the co-head of global FX strategy at Morgan Stanley, believes Canada will soon begin tightening rates based on the Central Bank’s inflationary concerns. Sophia said, “We’re looking for them to deliver 50 basis points rate hikes in the second quarter, and the market is slowly coming around to our point of view because the fundamentals in the data have been so strong.” She went on to say, “We think the rate-hike cycle is going to start in June and continue through the end of the year, and we’re looking for 125 basis points rate hikes, and the market’s only pricing in about 60.”

Canadian Dollar:

Source: Bloomberg

*The CAD has been one of the G10’s best performing currencies in 2010, only behind the Japanese Yen.  The worst performer has been the British Pound. 


Bullard Comments on Monetary Policy, Indicating a Fed Rate Hike Not Likely Over the Short-Run

February 8th, 2010 Michael McDonough Comments off

According to CNBC, James Bullard,President Federal Reserve Bank of St. Louis, indicated in an interview today that *he does not believe the Fed will begin hiking interest rates, until after they start selling off some assets. He anticipates that the Fed could begin selling assets during the second half of this year. Bullard had this to say on asset sales, “Maybe you get in the second half of 2010 or something like that, if things are going pretty well, maybe then you’d sell a little bit at that point and you’d try to see how the market reacts.”

In investors’ minds Bullard’s comments will likely reduce the probability of a near-term rate hike, and also help define the parameters for future hikes.  I presently do not anticipate that we will see a Fed rate hike until November 2010 at the absolute earliest.

*I heard this reported on CNBC, but have not yet found the quote to support this statement.

Categories: Fed News, US Tags: , , ,

This Morning’s Tightening in China Does Not Bode Well for Chinese Equities in 2010

January 7th, 2010 Michael McDonough Comments off

Inflation has begun creeping back into the China’s heating economy, and it was only a matter of time before the government’s hand was forced to tighten exceptionally loose polices. In 2010, a dance between inflation, growth, and government policy will guide Chinese equity markets. Coming into the year growth led the dance with policy and inflation warming up on the sideline, but recent tightening by the Chinese government due to inflationary fears has pushed all the dancers to the floor, and now the three must dance together to more somber music.  I had anticipated Chinese officials would wait to begin tightening until later in the year, but I was wrong, and now Chinese equities face a bumpy road ahead.  I believe there may still be some upside over the next couple months, at least until the tightening cycle moves into full swing, but I do anticipate a peak towards the end of 2Q10.  I remain bullish on the Chinese food and ag sector with my favorite positions being Zhongpin Inc., which should benefit from rising hog prices. For a much more detail analysis on this topic please see my upcoming column on RealMoney at

Categories: Asia/China Tags: , ,

A Brief Global Macro View on the World’s Markets

October 12th, 2009 Michael McDonough Comments off

This is a very short global macro overview of today’s markets. I do not recommend any of the trades mentioned in this report, but hope they help reinforce your own view or help you generate some news ideas.

Monetary policy around the globe remains easy, providing ample liquidity and room for credit growth. Additionally, fiscal policy remains expansionary, and in some regions the full benefits have likely not yet been realized.

In the U.S., I believe we’ll discover that growth returned in the third quarter this year, primarily due to a turning in the inventory cycle (I will go into more detail on this topic in my Economic First Look when GDP is released). While the U.S. is only just returning to positive growth, some developing nations never experienced contraction or have already returned to growth mode. The trend of developing nations outpacing the developed world should continue and provide some potentially profitable investment opportunities, especially in Brazil and China.

But the punch bowl won’t last forever. An eventual resurgence of inflation and massive government deficits will eventually lead to higher rates and limited room for new fiscal stimulus. In fact, on Tuesday the Australian central bank surprised the world by announcing a rate hike to 3.25% from 3.00% on the back of perceived economic strength. Nevertheless, it will take some time — six to nine months — for other governments and central banks to catch up to Australia’s policy stance, leaving markets around the globe ripe for further appreciation.

As market conditions remain favorable for asset appreciation over the next six to nine months, developing nations — especially Brazil and China — will continue to outpace developed nations — especially the U.S. — in terms of economic growth and equity market performance. Therefore, you should consider long positions in ETFs based on the countries; those include iShares Brazil (EWZ) and iShares FTSE/Xinhua China 25 (FXI) .

Both of these countries have strong consumer stories:

* In Brazil, personal consumption has been leading its recovery. The country experienced 2.1% sequential growth in consumption in the second quarter, and the metric is generally anticipated to remain robust into 2010 on the back of easy monetary policy. The Brazilian unemployment rate has already fallen to 8.1% in August from 8.8% in May, and it’s widely anticipated to move between 7% and 8% over the coming months.

* In China, if you are a believer of the burgeoning middle-class story, you may want to look at companies like Zhongpin (HOGS) . Zhongpin is a Chinese meat and food products company, specializing in pork products. Additionally, expected increases in the caloric intake of the Chinese population could provide some opportunities in the global fertilizer and agricultural sector. I view China as a more volatile Brazil, with higher return potentials but also much more downside risk.

Additionally, I am bullish on the currencies of commodity-producing economics, including the Australian dollar, Brazilian real, Mexican peso, Chinese renminbi and Korean won. At the same time, I believe the Japanese yen, which has experienced significant appreciation over the past several months, may be overvalued due to deteriorating fundamentals. One way to play this view is taking a long position in Proshares UltraShort Yen (YCS) ETF.

Domestically, I am somewhat overweight on the U.S. technology sector via ETFs or Apple (AAPL) as a single name. It will also be interesting to monitor whether Verizon (VZ) is able to end AT&T’s (T) monopoly on the iPhone. Apple’s contract with AT&T is set to expire in June, and analysts are mixed over whether Verizon can expect to add the product to its line.

I am still somewhat bearish on the U.S. housing sector as foreclosures and mortgage delinquencies across all types of loans continue to weaken the sector. Moreover, the first-time homebuyer tax credit program is set to expire at the end of November; that incentive doubtless had an impact on recent home sales. Continued weakness in the housing sector may place some downward pressure on U.S. REITs.

The show won’t go on forever. A return to growth coupled with fears of economic overheating will cause central banks around the world — likely starting with emerging markets that have already returned to growth — to tighten monetary policy. While at the same time, developed nations will face the repercussions of swelling budget deficits. In Brazil, like in the U.S., monetary policy is expected to remain unchanged for most of 2010, which should provide further support for domestic assets.

In the near term, the biggest downside risk to this investment the possibility that central banks may tighten monetary policy prior to current expectations. But tightening is inevitable; rates in the U.S. will not remain at 0% forever. Once it becomes clear that central banks are approaching a tightening cycle, investors should consider taking profits on their equity positions. Ultimately, higher budget deficits in the U.S. combined with potentially momentous health care reform could lead to higher taxes and rates, coinciding with a period of subdued growth and elevated unemployment.

For more please see my column on


Fed Leaves Rates Unchanged, But Begins to Scrap Treasury Purchase Program

August 12th, 2009 Michael McDonough Comments off

As expected the Fed announced no changes to the target range for the federal funds rate, which currently stands at between 0% and 0.25%. The market was trading up  prior to the announcement on what was generally expected to be a more constructive economic outlook from the Fed.  In fact the Fed did seem more optimistic on the economic outlook stating that “Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out.” They go on to say that they believe conditions will continue to improve, and that their current monetary policy stance will remain in place for an extended period of time.  They also announced, as expected, that the Fed will begin to slow and eventually stop purchasing US treasuries come October.

FOMC Statement:

Press Release

Federal Reserve Press Release

Release Date: August 12, 2009

For immediate release

Information received since the Federal Open Market Committee met in June suggests that economic activity is leveling out. Conditions in financial markets have improved further in recent weeks. Household spending has continued to show signs of stabilizing but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

2009 Monetary Policy Releases


Chinese Monetary Policy vs. Inflation FIGHT!

March 19th, 2008 Michael McDonough Comments off
*FX data updated on March 27th 2008

Policy makers in China have not only continued their anti-inflationary rhetoric, but have started acting on it. We have seen the RMB reach several new highs verse the USD in recent days (7.01). Additionally, Chinese authorities have increased reserve requirements for the second time this year by 50bp to 15.50%. It does not appear this news has settled too well with Chinese equities markets, which have experienced a significant sell-off from the combined fears of tighter monetary policy, a stronger RMB, and possible global slowdown. As a result, local investors seeking more attractive yields have started moving away from EQ and into the domestic fixed income market; yields have rallied accordingly. We expect this trend to continue.

Fears of a global economic slowdown and tighter monetary conditions have begun to show up in the SSE Composite…

Source: Bloomberg

This was not unexpected, as we outlined in an early posting, this how we expect Chinese policy makers to combat high inflation levels:

1) The Central Bank will increase interest rates, which it hasn’t done since December 07;

2) They will allow the RMB to appreciate at a faster rate;

3) They will implement new or stronger policies to reduce monetary growth. (i.e. Higher reserve requirements).

Additionally, we believe the government will continue to enforce its recent price control measures. With that said it is highly likely the Chinese government will continue increasing reserve requirements and continue appreciating the RMB at a faster rate. Given the recent weakness of the USD, the RMB has weakened substantially against the Euro, which probably implies European officials will begin placing pressure on the Chinese officials for quicker appreciation. We also expect to see increases in the Chinese reference rate, the last increase occurred at the end of December.

The Chinese Reserve Requirement Ratio has been increased steadily with inflation, and will continue to rise…

Chinese officials will continue to speed up appreciation of the RMB to combat inflation…

Investment Idea: We see potential upside in the domestic Chinese Steel industry. We have seen an increase in domestic demand as the country continue to develop and we believe the industry is ripe for consolidation. We may actually see the amount of Chinese steel exports decrease this year due to increased local demand, higher export tariffs, and an appreciating RMB. A reduction in Chinese steel exports could put upward pricing pressures on the global market. We also expect domestic steel makers to increase domestic prices as international prices rise. In fact, Baosteel has already announced price increases and may adjust prices on a monthly basis vs. quarterly previously. This of course will put further pressure on Chinese inflation. Which means it will be important to monitor to what degree government officials allow steel producers to pass costs to consumers. However, for steel, we see plenty of demand and a sticky supply. The bottom line is in 2008 look for higher steel prices, industry consolidation, and fewer exports from China (reducing the global supply). We believe this should directly benefit Brazil (ETF:EWZ), especially domestic iron ore producers. Brazil’s largest exports to China are soybeans and iron ore. However, there is a risk that a global economic slowdown could adversely affect steel demand.



Inflation, Inflation, Inflation

March 11th, 2008 Michael McDonough Comments off

Inflation, we have been talking about, the market has been talking about it, but has the Fed? In short the answer is yes, but it appears the market may not think so. For the first time since its introduction in 1997, the 5-year TIP traded at a negative yield, implying a significant lack of confidence in the Fed’s ability to fight inflation. The market is essentially betting that the Fed has lost sight of inflation and is solely targeting growth. We do not agree with the market’s assessment. First off, lets rehash an early blog post titled ‘Fed Cuts & Inflation’ :

“So long as the Fed considers downside risk to growth exists we can expect that rate cuts will remain on the table as long as Core PCE remains below the 2.7% to 3.0% range, or growth conditions do not deteriorate more significantly.

To be more specific, so long as demand continues to be a drag on growth and inflation remains within a ‘comfortable’ level, the Fed will cut rates. However, if inflation exceeds the Fed’s comfort level (as defined above), then we would likely see a quick reversal of policy, or at least the end to rate cuts. Core PCE for January finished 2.18%y/y vs 2.23%y/y the month prior. The Fed has not forgotten their dual mandate. The Fed realizes inflation is trending up, and it is clear that in addition to rate cuts they are looking for alternative methods to alleviate the credit crisis.

With this in mind, to us today’s Fed announcement implies a smaller rate cut at their official meeting on March 18th. We were originally calling for a rate cut of 75bp, but this move, pending how the market reacts over the coming days, changes our forecast to 50bp (with 25bp being a possibility). Of course the relationship between further easing and inflation wasn’t the only topic on the Fed’s mind in making this decision, but it was probably a factor. The bottom line is the Fed is well aware of inflation and will act accordingly. Markets can only trade irrationally for a finite period of time.


Fed Cuts & Inflation

February 27th, 2008 Michael McDonough Comments off

*Sorry for the delay in posting we were experiencing serious computer issues

One of the questions on everybodys’ minds is how high would inflation need to go before the Fed would reconsider any further rate cuts. During the recent months’ we have seen increasing down side risks to the US growth forecast, while at the same time growing inflation expectations. This is a dangerous mix in terms of continuing to use Fed policy as a stimulus to the economy. Historically, looking back at the data (since 1995), we can see that the Fed has never lowered rates when the Core CPI has gone above 2.9%, this means we could have at some room left, before the Fed rates cuts could potentially come off the table. To further test this we applied an ordered probit model with a grouping of economic indicators (ISM, core PCE – 2.0% inflation target, & a 1 month lag in the change in initial claims – 350) to see how the current situation compares to those in the past and to see which way the Fed is likely to move and in what magnitude based on inflation rates. What we discovered after running the model for both Core CPI and Core PCE (which we see as the Fed’s indicator of choice) was in-line with our original estimation that for the Fed to reconsider the cuts we would need to see the Core rates move to between 2.7% & 3.0%. Currently, the Core PCE and Core CPI are at 2.2% and 2.5%, respectively, with expectations rising.

To quantify the rate change we created five categories ranging from –2 to 2, with 0 implying no change. We created these categories after individually analyzing all FOMC rate changes from 1995 until 2007. To quantify the change we categorized the magnitude of the Fed rate hikes or cuts at each individual meeting into three groups: 0, 0.25%, and =>0.50%. So for example, a rate hike of 0.50% points would lead to a score of 2, while a rate cut of 0.25% would equal a score of -2.

With the left-hand side variable defined this way we ran them using an ordered Probit model against the ISM, inflation gap, and initial claims. We found that all of the variables were statistically significant.

The results show that the implied Fed rate change currently stands at -0.03 on our scale of -2 to 2, and has decreased in intensity over the last two months from its interim low of 0.09 in June (Chart 1). This movement corresponds to the decreasing growth and wavering employment levels. The current reading shows that there is a downward Fed bias, which implies the Fed is more likely to lower rates rather than raise them…


So long as the Fed considers downside risk to growth exists we can expect that rate cuts will remain on the table as long as Core PCE remains below the 2.7% to 3.0% range, or growth conditions do not deteriorate more significantly.


Fed likely to go 50 (Another look at China, India, Las Vegas Sands, and an introduction to Taiwan)

January 30th, 2008 Michael McDonough Comments off
This mornings GDP reading of +0.6% will outweigh the positive ADP number and lead to an additional cut of 50bps at today’s meeting. However, if the Fed were to cut by only 25bps we would expect a large sell-off in the US and global EQ markets; leading to in our opinion to another good buying opportunity. Fundamental economic data in the US is still not pointing towards a US recession, but both the EQ and FI markets continue to price one in. Our view is that the housing problem continues to be just that, a housing problem. We would need to see a clear spill-over into consumption before we began to worry. Keep in mind housing wealth is only a small component of consumption, with financial wealth and income making up the rest. Financial wealth and housing wealth tend to have a lagged and marginal effect on consumption verses income whose effect is both strong and immediate. Meaning, so long as we continue to see good employment (claims below 350K, etc..) and growing income levels we do not expect to see a recession. The way we see it is that we are still in the midst of a good buying opportunity and remain bullish on China, India, and Las Vegas Sands.

As an aside, we are now looking into the Taiwanese EQ market. The recent parliamentary elections in Taiwan provided the China ‘friendly’ party with a landslide victory; a result which is likely to follow in the March 22nd Presidential elections. Once the new administration takes power they will likely strengthen ties with China and Taiwan will begin to share in China’s economic success, from which it has remained mostly isolated. To take advantage of this market we are looking into the ETF ‘EWT’, which attempts to track the braod Taiwan EQ market.