Bullard signaling policy normalization
James Bullard is not a voting member at the Committee this year. Actually, he’s not even an alternate member, so why his comment should be taken so seriously? There is a good reason – he signaled the QE2 a one whole month before the Chairman did so in Jackson Hole on August 28th. So when Bullard takes the stage – voting or not – it might be wise to listen.
And his views are different this time – quite sharply different. Eight months ago Bullard saw the US economy close to the deflation in the Japanese style and called for purchases of Treasury bonds. This time he sees the economy growing fast and external risks (political meltdown in Africa/M.East, earthquake consequences in Japan, euro crisis etc.) not serious enough to stop the Fed from normalization. Sounds quite obvious but these are words spoken by a dove who held similar views to Ben Bernanke and that may herald a shift in rhetoric coming sooner than expected.
How soon? Depends on the labor market data and in fact we’re just awaiting key reports. Last two weeks brought a 46 bp rise in FRA18x24 for USD with only 28 bp for EUR. Should the readings be positive (200k+) this divergence might be continued.
Equity markets – strong gains in US and Asia
Equities reacted nervously to the signal sent by Bullard but at the end of the day, US session brought solid advances despite a poor reading of Conference Board sentiment index (falling from 72 to 63,4 pts.). End of the quarter might have some impact here and so far bulls are on track towards ’11 highs – 1343 pts. for S&P500 futures.
Asian session was similarly positive with buyers encouraged by a weaker yen (so ironically bearish comments from Bullard had bullish impact in Asia). Still, a prospect of tightening in the US is a major risk for bulls worldwide. Government data is released on Friday and equities will not by shielded by end-of-quarter effect by then.
EURUSD – ratings not as bad?
Bullish comments for the dollar and more rating cuts in the zone (yesterday S&P lowered rating for Portugal and Greece) – that seems like a perfectly bearish mixture for the EURUSD. Yet while the pair might not be skyrocketing, it didn’t give up on defending the trend line as well.
One thing is worth observing – while Portugal seems to be failing off the cliff, the impact is felt only on “true” peripheries – Portuguese, Greek and Irish bonds are sold while – interestingly – Italian, Belgian and (most importantly here) Spanish bonds are bought. For as long as this doesn’t change, fiscal worries will have a limited impact on the euro. Thus for the EURUSD policy expectations (read US labor market data) remain crucial.
Events to watch – ADP report
Indices like business climate in the euro zone (5.00 ET) or the Swiss KOF (5.30 ET) will be released today but frankly speaking the US ADP is the only one that matters (8.15 ET, 14.15 CET, consensus +200k). Should it show a rise in US private employment of more than 200k, Bullard’s views will gain weight. Later on the data on the US fuel inventories (10.30 ET, 16.30 CET) will be released.
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Przemysław Kwiecień PhD, Chief Economist |
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