Hawks of a feather

Hawks of a feather

A flock of central bankers sing the same tune; U.S. consumers keep their powder dry; France and the U.S. switch places on drilling

“I hope that it will not be in our lifetimes, and I don't believe it will be"
Fed Chair Janet Yellen, commenting on the potential for another financial crisis

Central banks: Hawks of a feather It started with an innocuous remark by European Central Bank (ECB) President Mario Draghi --  that strong economic growth plus status-quo easy monetary policy would add up to "monetary loosening", which would have to be countered in some non-disruptive manner as growth continued.  It was followed by Janet Yellen's pro-forma speech reiterating her well-understood belief that raising the Fed's target rate will be the new trend, data permitting – adding a rare assessment of stock market valuations as somewhat rich. Adding to the pile-on: Bank of England (BoE) Governor Mark Carney hinting that a rate rise might be in the cards if the UK economy continues growing – especially if there's a surge in investing.

While no one of these is terribly newsworthy, in aggregate, they’ve been widely seen as a clear (and possibly even coordinated) signal that the era of easy money is coming to an end, undone by net positive trends in global growth.

Fixed-income markets reacted strongly in Europe and the U.S., but in noteworthy fashion:  it was the mid-to-long end of the yield curves that rose, reversing a recent trend of curve-flattening that was beginning to generate concern among market watchers. For German sovereigns, 7-year yields notably went from negative to positive, from -0.02% to +0.08% between June 27 and 29[1]; 30-years moved from 1.12% to 1.29%.  In the US, the closely-watched spread between Treasury maturities reversed their well-established compression trend.  The 2-to-10 year spread jumped from 77.4 basis points (bps) on June 27 to a high of 91.1 on June 30. The 2-30 spread rose from 133.2 to 147.1, also a reversal.

Time will tell if this change is similar to the about-face in financial markets in February 2016, generally believed to be the result of a newly resolute tone from the Fed. But so far, the similarities are striking.

US consumers: Parsimonious Looks like Americans were saving more than spending in May. Consumer purchases rose 0.1% from the previous month, while incomes rose 0.4%. The effect had little apparent connection to consumer prices, which fell -0.1%.  Consumer behavior in May was consistent with their collective mood, as measured by the University of Michigan: for the first time since the November 2016 election, a bigger percentage of consumers expected a downturn in the next five years than an uninterrupted expansion. And households in the top 1/3 of incomes, which account for more than half of spending, reported less favorable buying attitudes for durables, vehicles and homes. 

Also of note: the consumer prices reported on Friday comprise the Fed's favorite measure of inflation, the Personal Consumption Expenditure (PCE) Deflator – which rose 1.4% year-on-year in May, still somewhat distant from the Fed's declared steady-state goal of 2%.

France, U.S. and oil: Trading places Environment Minister Nicolas Hulot announced France would halt granting new licenses for oil and gas exploration, both on the mainland and in overseas territories. That's in line with new President Emmanuel Macron's campaign statements opposing new exploration for gas and shale in within the country. This will be easier said than done, given that it legislative action which will not be brought to a vote before "this autumn".  It’s a stark contrast to the newly-declared U.S. energy policy of "American energy dominance", including renewed exploration and drilling, as well as rapid growth in energy exports.



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