U.S. Rates: Hawks on the Wing

U.S. Rates: Hawks on the Wing

The FOMC took a hawkish tone at its most recent meeting; U.S. home sales slowed somewhat but builders stayed optimistic; China's latest economic stats for Q3 were released; Italy's budget conflict with the EU took a time-out.

“The best thing you can do if you are in the Fed is put earmuffs on and just don't listen”
Former Federal Reserve Chairman Alan Greenspan

U.S. Rates: Hawks on the Wing The minutes of the September FOMC meeting were released on Wednesday, and they echoed the hawkish tone of speeches delivered by Fed officials over the past two months – alarming those who advocate leaving the Fed Funds target rate at its current upper-bound level of 2.25%.

Over and above the estimates of the number of hikes expected over the next year and a half (one more in 2018 and three in 2019), the talk of moving the bank  into a “restrictive” rate regime (i.e. a rate above the difficult-to-estimate “neutral” rate that would neither help nor hinder growth.) ignited fresh debate over how it might impact the current strong state of the U.S. economy, along with the well-worn debates about the importance of a central bank’s independence from political considerations.

Housing: Rates on the Move Meanwhile, the housing market is slowing slightly, due in part to rising mortgage rates. Sales of existing homes slowed in September to the weakest level in nearly three years, according to the National Association of Realtors. Contract closings fell from August to a 5.15 million annualized rate, below expectations and the lowest since November 2015. The median sales price rose 4.2% year-on-year to $258,100 and the inventory of available properties moved up 1.1% year on year to 1.88 million. Combined, the figures suggest that prices as well as mortgage rates are contributing to the slowdown, and that inventory is building as the sales rate slows – perhaps to the benefit of future homebuyers who could face sellers more willing to negotiate than before.

All the more surprising, then that confidence among U.S. homebuilders rose unexpectedly in October for the first rise in five months – according to the National Association of Home Builders. The market for new homes may be reaping the benefit of improving family finances in the face of strong employment, as well as the effect of tax cuts. But perhaps the most significant change, affecting sentiment more than overall costs, may have been the nearly 50% fall in lumber prices since their peak in May.

China: Pressing onward Friday saw a flurry of economic data releases for Q3 2018, accompanied by positive policy statements from high-ranking government officials. The headline number for GDP growth year-on-year came in at 6.5%, the lowest level since March 2009. Industrial production rose 5.8% for the same period, while retail sales grew 9.2% year-on-year. Reflecting the year’s government infrastructure and financial policy initiatives, aggregate financing came to a robust 2.21 trillion yuan ($319 billion). Noting that it has been a difficult year so far for China’s equity markets (down some 32% since the January 26 high) [1], Chinese Vice-Premier Liu He pointed out that “Measured by major indicators…economic growth remains within a reasonable range.”

In the wake of these and other supportive statements from head of the People’s Bank of China and others of similar stature, the Shanghai-Shenzhen CSI 300 Index rose 2.9% on October 19, the day the economic data were made public.

Italy: Encouraging Words There’s been little substantive change in the standoff between Italy’s governing coalition and the European Union (EU) on the country’s budget. But in the current hostile environment, the conciliatory tone of Pierre Moscovici, EU Commissioner for Economic and Financial Affairs, made an immediate, if evanescent, impact on Italy’s bond market: the spread between Italy’s 10-year BTP and the equivalent benchmark German Bund fell some 38 basis points from its opening level after remarks attributed to Mr. Moscovici that the EU had no interest in interfering in Italy’s internal politics and was interested in finding a negotiated solution to the standoff. The next few days will tell if the improving mood and market dynamics will continue.

All data Source: Bloomberg, Octaober 19, 2018, unless otherwise specified.


1 Source: Bloomberg, October 19, 2018. Data is for the Shanghai-Shenzhen CSI 300 Index, intra-day highs to lows, Jan 26, 2018 to October 19, 2018.



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