No elk or trout, but Fed’s virtual retreat may stoke market’s ‘animal spirits’

US Federal Reserve Chair Jerome Powell. (AP)
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Updated 23 August 2020

No elk or trout, but Fed’s virtual retreat may stoke market’s ‘animal spirits’

  • “The market is telling you there is asset price inflation occurring when there is still ... underlying weakness”

NEW YORK: Investors could get a hint from Federal Reserve Chairman Jerome Powell this week about how aggressively the US central bank will try to manage the long-term recovery from the coronavirus pandemic.

Powell will discuss the Fed’s monetary policy framework review — a review it has been undertaking for nearly two years into how it conducts monetary policy — on the opening day of the Kansas City Fed’s annual symposium on Thursday.

Since the 2007-2009 financial crisis, Fed chiefs have used their keynote speaking appointment at the conference — not being held this year in the hunting and fishing resort of Jackson Hole, Wyoming, for the first time in nearly four decades because of the pandemic — to signal important shifts in monetary policy or the economic outlook.

The market backdrop this time around could hardly be less dramatic. Spurred by Fed buying of assets, stocks have recovered their entire pandemic-related losses and are trading around record highs, while bond yields have been near record lows.

“The stock market is telling you there is asset price inflation occurring when there is still a lot of underlying weakness in the economy. I think the Fed is unlikely to view that as a signal of success on policy and, therefore, decide there is nothing more to do,” said Tony Rodriguez, chief fixed income strategist at Nuveen.

A major question — particularly ahead of the Fed’s September policy meeting — is whether or not the central bank will shift its inflation targets to an average, which would allow inflation to run higher than previously expected before interest rates are raised.

“We fully expect that they are going down the path of average inflation targeting,” said Bob Miller, head of Americas Fundamental Fixed Income at BlackRock.

Investors have been increasing their bets on inflation in reaction to the roughly $9 trillion in stimulus measures from central banks worldwide. Gold, a popular hedge against inflation and a falling US dollar, is up 28 percent for the year to date and near record highs, while the dollar has fallen close to two-year lows.

Benchmark 10-year Treasury yields hit near record lows of 0.504 percent earlier this month, before backing up to 0.638 percent after a rash of Treasury supply.

Real yields for the notes, which show yield returns after adjusting for expected inflation, dropped this month to a record low of minus 1.11 percent.

The shift to looking at an average measure of inflation would be a “big deal” and help the central bank avoid the same negative interest rate policies adopted by central banks in Europe and Japan, Miller said.

The Fed is trying to spur inflation over the next several years in order to prevent a deflationary spiral, as the global economy struggles to right itself from the shock of the global coronavirus disease pandemic.

“The Fed is rightly concerned about the unstable economic recovery so far and the degree to which we still need to absorb the job losses over the last five months,” said Gene Tannuzzo, the deputy global head of fixed income at Columbia Threadneedle.

An average inflation target would allow inflation to make up for the periods in which it fell below the Fed’s target. The Fed, like most central banks, shoots for 2 percent inflation but has missed that target for most of the past decade. With interest rates near historic lows, the central bank has fewer ways to help stimulate the economy.

Minutes from the Fed’s July meeting released on Wednesday showed that one tool to keep borrowing costs low — yield curve control — was likely off the table for now, but some think that the Fed could shift some of its buying to longer-dated debt.

Investors will also likely be looking for signs that the Fed is exploring additional ways to support the global economy should a stimulus package fail in Congress, Rodriguez said.

“If we get to a point where there is no stimulus package and no additional unemployment support, then the Fed will definitely feel like they have more to do,” Rodriguez said.


China economy grows in 2020 as rebound from coronavirus gains

Updated 18 January 2021

China economy grows in 2020 as rebound from coronavirus gains

  • Growth in the three months ending in December rose to 6.5 percent over a year earlier
  • China’s quick recovery brought it closer to matching the US in economic output

BEIJING: China eked out 2.3 percent economic growth in 2020, likely becoming the only major economy to expand as shops and factories reopened relatively early from a shutdown to fight the coronavirus while the United States, Japan and Europe struggled with rising infections.
Growth in the three months ending in December rose to 6.5 percent over a year earlier as consumers returned to shopping malls, restaurants and cinemas, official data showed Monday. That was up from the previous quarter’s 4.9 percent and stronger than many forecasters expected.
In early 2020, activity contracted by 6.8 percent in the first quarter as the ruling Communist Party took the then-unprecedented step of shutting down most of its economy to fight the virus. The following quarter, China became the first major country to grow again with a 3.2 percent expansion after the party declared victory over the virus in March and allowed factories, shops and offices to reopen.
Restaurants are filling up while cinemas and retailers struggle to lure customers back. Crowds are thin at shopping malls, where guards check visitors for signs of the disease’s tell-tale fever.
Domestic tourism is reviving, though authorities have urged the public to stay home during the Lunar New Year holiday in February, normally the busiest travel season, in response to a spate of new infections in some Chinese cities.
Exports have been boosted by demand for Chinese-made masks and other medical goods.
The growing momentum “reflected improving private consumption expenditure as well as buoyant net exports,” said Rajiv Biswas of IHS Markit in a report. He said China is likely to be the only major economy to grow in 2020 while developed countries and most major emerging markets were in recession.
The economy “recovered steadily” and “living standards were ensured forcefully,” the National Bureau of Statistics said in a statement. It said the ruling party’s development goals were “accomplished better than expectation” but gave no details.
2020 was China’s weakest growth in decades and below 1990’s 3.9 percent following the crackdown on the Tiananmen Square pro-democracy movement, which led to China’s international isolation.
Despite growth for the year, “it is too early to conclude that this is a full recovery,” said Iris Pang of ING in a report. “External demand has not yet fully recovered. This is a big hurdle.”
Exporters and high-tech manufacturers face uncertainty about how President-elect Joseph Biden will handle conflicts with Beijing over trade, technology and security. His predecessor, Donald Trump, hurt exporters by hiking tariffs on Chinese goods and manufacturers including telecom equipment giant Huawei by imposing curbs on access to US components and technology.
“We expect the newly elected US government will continue most of the current policies on China, at least for the first quarter,” Pang said.
The International Monetary Fund and private sector forecasters expect economic growth to rise further this year to above 8 percent.
China’s quick recovery brought it closer to matching the United States in economic output.
Total activity in 2020 was 102 trillion yuan ($15.6 trillion), according to the government. That is about 75 percent the size of the $20.8 trillion forecast by the IMF for the US economy, which is expected to shrink by 4.3 percent from 2019. The IMF estimates China will be about 90 percent of the size of the US economy by 2025, though with more than four times as many people average income will be lower.
Exports rose 3.6 percent last year despite the tariff war with Washington. Exporters took market share from foreign competitors that still faced anti-virus restrictions.
Retail spending contracted by 3.9 percent over 2019 but gained 4.6 percent in December over a year earlier as demand revived. Consumer spending recovered to above the previous year’s levels in the quarter ending in September.
Online sales of consumer goods rose 14.8 percent as millions of families who were ordered to stay home shifted to buying groceries and clothing on the Internet.
Factory output rose 2.8 percent over 2019. Activity accelerated toward the end of the year. Production rose 7.3 percent in December.
Despite travel controls imposed for some areas after new cases flared this month most of the country is unaffected.
Still, the government’s appeal to the public to avoid traditional Lunar New Year gatherings and travel might dent spending on tourism, gifts and restaurants.
Other activity might increase, however, if farms, factories and traders keep operating over the holiday, said Chaoping Zhu of JP Morgan Asset Management in a report.
“Unusually high growth rates in this quarter are likely to be seen,” said Zhu.