[14th June '17] Meeting @ Yeouido
14th June 2017 19:00-20:00
selected by SDC
participants: SDC JWK
1. Because I said so -Why the Fed is likely to raise rates, despite low inflation - Like a parent teaching a child it means business, the Fed may feel it must hike to preserve its credibility with financial markets (Free exchange, Jun 6th, by B.G., Washington)
1.1. Consistently responding to toddlers' undesirable behavior is important to get credibility to make works easier.
1.2. The same problem arose with Federal Reserve which said they would raise up the interest rate by a quarter percentage point questioning whether they would do just that even if it's a bad idea
1.3. While the unemployment rate reached 4.3% in May, the inflation rates indicate that the low unemployment rate is causing inflation as of early June.
1.4. Market participants now mooted the Fed to change their attitude to not increasing the rate lest it squanders the credibility.
1.5. The FOMC should be concerned about risks of markets reacting dangerously to its expected interest rate hikes.
2. Why government-bond yields have been falling again - Economic optimism and soaring stockmarkets had been expected to push them further (Printed Edition, Finance and economics, Jun 10th 2017)
2.1. Every year analysts investors assert that the bond yields will rise (and prices fall), but the market goes differently with their assertion.
2.2. The same pattern appeared as "reflation trade" with tax cuts from Donal Trump's regime leading to higher growth which will encourage the Fed to increase the interest rate.
2.3. 10y Treasury yield fell from 2.63 in March to 2.13% on June 6th and 10y gilt to below 1%(in real-term, negative) and more money flowed into bond funds($168bn) than equity funds($141bn).
2.4. Falling bond yields is conflicting the recovery trend of equity market since February 2016.
2.5. Despite the sign of economic growth, inflation does not seem to be rebounding with US 1.5%, and China, Japan, and the euro-zone all under 2%, which saps the attractiveness of bond investment
2.6. In the absence of inflation, the market is pricing in 1.7% of inflation for two years, which is lower than 2.5% that the Fed has promised.
2.7. Another reason is the delayed Trump's fiscal stimulus which would require issuing new bonds
2.8. But there are worries about Chinese potential slowdown accompanied by its tightening monetary policy and 12m low commodity prices as an indicator of demand.
2.9. Nevertheless, the stock market is in a bull position because strength in corporate earnings with the growth of 14% which is the result of higher oil prices.
2.10. Also, subdued wage growth is restraining the upward pressure on inflation, which is good news for bonds.
2.11. The abnormal economic cycle such as Japan can explain the reason why the bond yield has stayed so low so far.
Comments
Post a Comment