Short view By Philip Coggan - Financial Times
Short view By Philip Coggan
Published: April 20 2006 03:00 | Last updated: April 20 2006 03:00. Copyright by The Financial Times
Investor reaction to the latest Federal Reserve meeting minutes has been both swift and striking. But has it been consistent? The equity markets reacted with joy to the minutes, as investors took the view that the Fed would halt its tightening policy after just one more rate rise. Tuesday's sharp rally on Wall Street was followed up in Asia and Europe.
That same reasoning also caused a sharp fall in the US dollar, which hit a seven-month low against the euro. Yield support has been an important prop for the dollar over the past two years; now it seems the European Central Bank and the Bank of Japan will narrow the yield gap with the US.
But what story is the market telling? In recent weeks, it looked as if investors were making a reflation trade, pushing equity markets and commodity prices higher and deserting government bonds. Ten-year Treasury bonds recovered a little in the wake of the Fed minutes but are still yielding close to 5 per cent.
However, if the reflation trade is in full swing, can the Fed really stop raising interest rates so soon? And the strong growth thesis does not really fit with recent signs of weakness in the US housing market.
Then there are the geopolitical risks that have helped push oil over $70 a barrel and gold well above $600 an ounce. If investors are becoming twitchy about US-Iran tensions, why are global equity markets performing so well?
There seem to be two possibilities for squaring the circle. One is the revival of the "Goldilocks scenario", in which buoyant growth is combined with low inflation (although the core US number yesterday was higher than expected). Investors could be reasoning that US consumers will overcome the effects of a slowing housing market, since recent retail data have been solid and the employment market is strong. Or they could believe that recoveries in Europe and Japan could offset US weakness.
The other possibility is that asset prices are being pushed higher by abundant liquidity. The tightening undertaken by central banks to date has not been sufficient to curb this exuberance. The Fed minutes may have given the speculators more encouragement.
Published: April 20 2006 03:00 | Last updated: April 20 2006 03:00. Copyright by The Financial Times
Investor reaction to the latest Federal Reserve meeting minutes has been both swift and striking. But has it been consistent? The equity markets reacted with joy to the minutes, as investors took the view that the Fed would halt its tightening policy after just one more rate rise. Tuesday's sharp rally on Wall Street was followed up in Asia and Europe.
That same reasoning also caused a sharp fall in the US dollar, which hit a seven-month low against the euro. Yield support has been an important prop for the dollar over the past two years; now it seems the European Central Bank and the Bank of Japan will narrow the yield gap with the US.
But what story is the market telling? In recent weeks, it looked as if investors were making a reflation trade, pushing equity markets and commodity prices higher and deserting government bonds. Ten-year Treasury bonds recovered a little in the wake of the Fed minutes but are still yielding close to 5 per cent.
However, if the reflation trade is in full swing, can the Fed really stop raising interest rates so soon? And the strong growth thesis does not really fit with recent signs of weakness in the US housing market.
Then there are the geopolitical risks that have helped push oil over $70 a barrel and gold well above $600 an ounce. If investors are becoming twitchy about US-Iran tensions, why are global equity markets performing so well?
There seem to be two possibilities for squaring the circle. One is the revival of the "Goldilocks scenario", in which buoyant growth is combined with low inflation (although the core US number yesterday was higher than expected). Investors could be reasoning that US consumers will overcome the effects of a slowing housing market, since recent retail data have been solid and the employment market is strong. Or they could believe that recoveries in Europe and Japan could offset US weakness.
The other possibility is that asset prices are being pushed higher by abundant liquidity. The tightening undertaken by central banks to date has not been sufficient to curb this exuberance. The Fed minutes may have given the speculators more encouragement.
posted by Carlos T Mock at 7:41 PM
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