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Reconsidering US monetary policy

Fed breaks ranks

Although sterling was Monday’s top-performing major currency, it was the US dollar that won out over the three-day bank holiday weekend. Its gains were made on Friday after Robert Kaplan, the President of the Dallas Federal Reserve, stepped apart from his FOMC colleagues to raise the topic of inflation, tapering and higher interest rates.

Mr Kaplan warned of “imbalances” in financial markets and “historically” high equity prices. He said, "[A]t the earliest opportunity, I think it would be appropriate for us to start talking about adjusting those [quantitative easing] purchases". His comments were out of step with the official line of the Federal Reserve and its Chairman Jerome Powell. The chairman reiterated his position on Monday when he said the US economy is “not out of the woods yet”. It is also relevant that Mr Powell and President Joe Biden are apparently united in their efforts to move the economic goalposts, one with relaxed monetary policy and the other with fiscal stimulus.

The USD strengthened by an average of 0.7% on Friday, adding a cent against the EUR and strengthening by a cent and a quarter against the GBP. It gave some of that back on Monday, losing half a cent to sterling and a fifth of a cent to the euro. In the longer run the dollar picture is less rosy, showing an average loss of 1.9% over the last month.

 

Lots of numbers

The stack of economic statistics at the turn of the month was depleted slightly by Labour Day holidays in Britain and parts of Europe. There were nevertheless plenty of important numbers to keep investors busy.

The focus on Friday was European and US inflation and US consumer confidence. Eurozone inflation came in at a provisional 1.6% for April, up from 1.3% in March and in line with forecast. In the United States, personal income and spending were both significantly higher in March, partly for seasonal reasons but also because incomes received a boost from the government’s stimulus cheques. The University of Michigan's index of consumer sentiment was higher than forecast at 88.3, its best result since March last year.

Monday was mostly about manufacturing sector purchasing managers’ indices. The two readings from Australia were both higher on the month at 61.7 (AiG) and 59.7 (Markit). Markit’s figure was the highest since the series began in May 2016. Switzerland’s SVME measure was also a record high, at 69.5. The Eurozone PMI was less sparkling; lower on the month and below forecast at 62.9. That said, the Netherlands, Austria and Italy did report record highs. In the States, Markit’s 60.5 and ISM’s 60.7 both underwhelmed investors who had been expecting better numbers.

 

RBA steady

The Reserve Bank of Australia did as expected this morning, keeping its benchmark Cash Rate and the target yield for the three-year bond unchanged at 0.1%. Its statement indicated that those rates are likely to remain in place for some time.

Data scheduled for this morning include Britain’s manufacturing PMI, estimated at 60.7, Swiss consumer confidence and UK money supply and mortgage approvals. After lunch there are US figures for international trade and factory orders, while Canada reports on trade and building permits.

A busy start to Wednesday in New Zealand brings the Reserve Bank of New Zealand’s Financial Stability report, an appearance by RBNZ Governor Adrian Orr and the employment data for Q1. There will be PMIs from Australia and NZ. Australian building permits for March will probably look a bit limp after February’s 21.6 spike.

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