Bubble? What bubble?
On Friday a Fox TV interviewer asked Richard Clarida, the vice chairman of the Federal Reserve, if he saw unintended consequences or new bubbles stemming from his bank’s massive policy response to Covid-19. Mr Clarida replied “I certainly don’t”, even though America’s DJ30 equity index has climbed more than 40% in just three months.
The Fed vice chairman was echoing the views of his boss, Jerome Powell, who said a couple of weeks ago (if not quite in so many words) that inflated asset prices are an inevitable by-product of massive monetary and fiscal stimulus and nothing to worry about. Mr Clarida said the Fed has no intention of bringing to a halt or reversing monetary easing any time soon because “we think it’s working”.
Mr Clarida went further, saying “there’s more that we can do and we will”. His comments reinforced, rather than altered, investors’ perception that the Fed is an inexhaustible source of whatever-it-takes monetary stimulus. The US dollar was unchanged on average against the other majors, dropping a seventh of a cent against the euro and unaffected by any US economic data good or bad.
Strong sales, rising debts
Most of Friday’s UK statistics were better on the month. One was way off the scale: public sector borrowing jumped £54.5 billion in May, blowing away the forecast £47.4bn rise. The increase took public sector net debt to 100.9% of gross domestic product, the first time since 1963 that it has exceeded 100%.
The government’s response to the tragic Covid-19 makes it obvious why debt has risen so sharply. And investors understand that nine million furloughed wage packets do not magically appear out of thin air, but that does not mean they have to like the situation. Friday’s numbers were an unwelcome reminder that government borrowing is much higher than it ought to have been and will continue to rise.
Friday’s other UK ecostats were tolerable, under the circumstances. Consumer confidence improved by six points to -30 for June and all five components beat the original estimates of two weeks ago. Retail sales ”partly rebounded” by 12% in May after plunging 22.7% in April. Sales were still 13.1% lower than in the same month last year. Investors did not like the overall picture and they sent sterling almost to the back of the field with an average net loss of 0.2%. Only the NOK did worse, losing 0.8% on average.
There are not many ecostats on today’s list but there is no shortage of central banker appearances. Reserve Bank of Australia governor Philip Lowe has already said his piece. Yet to come are the Bundesbank’s Jens Weidmann, the European Central Bank’s Luis De Guindos and Philip Lane and the Bank of Canada’s Tiff Macklem.
The RBA governor floated the idea of changing the inflation target, though not immediately. The Bundesbank president will be talking about “The current crisis and the challenges it poses for economic and monetary policy“. Mr de Guindos will be joining Mr Weidmann at the Frankfurt Finance Summit. Mr Macklem’s subject is “Monetary policy in the context of COVID”.
Today’s data cover Britain’s CBI Industrial Trends Survey, the Chicago Fed’s national activity index, US existing home sales and Euroland consumer confidence. Tonight brings the provisional purchasing managers’ index readings from Australia.