Economic Conditions

  • Europe's largest economy adds its woes to the Brexit talk at the euro's expense.

    Germany's IFO Survey Adds to the Weight on the Euro

    The US dollar and yen remain firm.  The ramifications of Brexit continue to weigh on sterling and the euro.  After nearing $1.4050 yesterday, sterling could not move much above $1.4150 before sellers re-emerged.  The euro, which came close to $1.10 yesterday, was sold into about half a cent bounce.  It marginally extended yesterday's decline, slipping to almost $1.0990.

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  • The markets stabilized, but remain fragile.

    The Relative Calm May Be Short-lived

    The main driver of the investment climate is not so much the incremental economic data as the capital markets themselves. The market turmoil contributed to the tightening of financial conditions, which in turn heightened risks, which monetary officials are committed to resisting.  

    Financial markets stabilized last week, but the tone remains fragile.  The damage to the technical condition and sentiment requires further consolidation to rebuild investor confidence.

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  • There are calls for the ECB to be bold and act quickly.

    Europe's Slowing Economy Keeps the Pressure on the ECB

    Global equities are beginning the last week of February on a firm note.  The MSCI Asia Pacific Index rose 0.75%, with China's markets gaining more than 2%, leading the way. European shares have followed suit.  The Dow Jones Stoxx 600 is up 1.7% near midday in London, led by materials and telecom.  Like the MSCI Asia-Pacific Index, the Dow Jones Stoxx 600 is flirting with last week's highs.  

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  • Market turbulence settled somewhat last week.

    Smoother Air Ahead Please

    After a terrible first several weeks of the year, global capital markets stabilized in the past week.  Chinese markets re-opened after the extended Lunar New Year holiday and proved not to be disruptive. 

    Chinese equities did not decline to catch-up to the performance of global markets in its absence and instead gained 3% on the week. The offshore yuan appreciated during the holiday, and the onshore yuan strengthened to converge with it.  It traded in a narrow range after the markup.

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  • Have the markets swung too far, or is there more to go?

    When the Market's Pendulum Swings too Far

    Investors have become unhinged. The increased volatility and dramatic market moves challenge even the most robust investment strategies. This sets off a chain reaction of money and risk management that further amplifies the price action, like an echo chamber. Then a cottage industry of reporters, analysts and bloggers offer explanations often without distinguishing the initial sound from the echo.

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  • Analysts are noting the extreme price action and looking for the finish line.

    Did the End of Last Week Indicate Potential Market Stability?

    The outlook for the dollar in the week ahead is not about economic data or the FOMC and ECB minutes.  It is about the stability of the global capital markets.

    Many are looking for an event or official action that will stop the rout that is of historic proportions to start the year.  We too have been thinking about what it would take to stop the rot.  However, none of the frequently mentioned events, like an agreement to cut oil output, or for a coordinated policy response by the major countries, is particularly likely. 

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  • Market participants await the reopening of China's markets on Monday.

    Enjoy the Weekend, China Returns to the Fray on Monday

    After another difficult Asian session that saw the Nikkei fell 4.8% (12.3% on the week), the capital markets against have stabilized in Europe.  Equity markets are mostly higher, with the Dow Jones Stoxx 600 up nearly 2% led by energy and financials.  

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  • The sell-off continues, for now, as the markets search for good news.

    Everybody in, Going Down, No Waiting

    The continued sell-off in global equities is the main driver of the capital markets.  It, along with the push lower in oil prices, is pushing core bond yields sharply lower.

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  • Lately, jobs data indicates wage pressure, which the Fed wants.

    Labor Economist and Fed Chair Yellen Should Like the Jobs Data

    After another soggy Asian session, European markets have begun on a firm note, and US shares are trading broadly higher in Europe as well.  Led by the beleaguered financial shares, and healthcare, the Dow Jones Stoxx 600 is up 2%.  Similarly, the peripheral bonds, including Portugal (though not Greece) are seeing a reprieve from the recent selling.  Spanish and Italian 10-year benchmark bonds are off 5-6 bp while the Portuguese yield is off 10 bp.  The yield on JGBS, bunds, gilts and Treasuries are 2-5 bp firmer.

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  • The Fed may be paying less attention to the dollar's effects.

    Returning to the Fed's Transitory Dollar Effect Argument

    Investors and policymakers continue to wrestle with the economic impact of the dollar's rise.  The Federal Reserve has argued that the dollar's appreciation acts as a headwind on exports and dampens imported inflation.  At the same time, despite the dollar's appreciation and the fall in oil prices, core inflation rose steadily last year.

    Core CPI rose from 1.6% at the end of 2014 to 2.1% at the end of 2015.  The core PCE deflator lagged, but the after bottoming last July below 1.26%, it finished the year near 1.41%.

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