Central Banks Pump Up the Volume

Aggressive central bank accommodation from Europe to Japan and a dovish Federal Reserve bode well for equities and bond prices.

September 02, 2014    |    By Scott Minerd

Global CIO Commentary by Scott Minerd

The Federal Reserve’s annual getaway in Jackson Hole is not usually considered a gathering of rock stars, but that’s exactly how the late August event unfolded. The hawks loosened up the crowd with their dark, foreboding lyrics. After that, the doves sweetened the mood, singing a far more melodic and happy tune. Then the event’s two biggest stars—Fed Chair Janet Yellen and European Central Bank President Mario Draghi—hit the stage amid the twin pyrotechnics of easy money and a vision of the future where every worker has a job, and the crowd went wild.

Central bank liquidity trying to restart stalling economies around the globe bodes well for equities and bond prices.


The biggest news was Dr. Draghi’s comments that the ECB may soon have no option but to join the United States and Japan in undertaking more aggressive accommodation through a quantitative easing program, taking up the slack as the Fed ends its asset purchases. “On the demand side, monetary policy can and should play a central role, which currently means an accommodative monetary policy for an extended period of time,” he said, before adding the kicker that the ECB will “stand ready to adjust our policy stance further.”

Reinforcing Dr. Draghi’s outlook was Monday’s dismal data out of Europe’s largest economy. According to Germany’s Federal Statistical Office, German GDP contracted 0.2 percent in the second quarter. As goes Germany, so goes the euro zone, where inflation has fallen to 0.3 percent (its lowest level in five years) and manufacturing is struggling.

It’s not just Europe that could add stimulus. Bank of Japan Governor Haruhiko Kuroda faces similar pressures as Japan’s economy has failed to rebound after a sales tax hike prompted the sharpest economic contraction since the start of 2011.

Back at home, we expect the Fed’s band will keep playing its merry tune for now. The voting members of the Federal Open Market Committee in 2015 will be even more dovish than the current committee. If there is a risk, it is that the Fed will keep monetary policy at a high level of accommodation for longer than previously anticipated.

Financial markets heard the sweet song of easy money from Jackson Hole loud and clear, sending equities up strongly while driving U.S. Treasuries’ prices higher and yields lower. The recent high of the New York Stock Exchange Advance-Decline Line supports this optimistic hypothesis, suggesting that stock prices will continue to reach new highs.

The world’s central banks will be doing whatever is necessary to keep their economies from falling into depression or any other economic malaise. So not to worry: From what we heard in Jackson Hole, the world is a beautiful place and the easy-money band won’t stop rocking.

FOMC Doves to Rule the Roost in 2015

With the labor market improving and after nearly six years of ultra-easy Federal Reserve policy, hawkish members of the FOMC have become increasingly vocal about the need to increase interest rates. However, while these hawks generate a lot of headlines, they are a minority among voting members, occupying just two of 10 spots. Next year, as the debate over rate hikes becomes more prominent, the annual rotation in voting FOMC members will further weaken the hawks and bolster the doves. This suggests that the risk lies with later rate increases, not earlier.



Source: Federal Reserve, Guggenheim Investments. Data as of 9/3/2014.

Economic Data Releases

Almost All U.S. Data Is Positive

  • Second-quarter GDP was revised up to 4.2 percent, led by strong business investment and a shrinking trade deficit.
  • Factory orders jumped 10.5 percent in July, a record high due to surging aircraft orders.
  • The ISM manufacturing index surprised to the upside in August, accelerating to its highest point in three years, to 59.0 from 57.1.
  • Personal income rose for a ninth straight month in July, up 0.2 percent.
  • Personal spending decreased by 0.1 percent in July, the first negative month since January.
  • The core Personal Consumer Expenditures deflator was flat in July at 1.5 percent.
  • Pending home sales rebounded in July, rising 3.3 percent after falling in June.
  • Construction spending was strong in July, up 1.8 percent from a month earlier and representing the largest monthly gain since May 2012.
  • University of Michigan’s index of consumer confidence improved in the final August reading, rising to 82.5 from 81.8 in July.
  • Initial jobless claims for the week ending August 22 were down slightly to 298,000 from 299,000.

Euro Zone Recovery Falters as Prices Decline

  • Euro zone economic confidence dropped in August to 100.6, the lowest level this year.
  • Euro zone retail sales fell in July by 0.4 percent, the first decrease this year.
  • The euro zone unemployment rate was unchanged in July at 11.5 percent.
  • The euro zone-wide CPI inched down in August to 0.3 percent, the lowest level since October 2009.
  • Germany’s CPI was unchanged in August at 0.8 percent.
  • Manufacturing PMIs across Europe showed a weakening pace of activity, with the aggregate manufacturing PMI falling to a 13-month low of 50.7 in the final August estimate.
  • Services PMIs were revised lower in France and Italy, with the euro zone services PMI ending August at 53.1, down from 54.2 in July.
  • Retail sales in Germany dropped 1.4 percent in July, the fourth decline in five months.
  • Italy consumer prices declined 0.2 percent in August from a year earlier.
  • The U.K. manufacturing PMI dropped to 52.5, its lowest level since June 2013, from 54.8 in August.
  • China’s manufacturing PMI slowed slightly more than expected in August, sliding to 51.1 from 51.7.
  • China’s HSBC services PMI bounced back in August, rising to a 17-month high of 54.1 from an all-time low of 50.0.
  • Japan’s consumer price index slowed in line with expectations in July, falling to 3.4 percent from 3.6 percent. Prices excluding food and energy were stable at 2.3 percent.
  • Industrial production in Japan rose weakly in July, up 0.2 percent following June’s 3.4 percent drop. Production is down over three percent year to date.


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Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”

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In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”

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