News & Views: Wednesday, August 20
What you need to know for today's trading day.
'Good news' shock could kill the five-year-old bull market (Reuters)
Pound Gains as BOE Says Two Policy Makers Sought Rate Increase (Bloomberg)
Norway's Wealth Fund Gains $31 Billion on Global Stock Surge (Bloomberg)
Hamas Military Commander's Wife and Child Killed as Gaza Attacks Escalate (WSJ)
Putin Meeting Leaves Kiev With Tough Choices (WSJ)
As was expected by a significant number of participants, the two hawkish members of the Bank of England's Monetary Policy Committee (MPC) dissented at its meeting earlier this month calling for a 25bps interest rate hike. The MPC is now split between a dovish/neutral majority and a hawkish minority. The majority is concerned that hiking too quickly would expose the British economy to shocks, jeopardize indebted households, boost the pound to excessive levels (and hold back inflation), impede household rebalancing, and that the medium-term outlook for prices does not justify a rate increase. The minority feels that the recent labor strength has increased the risk of upward wage pressure, an early rate risk will allow for a gradual tightening, and that a possible market overreaction is not a reason to delay tightening.
There has been a negative reaction in UK Gilts and sterling this morning, but that is only due to the unwinding of bearish positions that were initiated after Carney's speech on June 11. The main takeaway, though, is that the BoE is giving US investors an excellent roadmap for the challenges that the Fed will face later this year, and next, as it tries to prepare the market for tightening. The BoE is about six months ahead of the Fed in terms of policy tightening.
In Reserve Bank of Australia Stevens' testimony to his country's parliament last night, he tried to imply that the central bank may try currency intervention operations rather than lowering rates to prevent further increases in the Aussie dollar, which is a drag on economic growth. He has already hinted as much in prior speeches. He stated that he doesn't think lowerig rates is the answer. The one oddball comment was that he blamed companies' lack of animal spirits as a reason for slower-than-normal economic growth. That seemed very odd, as if he was blaming them for monetary policy not working as intended. Even though the Aussie forward curve is more biased to a rate cut in the next 12 months, the AUD rose against the USD.
News from this morning indicated that Walgreens' (WAG) CFO was ousted earlier this month due to a gross overestimation on profits from Medicare Part D scripts. The differential was $8.5bln to $1.1bln.
The geopolitical - even social - risk is heating up with the ceasefire ending in Israel, a US journalist beheaded by IS in Syria (Germany's Merkel has already made a public statement on the matter), and a meeting set up between Ukraine's Prime Minister and Russian President Putin.
- German PPI YoY (July) down to -0.8% vs -0.7% expected, prior -0.7%
- Japan all industry activity index MoM (June) down -0.4% vs -0.4% exp, prior 0.6%
- Japan trade balance (July) widens to -964B Yen vs -713.9b exp, prior -823.2b
-- Exports YoY up to 3.9% vs 3.8% exp, prior -1.9%
-- Imports down to 2.3% vs -1.5% exp, prior 8.4%
US Economics (Time Zone: EST)
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