Fed’s Dudley Talks Up Balance Sheet ‘Normalisation’, UK High street Under Pressure as Inflation Drops, more…


This week several chairmen at the Federal Reserve have been rallying behind the expectation of a further interest rate rise this December – in spite of muted inflation and a variety of poor data samples in recent weeks. Comments from New York Fed chair William Dudley in particular deserve closer scrutiny. Speaking about the ‘normalisation process’ with regards to balance sheet reduction, he went on to say the following:

The reinvestment process, phasing that down, is going to happen very gradually. We’re not just going to stop abruptly because we want to make sure that the adjustments are small, the model is gentle, and don’t have a big consequence for financial statements. So far I would say that the market reaction has been extraordinarily mild. As expectations have gone from relatively low probability that we’re going to start this to a very high probability that we’re going to start this relatively soon. And so that makes me more confident that when we start, it’s not going to have a big consequence for financial statements.”

Here, Dudley is saying that the Fed’s behaviour up to this point, as well as their future intentions, have been met with a positive reaction by investors. Discounting for a moment the use of stock buybacks by corporations (which are now in decline), what Dudley’s comments suggest is that the Fed by their own reckoning are not a cause for market instability.

This is where geopolitics enters the picture. As proven with missile strikes in Syria and heightened tensions with North Korea, instances such as this possess the capability of impacting negatively on markets. The Fed’s policy of ‘normalisation’ requires the steady build up of geopolitical conflict, simply because this will act as a distraction from their own actions.

As the Fed gradually begin to ‘normalise’ monetary policy, geopolitical tensions are slowly fermenting across the world. A process that looks set to continue throughout the rest of 2017 into 2018.

Zero Hedge: Dudley Warns “Market’s Rate Hike Expectations Are Not Unreasonable” Sending Yields, Dec. Odds Higher

  • NY Fed President William Dudley threw currency and eurodollar traders for another loop when he said on Monday that it was not “unreasonable” to think that the central bank would begin trimming its balance sheet in September and sees another rate hike this year – supposedly in December – should economic data hold up, ignoring the message sent from monthly inflation reports.
  • Dudley also spoke on balance sheet reduction: “We can obviously announce the start of the program but delay the actual start date. So I think that — I don’t think the debt limit will have big impact on our decision about whether to start or not start the balance sheet normalization process…”

Reuters: Trump orders probe of China’s intellectual property practices

  • President Donald Trump on Monday authorized an inquiry into China’s alleged theft of intellectual property in the first direct trade measure by his administration against Beijing, but one that is unlikely to prompt near-term change.
  • The investigation is likely to cast a shadow over relations with China, the largest U.S. trading partner, just as Trump is asking Beijing to step up pressure against Pyongyang.

Zero Hedge: US Stock Buybacks In Biggest Slide Since The Financial Crisis

  • Share buybacks have slumped by over 20% YoY.” Ominously, this is the sharpest drop in corporate buybacks since the financial crisis effectively shut down bond markets in 2008, as a result of the market no longer rewarding companies that lever up just to repurchase their own stock.
  • If this phase is now officially over, it is unclear what – if any – new source of capital inflows, central banks notwithstanding, will replace corporations as the main buyers of US equities going forward.

Bloomberg: Kashkari Says Fed Concerns Over Inflation Based on ‘Ghost Story’

  • Federal Reserve Bank of Minneapolis President Neel Kashkari said his colleagues at the U.S. central bank have voted to raise interest rates because they are worried about accelerating inflation in the future, a concern he likened to a “ghost story.”

Reuters: Fed to soon shed bonds, should hold off rate hikes: Kaplan

  • The Federal Reserve will set a time frame for beginning to shed some of its $4.2-trillion bond portfolio “soon” but, given inflation weakness, it should hold off interest rate hikes for now, Dallas Fed President Rob Kaplan said on Friday.
  • “I want to make sure before we take a next step that I understand incoming data … and that we are making progress” toward a 2-percent inflation goal, he told reporters.

Sky News: Shoppers shun high street and shopping centres in sale season as they cut back on non-essentials

  • British consumers shunned the high street in sale season and also reined in their spending on leisure pursuits last month.
  • Footfall – visitors to Britain’s brick-and-mortar retail stores – declined 1.1% in July, the biggest fall since January, said the British Retail Consortium.
  • Figures released by the BRC showed high streets were the hardest hit with a 2.1% drop, while shopping centres saw a 1.3% fall.
  • However, retail parks bucked the trend with a 1.7% increase in footfall, down to in part “convenience for shoppers”, the BRC said.

Independent: UK inflation – CPI came in lower than expected in July while RPI beat estimates

  • Consumer price inflation came in lower than expected in July on the back of another sizeable fall in fuel prices, but retail price inflation beat estimates spelling a larger rise in rail fares next year.
  • The annual rate of CPI inflation was 2.6 per cent in the month, equal to June’s figure and lower than the 2.7 per cent City of London analysts had pencilled in
  • However, RPI inflation, which although stripped of its “national statistic” status is still used to benchmark rail price increases for next year, came in at 3.6 per cent, higher than the 3.5 per cent expected in the Square Mile.

Zero Hedge: Retail Sales Rebound In July – Biggest Jump Since Dec 2016 On Record Auto Incentives

  • After declining for two straight months, US Retail Sales in July rebounded dramatically to a 0.6% MoM gain – the most since Dec 2016 – driven a surge in motor vehicles (record incentives) and department stores (more inventives?). Year-over-year saw upward revisions and a rebound to a 4.2% rise in July.
  • The last two month’s declines in Retail Sales have been revised away magically and we have now gone 5 months without a decline…

  • How sustainbale is this? Record automaker incentives and a desperate ‘retailer’/department store business slashing prices to maintain some revenues?

Reuters: Euro zone June industry output drops by more than expected

  • Industrial output in the 19 countries sharing the euro currency fell by more than expected in June, as the production of capital and durable goods fell following sharp increases in the previous month, European statistics office Eurostat said on Monday.
  • Factory output fell most in Ireland and Malta, while the euro zone’s two largest economies, Germany and France also showed a decline. Italy and the Netherlands showed an increase in monthly output, however.

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