Friday, 31 August 2012

Week in review: The end of Silly Season

Image: Kumar Appaiah
The summer parliamentary recess creates a news drought which traditionally makes space for bizarre stories. Perhaps therefore we should not have been surprised when news of a lion stalking Essex erupted last weekend. But fear not: politics now seems firmly back on the agenda as we pass into September and US election fever starts to build. With just until ‘America decides’ (plus a few weeks for legal challenges). The excitement seems to have gone to some peoples’ heads: specifically Tom Head, a county judge in Lubbock County, Texas who told a local news station on Monday that taxes needed to be raised so the county could ‘prepare for contingencies’ if Obama was re-elected for a second term. The contingencies were to defend Texas against United Nations Troops being sent in to quell unrest! UN Secretary-General Ban Ki-moon's spokesman denied there was any such plan. He added “not even the United Nations would ever mess with Texas."

Staring down the Jackson Hole…
Back in the world of reality, most equities continued to retreat from their mid-month highs. The receding potential for further stimulus at this weekend’s Jackson Hole Monetary Policy Jamboree caused most equity markets to soften over the week. Despite Federal Reserve Minutes suggesting greater dovish sympathies from the US interest rate setters, newsflow since then has been more upbeat.  So guidance on the future direction of policy was not expected to be forthcoming when Ben Bernanke gave his speech this afternoon.  Rather, as Mike discussed earlier this week, he spoke of the unconventional policy tools, including their costs and benefits, that have been employed so far to try and return the economy to growth. 

He also made clear that the impact of quantitative easing on equity prices was a clear benefit of the policy - a stance which should encourage investors and provide further credence to the argument that share prices will continue to be supported by a ‘Bernanke put’. Bernanke’s final lines concluded: “the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability.”

The importance of being Frankfurt…
Jackson Hole is hosted by the Wyoming Federal Reserve but invites the great and good from monetary circles.  One absentee this year will be Mario Draghi who is currently reviewing his own policy options to permit the transmission mechanism of monetary policy to function appropriately. Rob touched on the poor historical record of partnerships between the Latin and Germanic peoples. 

Details of Draghi’s specific plans are lacking, however there seems to be a suggestion for the targeting of yields for peripheral economies. Comments throughout the week from policymakers (including the ECB’s executive board member Joerg Asmussen) indicated that a swell of support for this policy is building. Notably even the German government seem supportive, although the Bundesbank remain fearful that their teutonic monetary discipline might be replaced by sprezzatura. 

Last week, as I said, a committed and appropriately structured response, in line with that described in my policy-wish list, has the potential to greatly ease the eurozone crisis. I described it as Out of the fire, back to the safety of the frying pan because while the crisis may be subdued, it does not return the eurozone to growth. Spanish bonds weakened, as the latest data release revealed that growth from previous years had been revised lower. That means the current rate of GDP growth has not changed, but of course it does mean that measures which include the monetary value of GDP (budget deficit as % of GDP, debt to GDP) become instantly worse. The UK’s own data was revised a touch better at the end of last week.

Guy Foster
Head of Portfolio Strategy

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