lunes, 6 de octubre de 2014

lunes, octubre 06, 2014

October 2, 2014 10:59 pm

Dwindling US inflation casts shadow

U.S. Federal Reserve Chair Jane Yellen (L) walks with European Central Bank President Marlo Draghi at the Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming August 22, 2014. REUTERS/David Stubbs (UNITED STATES - Tags: BUSINESS POLITICS)©Reuters
 
Market expectations of US inflation have slid to levels rarely seen over the past decade, overshadowing the outlook for growth for the world’s largest economy and posing a challenge to central bank policy makers.
 
With Japan and the eurozone pushing for weaker currencies to boost their struggling economies, a strengthening dollar since the summer has cut inflation pressures for the US. That raises the prospect of global disinflationary forces swinging back and forth between regions, reinforcing the current cycle of low interest rates and lacklustre growth.
 
“Investors are beginning to realise that, contrary to their confident actions and assurances, the Fed and the European Central Bank have failed to prevent a dreaded replay of Japan’s deflationary template a decade earlier in the west,” said Albert Edwards, strategist at Société Générale.

The Fed will get its latest reading on the health of the jobs market on Friday, with the release on non-farm payrolls data for September, expected to show 215,000 new jobs and a steady 6.1 per cent unemployment rate.

Some Fed officials are starting to think about the strength of the dollar, and the broader weakness of the global economy, as a threat to the US growth outlook. Fed chairwoman Janet Yellen warned of “a number of risks to the global economy” in her most recent press conference.
 
“Given the relative movements of exchange rates, it seems likely that our net export position is going to be a challenge for those of us in the US,” said Charles Evans, president of the Chicago Fed, on Monday.
 
He questioned whether the US can decouple from weak growth elsewhere in the world. “It would be pretty surprising to have a very strong economy in an otherwise weak world economy,” he said.

The US central bank follows a dual mandate of maximum employment and stable prices, which it defines as 2 per cent inflation. Since late 2008 the Fed has undertaken several rounds of bond purchases designed to stimulate the economy, boost job creation and firm up consumer prices.

While employment has steadily improved over the past 18 months, the inflation outlook has lagged behind the Fed’s target, with consumer prices recently retreating anew due to a stronger currency and lower commodity prices.

Now as the Fed looks to formally end quantitative easing this month, a key market measure of inflation expectations that is followed by the central bank has dropped back to 2.17 per cent, near levels that in the past provoked aggressive bond purchases from the central bank.

Alan Ruskin, strategist at Deutsche Bank, said the drop in inflation expectations “is bound to gain some attention among US officials, especially if it shows persistence at levels near 2 per cent”.

The Fed follows a specific measure that looks at five-year inflation expectations that start five years from now. The so-called five-year into five-year break-even rate loiters at 2.15 per cent, near the low from September 2011 and just above the financial crisis nadir of 1.95 per cent seen in December 2008.

Mario Draghi, president of the European Central Bank, said on Thursday that eurozone inflation expectations, as measured by the region’s five-year, five-year inflation swap rate, were still below the ECB’s target, but close to 2 per cent.

Beyond the energy and global growth story lowering US inflation expectations, the Treasury inflation market has also been influenced by the travails at Pimco. Bill Gross, the former manager of the Total Return Fund, was an advocate of inflation-protected bonds and the tens of billions of outflows from Pimco during September has compelled investors to pre-empt sales by the investment firm.

The Fed watches inflation expectations closely and similar drops were a factor in its decision to launch QE2 in 2010 and the so-called Operation Twist in 2011. They are particularly important to certain Fed officials, such as James Bullard of the St Louis Fed, who are otherwise inclined towards early rate rises.


 
Copyright The Financial Times Limited 2014.

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