The Fed’s Williams May Have Flipped His Rate Script

(Bloomberg Opinion) -- Federal Reserve Bank of New York President John Williams is the most influential central banker in the U.S. after Fed Chairman Jerome Powell. The New York Fed is the central bank’s liaison to Wall Street, and its president has a permanent vote on the interest rate-setting Federal Open Market Committee. (The heads of the other regional Fed banks rotate.) Bloomberg Economics pegs Williams as a moderate hawk, meaning he’s in favor of higher rates. But a speech by Williams on Thursday had bond traders buzzing that he may be changing his feathers.

U.S. Treasuries rallied after Williams said at an event in Buffalo that “It’s still a little bit of a puzzle” why wage growth hasn’t accelerated despite the lowest unemployment rate since 2000. He also said that “It’s a bit of a Goldilocks economy from a policy-maker point of view.” Taken together, the comments are dovish and suggest that Williams no longer thinks it is urgent to raise rates, according to Fed watcher and FTN Financial chief economist Chris Low. The use of the term Goldilocks in reference to the economy, Low notes, was coined in the late 1990s, when the economy appeared to be incapable of running too hot or too cold despite the Fed allowing much faster growth than it thought possible without spurring faster inflation. “Unless something significant changes on the growth or inflation front, all this suggests he supports another hike or two followed by a pause,” Low wrote in a note to clients.

The Fed’s Williams May Have Flipped His Rate Script

Bond bulls have thought for some time that a lack of inflationary pressures could allow the Fed to slow the pace of rate hikes sooner rather than later, especially with a budding global trade war threatening the economy. The bond market is certainly worried about faster inflation. Breakeven rates on Treasuries — a measure of what traders expect the rate of inflation to be over the life of the securities — have declined rapidly. For five-year securities, the rate has come all the way down to 1.95 percent in recent weeks from this year’s peak of 2.19 percent in May.

THE END MAY BE IN SIGHT
Emerging markets would certainly welcome a pause by the Fed. Higher rates in the U.S. have been credited with a strengthening in the dollar over the past five months, especially against emerging-market currencies. The MSCI EM Currency Index has dropped 6.31 percent since early April. Portfolio flows into emerging markets slowed to $2.2 billion last month from $13.7 billion in July, according to the Institute of International Finance in Washington. Jordi Visser, the chief investment officer at the $1.7 billion hedge fund Weiss Multi-Strategy Advisers in New York and one of the few people who earlier this year predicted a “significant correction” in emerging-market assets, says a rebound may be looming. Visser told Bloomberg News’s Ben Bartenstein that an easing or a more accommodative monetary policy by the Fed and increasing global coordination would be crucial to any turnaround. Visser said he sees value in the Brazilian real, Mexican peso and Chinese internet stocks. Famous emerging-market investor Mark Mobius, the founder of Mobius Capital Partners, told Bloomberg TV on Thursday that he prefers EM equities, especially those in Brazil, India and South Korea.

The Fed’s Williams May Have Flipped His Rate Script

CRYPTO CRUMBLES
A horrible year for cryptocurrencies such as Bitcoin is not only getting worse, it’s exposing a fundamental problem. The Bloomberg Galaxy Crypto Index has dropped 70 percent this year, suffering two flash-crash-type events in each of the past two days. The latest weakness has been tied to reports that Goldman Sachs Group Inc. is pulling back on near-term plans to set up a crypto trading desk. But Goldman is hardly the only firm backing away. Kraken, one of the largest cryptocurrency exchanges, is laying off 57 of its employees based in North America, according to Bloomberg News’s Camila Russo, citing an email from Chief Executive Officer Jesse Powell. This should be the time for cryptocurrencies to shine with the turmoil in emerging markets boosting the appeal of alternative currencies for those worried about the debasement of the dollar, euro, yen and pound because of extraordinary central bank polices. But the fact that it’s not happening calls into question the heady predictions made by crypto bulls that Bitcoin and its siblings are destined to replace fiat currencies in the global financial system. That may still happen, but this year’s experiences suggest perhaps not in our lifetimes.

The Fed’s Williams May Have Flipped His Rate Script

INSIDERS ARE SELLING
The S&P 500 Index fell for a third consecutive day on Thursday. There’s a lot of whispering about whether the economy has peaked, and questions about President Donald Trump’s fitness for office may spur him to show he’s in control by ramping up the global trade war. If that’s not concerning enough, it looks as if confidence among corporate officials may be waning. Executives sold more than $10 billion worth of their stock holdings in August, the most since November, according to Bloomberg News’s Brandon Kochkodin, citing data from TrimTabs Research. “One cautionary sign for U.S. stocks is that corporate insiders have accelerated their selling of U.S. equities,” said Winston Chua, an analyst at TrimTabs. “They’ve dedicated record amounts of shareholder money to buybacks but aren’t doing the same with their own, which suggests that companies aren’t buying stocks because they’re cheap.”

The Fed’s Williams May Have Flipped His Rate Script

WHEAT RALLY’S IN JEOPARDY  
Wheat has been one of the bright spots in the commodities market this year, with prices rising 13.8 percent compared with a 6.51 percent drop in the Bloomberg Commodity Index. Much of the gains have been due to a lack of rain, but that may be starting to change. Wheat prices tumbled about 1.50 percent as farmland across Kansas, parched for months by drought, received a dose of favorable rain just as this season’s wheat crop is set to be sown, according to Bloomberg News’s Megan Durisin. Recent showers reduced the percentage of the state facing drought to the smallest since late 2017, government data showed Thursday. Kansas is the largest U.S. producer of winter wheat, and the rain boosts conditions for the crop, which is typically planted through October. While U.S. planting of the grain fell to the lowest in a century in recent seasons, the mood may be shifting as prices climb. “There’s an expectation that we’re going to have a sizable increase in winter-wheat acreage for harvest in 2019,” Bill Lapp, president of Advanced Economic Solutions in Omaha, Nebraska, told Durisin in a phone interview.

The Fed’s Williams May Have Flipped His Rate Script

TEA LEAVES
The U.S. Labor Department on Friday will release its monthly report on the health of the job market. The consensus is that payrolls jumped by 195,000 in August, in line with the average of 200,000 in the prior 12 months. Even so, there’s a growing sense that the actual numbers could be a bit disappointing. The top-ranked interest rates strategists at BMO Capital Markets pointed out in a research note Thursday that seven proxies they track are negative for the report while just four are positive. That may help explain why the so-called whisper number is for a gain of 180,000 jobs last month, according to data compiled by Bloomberg. To be sure, a weaker-than-forecast number may not generally mean that the economy is losing steam. The unemployment rate is hanging around its lowest since 2000, and many employers say the labor market is so tight that they are having trouble filling positions. If true, then expect to see an acceleration in the pace of average hourly earnings gains, which have remained muted at an average of about 0.2 percent in recent years.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.

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