Markets, data and official hints point to a rate rise
Falling gold and rising wages strengthen the case for tightening son
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More than Greece, more even than the Shanghai stock market, the US interest rate cycle obsesses financial markets. The dollar retains a worldwide pre-eminence, both as a yardstick of value and the medium through which much of global finance is delivered. No part of the world economy can be indifferent to US monetary conditions.
Ever since US rates hit rock-bottom in 2008, there has been speculation about the return to normality. Now the evidence is beginning to accumulate — from markets, economic data and official hints — that the next few months could finally see a bend in the curve.
One augury can be found in the price of gold, which on Monday plumbed a five-year low of $1,088. As a monetary mechanism, bullion no longer matters as it did when central banks needed vaults full of it as their means of settlement. But gold still says much about sentiment.
Its ascent to $1,900 per ounce tracked the collapse of investor confidence in the wake of banking and sovereign debt crises.
Gold remained expensive for as long as the authorities appeared unable to restart growth. Now, whether it be inflation, financial contagion or economic weakness, investors are no longer as nervous, and consequently see less value in buying tonnes of an inert yellow metal.
Gold’s recent skittishness may partly stem from its own idiosyncrasies: the release of figures breaking down Chinese reserves came in unexpectedly low, for example. But other signs of confidence are unmistakable. In 2012, a protracted stand-off between Greece and the rest of the eurozone led to carnage in European bond markets. This time around, their response has been to shrug. There is a similarly sanguine reaction beyond China to its stock market gyrations.
Even as the Shanghai Composite lost 30 per cent in value, the S&P 500 flirted with all-time highs, and a measure of market volatility reached its lowest point in two and a half years.
Economic reasons for delaying a rise are melting away. One is the persistence of low inflation.
Central banks have been at pains to emphasise the difference between good deflation, which stems from a positive supply shock, and the bad kind, brought about by weak spending. The past year has been all about the first sort, as plummeting oil and other commodity prices have granted developed economies a helpful boost to their incomes. However much headline inflation is dragged down, such effects ought not to linger for more than a year or so.
Recent experience helps to dispel another reason for delay, which is the risk of low inflation feeding through into weaker wages. Faster growing economies are instead seeing pay rises returning to normal levels. As a result, signs that the oil price is slipping again ought to be interpreted as unambiguously positive for growth.
Lastly, in the US and UK there has been a gradual conversion to the merits of early action. While the Federal Reserve and Bank of England are not exactly racing one another to the first rate rise, their respective bosses show a newfound eagerness to discuss it. In speeches studded with caveats, Janet Yellen and Mark Carney each hinted at rates beginning to rise by the turn of the year. Both elevate data over dogma; Mr Carney described how the BoE needs to “feel its way as it goes”, echoing the approach of his US counterpart.
The era of zero interest rates has not proven kind to those fond of confident market forecasts.
In light of this a little circumspection from central banks is understandable. But in recent weeks all of the straws in the wind have started to drift in the same general direction. A turn in the monetary cycle may at last be on the cards.
Ever since US rates hit rock-bottom in 2008, there has been speculation about the return to normality. Now the evidence is beginning to accumulate — from markets, economic data and official hints — that the next few months could finally see a bend in the curve.
One augury can be found in the price of gold, which on Monday plumbed a five-year low of $1,088. As a monetary mechanism, bullion no longer matters as it did when central banks needed vaults full of it as their means of settlement. But gold still says much about sentiment.
Its ascent to $1,900 per ounce tracked the collapse of investor confidence in the wake of banking and sovereign debt crises.
Gold remained expensive for as long as the authorities appeared unable to restart growth. Now, whether it be inflation, financial contagion or economic weakness, investors are no longer as nervous, and consequently see less value in buying tonnes of an inert yellow metal.
Gold’s recent skittishness may partly stem from its own idiosyncrasies: the release of figures breaking down Chinese reserves came in unexpectedly low, for example. But other signs of confidence are unmistakable. In 2012, a protracted stand-off between Greece and the rest of the eurozone led to carnage in European bond markets. This time around, their response has been to shrug. There is a similarly sanguine reaction beyond China to its stock market gyrations.
Even as the Shanghai Composite lost 30 per cent in value, the S&P 500 flirted with all-time highs, and a measure of market volatility reached its lowest point in two and a half years.
Economic reasons for delaying a rise are melting away. One is the persistence of low inflation.
Central banks have been at pains to emphasise the difference between good deflation, which stems from a positive supply shock, and the bad kind, brought about by weak spending. The past year has been all about the first sort, as plummeting oil and other commodity prices have granted developed economies a helpful boost to their incomes. However much headline inflation is dragged down, such effects ought not to linger for more than a year or so.
Recent experience helps to dispel another reason for delay, which is the risk of low inflation feeding through into weaker wages. Faster growing economies are instead seeing pay rises returning to normal levels. As a result, signs that the oil price is slipping again ought to be interpreted as unambiguously positive for growth.
Lastly, in the US and UK there has been a gradual conversion to the merits of early action. While the Federal Reserve and Bank of England are not exactly racing one another to the first rate rise, their respective bosses show a newfound eagerness to discuss it. In speeches studded with caveats, Janet Yellen and Mark Carney each hinted at rates beginning to rise by the turn of the year. Both elevate data over dogma; Mr Carney described how the BoE needs to “feel its way as it goes”, echoing the approach of his US counterpart.
The era of zero interest rates has not proven kind to those fond of confident market forecasts.
In light of this a little circumspection from central banks is understandable. But in recent weeks all of the straws in the wind have started to drift in the same general direction. A turn in the monetary cycle may at last be on the cards.
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