Tag Archives: New York

Yellen Takes Control of Fed Message to Stress Gradual Approach

Bloomberg, Mar 30, 2016


* Fed chair spells out what officials need to see for rate hikes
* Data dependence places dollar, growth abroad in sharp focus

Federal Reserve Chair Janet Yellen spelled out on Tuesday what she means by data dependence, asserting her leadership of the U.S. central bank with a clear message that interest rates will be raised at a cautious pace.

In one of her most detailed policy discussions this year, Yellen gave investors a list of conditions they need to watch for future rate hikes. Here they are:

  • Foreign economies and their financial markets need to stabilize.
  • The dollar can’t appreciate further. That would depress inflation and exports, and hurt U.S. manufacturing.
  • Commodity prices need to stabilize to help foreign producers find a better footing for growth.
  • The housing sector needs to make a larger contribution to U.S. output.
  • Inflation is a two-sided risk: Yellen is skeptical that the recent rise in core inflation, which strips out food and energy, “will prove durable.” She is watching closely.

Taking Charge

For all their efforts at transparency, Yellen’s speech in New York showed that communication by the Federal Open Market Committee, the panel that sets U.S. interest rates, sometimes means the leadership taking charge to hammer down a guiding view. That can be hard with a group that currently numbers 17 participants. Still, in times of uncertainty, it is the chair’s job to step up and describe the challenges and possible outcomes for policy.

“I thought it was her best performance since she has been chair,” said Michael Gapen, chief U.S. economist at Barclays in New York. “In the absence of unity, the chair has to exert leadership and it felt like she exerted that.”

Officials this month left their target for the federal funds rate unchanged at 0.25 percent to 0.5 percent and signaled a slower pace of rate hikes in 2016 than they’d expected in December, before concerns over Chinese growth sent a spasm through global financial markets.

However, following the March 15-16 FOMC meeting, a number of regional Fed presidents, including James Bullard of St. Louis, Patrick Harker of Philadelphia and Dennis Lockhart of Atlanta, signaled they would like to see rates rise further, pointing to the possibility of a move at the next FOMC meeting on April 26-27.

Rate Path

While the Fed chair steered clear of telegraphing an April or June rate hike, that was probably intentional. Neither she nor anyone else on the FOMC knows if the global climate for growth will have improved enough by then to warrant action.

For that reason, Yellen also drove home the message that when officials don’t know, they either don’t change policy at all, or only move gradually. That means making progress in the current tightening cycle isn’t about the Fed following a pre-set course of rate hikes, but acting when conditions are right. In a way, it takes a page from previous Fed playbooks.

During the chairmanship of Alan Greenspan, Fed officials spoke about “opportunistic disinflation,” or a strategy of moving interest rates early in an economic cycle to clip off the inflation impetus that was embedded in the economy at that time. Today, the Yellen Fed is coming from the opposite direction — letting the economy run hot and only raising interest rates when it won’t upset fragile balances in the global economy and financial markets.

‘Proceed Cautiously’

The Fed chair said it was appropriate to “proceed cautiously.” One sentence later she said “caution is especially warranted.” If her audience at the Economic Club of New York still didn’t get the message, a footnote in the text of her speech stated “uncertainty and greater downside risk” when the Fed’s policy rate is so close to zero “call for greater gradualism.”

“They really mean they are data dependent and willing to be patient,” said Laura Rosner, U.S. economist at BNP Paribas in New York, whose firm predicts no further rate increases for 2016 or 2017. “She is saying, ‘We have started this process and don’t have to continue if not warranted.”’

While the committee continued to suspend its assessment of the balance of risks to the outlook in the March statement, Yellen clearly saw more risks to the downside, said Ward McCarthy, chief financial economist at Jefferies LLC in New York.

“What I learned is just how little weight they gave to their own baseline and how much weight they put on a plethora of downside risks,” he said.

All Embracing

Another insight from the speech, McCarthy said, is the “wide range of things” data dependence covers.

For example, just looking at the Fed’s domestic mandate of employment and inflation, it looks like the central bank should be raising rates further this year.

The unemployment rate of 4.9 percent in February sits just above officials’ estimate of 4.8 percent consistent with full employment — one half of its dual mandate from Congress. The other is price stability. Core inflation measures are rising. Still, the FOMC median estimate for the appropriate pace of rate increases this year was halved in March from four hikes projected in December.

“We are looking at a whole variety of factors that impact the outlook for the U.S. economy,” Yellen said in the question-and-answer session following her speech.

If Fed officials had stuck with their December forecast for four rate rises this year in the face of slowing global growth, it could have been bad news for U.S. inflation and unemployment, she explained.

“Ideally, we want to get ahead of that,” she said. “The market response has been favorable.”


Ferrari Rises in New York Debut After IPO Priced at High End

Bloomberg, Oct 21, 2015

* Ferrari’s listing marks first step in Fiat’s spinoff plans
* Agnelli family, Piero Ferrari to join forces to secure control

Ferrari NV climbed as much as 17 percent in its first day of trading, marking a successful step in Fiat Chrysler Automobiles NV’s plans to spin off the supercar maker to finance expansion plans.

Shares in the maker of the $240,000 458 Italia sports car traded as high as $60.97 and were up 9.5 percent to $56.94 at 11:10 a.m. in New York. The stock priced at $52, the top end of the marketed range. Fiat Chrysler kept demand high by limiting the public listing of the car brand to no more than 10 percent of the unit.

The interest in Ferrari comes as investors have shied away from other IPOs. Three U.S. offerings faltered within about a week this month, as Digicel Group Ltd. canceled a sale, First Data Corp. priced shares below a marketed range and Albertsons Cos. postponed its offering.

Ferrari’s share sale, which has been in the works for about a year, is critical to help Fiat Chrysler finance a 48 billion-euro ($54 billion) investment program focused on expanding the Jeep, Alfa Romeo and Maserati nameplates globally. Ferrari Chairman Sergio Marchionne, also chief executive officer of Fiat Chrysler, has taken both companies’ stories on the road in London, New York and Ferrari’s home in Maranello, Italy.

Agnelli Control

The public listing will raise more than $4 billion for Fiat Chrysler, thanks to additional cash the Italian-American manufacturer will squeeze out of Ferrari before spinning it off completely early next year. Fiat Chrysler plans to distribute its remaining 80 percent of Ferrari to its own investors early next year.

Piero Ferrari, the son of the brand’s founder, will retain his 10 percent stake and becomes a billionaire from the deal. Following the spinoff, the Agnelli family will be the biggest shareholder and control more than 30 percent of the supercar maker’s voting rights, thanks to a loyalty shareholder program put in place by Marchionne.

John Elkann, a descendant of Fiat founder Giovanni Agnelli and the head of the family’s business activities, said in an interview with Bloomberg after the start of trading that the Agnellis will to retain their holding and work closely with Piero Ferrari. That means control of the company is locked up even before Ferrari becomes completely independent from its long-time parent.


Banks’ Record Treasuries Stockpile Boosts Case for Fed to Hold

Bloomberg, Oct 16, 2015

* Buying helped push U.S. 10-year yields below 2% this week
* Probability Fed will raise rates by December meeting is 30%

U.S. banks are gorging onTreasuries in the latest sign investors expect the Federal Reserve to postpone raising interest rates.

Commercial lenders boosted theirholdings to a record $2.15 trillion at the end of last month, based on Fed data. The stake is almost double the amount owned by China, the biggest U.S. foreign creditor. Treasuries have been advancing since the middle of June, with 10-year yields dipping below 2 percent this week, on speculation the absence of inflation means policy makers will defer raising rates.

“As to why they’re holding all these Treasuries, the view of the Fed has changed,” saidAli Jalai, who trades bonds in Singapore at Bank of Nova Scotia, one of the 22 primary dealers that trade directly with the Fed. “Maybe they’re not going to raise rates this year.”

Benchmark 10-year note yields were little changed at 2.01 percent as of 7 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2 percent security due in August 2025 was 99 29/32. The yield may fall to 1.75 percent by year-end, Jalai said.

Treasuries returned2.1 percent this year through Thursday, after gaining 6.2 percent in 2014, based on Bloomberg World Bond Indexes.

Fed Forecasts

Investors have been reducing forecasts for a Fed rate increase since August as inflation stagnates in the world’s biggest economy. U.S.consumer prices fell in September by the most since January, a government report showed Thursday.

Economists predictdata Friday will show industrial production fell last month and a gauge of job openings slipped from a record high in August, based on Bloomberg surveys. The Treasury is scheduled on Friday to release figures on overseas holdings of U.S debt and other assets for August.

Now is the time to seek higher returns outside the Treasury market, saidWill Tseng, a bond portfolio manager for Mirae Asset Global Investments.

“The Fed won’t hike for the next few months, but we’re still in a recovery path” in the U.S., said Tseng, who’s based in Taipei. “That’s the best position for high-yield and equity assets.” Mirae, which has $75 billion in assets, has been adding dollar-denominated high-yield bonds and emerging-market local-currency debt in October, he said.

The probability the Fed will increase rates by its December policy meeting has dropped to 30 percent from 70 percent odds at the start of August, according to futures data compiled by Bloomberg. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff.


Bundesbank to Doubters: Here Is Our Gold. Every. Single. Bit of It.

Bloomberg, Oct 7, 2015

Show me the gold! Show me the gold!

Germany’s central bank has listed all of its gold.

In 2012 the Bundesbank found itself at the center of a storm when the German Federal Court of Auditors called on the central bank to physically take stock of its gold holdings outside the country as they had never been assessed. The Bundesbank opted not to accede to the auditors’ request and do a stock take on its gold, noting that there were “no doubts about the integrity, reputation and safety of these foreign depositories.”

This response proved to be ill-judged as it only served to fuel speculation over the safety of German gold and even questions about whether it exists at all.

In response to the backlash, the Bundesbank announced in January 2013 that they would begin repatriating gold from vaults in Paris and New York. A year later there was another change of heart following the federal election which resulted in the Free Democratic Party, which was in favor of full repatriation, being dropped from Angela Merkel’s government. Budget spokesman for Merkel’s CDU/CSU bloc declared “the Americans are taking good care of our gold.”

That might have been that, if not for the tenacity of campaigners such as Peter Boehringer, whose “repatriate our gold” blog continued to seek answers on how much gold there was in New York. He was particularly concerned that the Bundesbank claimed to have a full list of all its gold holdings but was refusing to publish it due to security reasons.

Well, this morning Germany’s central bank appears to have had yet another change of heart and has published on its website the full list of all its gold holdings and where they are located.

It is very detailed, listing the location, inventory number, weight and fineness of every single bar.

It is also very, very long. 2,302 pages long, to be precise.

Perhaps the Bundesbank has learned a lesson here and realized that if it had just complied with the wishes of the Federal Court of Auditors back in 2012 it could have avoided this mess. Or perhaps it has just become tired of people asking and decided to give the doubters enough data to keep them busy for a very, very long time.


Oil Ignoring Bad News Usually Means a Rebound Is Near, Says Jim Rogers

Bloomberg, Oct 2, 2015

* Rogers sees decline in U.S. output helping stabilize prices
* Investor also sees opportunities in agricultural commodities

Oil is holding near $45 while the bad news keeps coming. For investorJim Rogers, that’s usually a sign a rebound is near.

The Organization of Petroleum Exporting Countries is stillpumping near record amounts of oil, China’s imports have slowed and U.S. crude stockpiles remain about 100 million barrels above the five-year seasonal average. Yet, U.S. benchmarkprices have held steady for more than four weeks since plunging to a six-year low at the end of August.

“When there’s bad news and something doesn’t decline, it usually means it’s at a bottom and will be turning,” Rogers, who correctly predicted a commodities rally in 1999, said in an interview in Singapore on Thursday. “Whether we’re at a turning point or not, I don’t know yet and I’m watching this very closely.”

A persistent global glut of crude that’s cutprices by half over the past year has prompted banks including Citigroup Inc. to predict further declines, with Goldman Sachs Group Inc. warning they may drop to as low as $20 a barrel. The losses, driven by a U.S. shale boom and OPEC’s strategy to sustain output to defend market share, has led a slump in commodities that’s roiled currency, equity and debt markets across the world.

West Texas Intermediate crudefutures in New York plunged to $37.75 a barrel on Aug. 24, the lowest intraday level since February 2009. They’ve since averaged $44.99 and haven’t closed below $44 from the start of September. The November contract traded 51 cents higher at $45.25 at 6:31 p.m. Singapore time on Friday.

While U.S.inventories remain abundant, the nation’s production has slipped in seven of the past eight weeks and drillers have idled more than half their rigs. Those cuts will help stabilize prices, Rogers said.

“Some companies are stopping drilling andproduction is actually going down in the U.S. now,” the chairman of Rogers Holdings said. “Shell iscanceling some drilling. All of these mean supplies will be going down in the future.”

Rogers also said he was watching Glencore Plc, whose shares fell by a record on Monday in London amid concern over its debt load. The commodity producer and trader has since recoveredsome of the near 30 percent loss after the company moved to reassure investors and as banks including JPMorgan Chase & Co. said the slump left the stock undervalued. Citigroup wrote that management should consider taking the company private.

Agriculture Opportunity

“It might be a good trade if you go public at a high price and you buy it back at a depressed price,” Rogers said, referring to Glencore. “That might be a wise thing to do. On the other hand, they have a lot of debt so I don’t know if they could do that.”

With theBloomberg Commodity Index, a measure of returns from 22 components, plunging to the lowest level since 1999 in August, Rogers also sees opportunities for investors in other raw materials.

“Agriculture is probably where the best opportunities are,” he said. “I’m not buying rice and sugar at the moment but some of these things are down a lot from their all time highs. There’s potential opportunities out there.”