Markets have been range-bound, but not so much as to remove opportunity. Watch closely, this may be fleeting. Two of the world’s most prominent central bankers delivered hawkish comments last week as both were full of “plain talk.”
Fed Chairman Powell mentioned the possibility of four rate hikes this year, instead of three, with more to come in 2019. Mr. Draghi of the ECB announced a timetable for ending QE asset purchases. It didn’t seem that long ago that he was promising to do “whatever it takes.” Is the Eurozone ready to go it alone?
Although last week’s actions would appear to be an attempt to coordinate the efforts of monetary policy in the EU and the US, the result will probably have different effects. Last week saw markets bid up the dollar against the euro. This makes inflation less likely in the US and more likely in the EU… Surprisingly, equity markets rallied in Europe but sold off in the US. While a stronger dollar makes inflation less likely by hurting US trade competitiveness, this is something the equity markets have been following closely. And let’s not forget that a stronger dollar will cause more than its share of angst in emerging markets.
Finally, the banks in both regions could be hinting at how this might play out. Bank stocks are down in the Eurozone, and they sold off in the US after the rate announcement. Banks tend to like rising interest rates if there’s steepening involved. Rising rates that flatten the yield curve are bad for net interest margin, no matter which part of the world you operate in.
Let’s hope both central banks can transition into a tighter monetary world without major disruption. Both Mr. Powell and Mr. Draghi have delivered as they promised. Let’s hope they can stay the course.
SCI HIGHLIGHTS
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