Weekly Economic Briefing

Fed spillovers

23 September 2014

Global Overview

  • Contrary to the expectations of some in the market, the Federal Reserve maintained its guidance that interest rates will likely remain low for a considerable time after asset purchases end in October.
  • The dovish statement was offset by the release of new projection materials, implying that pricing in the government bond market is underestimating how quickly rates will rise after the first rate hike. Increasing yields at the short end of the US curve has led the dollar to rally significantly in recent months.
  • The strong dollar has helped both the euro and yen to weaken. Some have argued that this alleviates the need for further policy easing. We disagree and think accelerated balance sheet expansion will be necessary to achieve price stability.
  • Emerging markets with external imbalances are in a more difficult position. A rapid increase in US yields could trigger capital outflows. Meanwhile, Chinese policymakers are struggling to deal with the weakening property market.
  • The ‘No’ vote in the Scottish referendum switches the focus of local markets to the Bank of England and the timing of the first local rate hike.
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US

Although the Fed’s statement was dovish, its projection materials suggested that markets are still underestimating how quickly interest rates will rise over the next few years.

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UK

Scottish voters’ decision to remain within the United Kingdom brings the timing of the first rate hike back into focus.

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Europe

The results of the first TLTRO were disappointing. The takeup of the December operation should be larger but questions remain about the efficacy of the programme.

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Japan

The Bank of Japan’s assessment of the economy appears to be stuck on repeat. Unless there is real evidence that prices can renew their upward momentum, faith in Abenomics may evaporate.

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Emerging Markets

China’s latest easing demonstrated the uniqueness of its policy approach. Policy can help prevent a crisis but not a long-term adjustment in the property market.

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Standard Life Investments’ Global Strategy team provide regular analysis of the key economic data that has been influencing financial markets.

Available on a weekly basis, the Weekly Economic Briefing takes a detailed look at the global economic issues that have been impacting our investment strategy. The regional approach aims to provide an easy-to-navigate guide to the most recent developments in the global economy.

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