Tag: the European Central Bank (ECB)

Inflation - Getting Back To Normal

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates - inflation


So now, suddenly, out of nowhere, inflation has reared its ugly head, and the financial markets are starting to believe it.

On Wednesday the Labor Department reported that the consumer price index rose a higher than expected 0.5% in January, 2.1% compared to the year-earlier period. The all-important core rate, which excludes food and energy prices, rose 0.3% for the month, 1.8% versus a year ago. While not exactly hitting the Federal Reserve’s revered 2.0% annual inflation target, it was apparently close enough to create more jitters in the bond market, with the yield on the U.S. Treasury’s benchmark 10-year note immediately climbing seven basis points to 2.91%, its highest level in more than four years.

The very next day, Labor reported that the core producer price index rose 0.4% for the month and 2.2% year-on-year, which pushed up the yield on the 10-year another basis point, to 2.92%.

I’m not exactly sure why this recent surge in inflation should come as such a big surprise to anyone, but it surely has, witness the tremendous amount of volatility in the financial markets in just the past two weeks. The tipping point seems to have been the release of the January jobs report, the highlight of which wasn’t the change in nonfarm payrolls and the unemployment rate, which they usually are, but the 0.3% (2.9% annualized) growth in wages, which was the strongest year-over-year gain since June 2009.

That seemed to finally catch everyone’s attention that yes, contrary to what the Fed has been telling us for the past four years, inflation really does exist. Now we have more verification. And it’s probably only going to exacerbate.

And who do we have to thank for this new-found inflation? Continue reading "Inflation - Getting Back To Normal" →

What's Behind the Fed's Inflation Obsession?

Posted on by George Yacik

George Yacik - INO.com Contributor - Fed & Interest Rates


The battle lines are being drawn for the Federal Reserve’s monetary policy meeting this week. The prevailing market consensus right now is that no resolution of the debate – which mainly concerns inflation – will happen at the meeting, meaning there will be no change in interest rates, and may not be before the end of this year.

One side of the issue, which seems to be the prevailing view at the central bank, was recently promulgated by Fed governor Lael Brainard at a meeting of the Economic Club of New York. “My own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” she said. “We have been falling short of our inflation objective not just in the past year, but over a longer period as well. What is troubling is five straight years in which inflation fell short of our target despite a sharp improvement in resource utilization.”

The other side, which appears to be the minority opinion, is represented by William Dudley, the president of the New York Fed, who isn’t overly concerned about the current level of inflation. “Even though inflation is currently somewhat below our longer-run objective, I judge that it is still appropriate” to raise interest rates soon, he said recently. “I expect that we will continue to gradually remove monetary policy accommodation.” Continue reading "What's Behind the Fed's Inflation Obsession?" →

German Bundesbank Uneasy With ECB

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor


Relations between the German Bundesbank and the ECB are turning tense again. What dictates this complex relationship of ups and down is one thing and one thing only—the Bundesbank’s fear of inflation. When deflationary pressures occur (falling prices) the German Bundesbank tends to accord more leeway for the ECB and it mutes its hawkish stance.

But when German inflation is on the rise, then the trauma Germany experienced from the inflationary crisis of the 1930s comes rushing back. Then the Bundesbank’s stance becomes hawkishly vocal and relations become strained. So, what has caused Germany’s Bundesbank to “raise its voice” this time around? This time, it's a bit more complex than just inflation. Continue reading "German Bundesbank Uneasy With ECB" →

Eurozone: 2017 Spells More Trouble

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor


The year 2017 is just around the corner and it seems that more troubles are brewing for the Eurozone. The region faces a deadly combination of a premature ECB taper, Fed tightening and more political uncertainty. Together, those factors could disrupt the already fragile Eurozone recovery.

ECB Tapers While Fed Tightens

Mario Draghi, the ECB President, so far has proved (and more than once) his ability to stabilize the Eurozone economy and delicately navigate monetary policy. But, in the latest ECB rate decision, which was also the last for 2016, Mario Draghi may have slipped up and acted a bit too hastily. Draghi declared that the ECB would reduce its monthly bond purchases from the current pace of €80 billion a month to €60 billion, beginning in April 2017. Despite constant denials from the ECB, there is simply no other way to interpret Draghi’s declaration but as a tapering of the ECB’s Quantitative Easing program. And, in the world of monetary policy, especially ultra-loose monetary policy, less stimulus equals tightening.

The ECB is effectively rolling back part of the brakes it has used to curb volatility in the Eurozone debt market. When the Greek crisis loomed, the ECB used QE to curb volatility. Likewise, when the Spanish banking crisis erupted and, as of late, with Brexit and the Italian banking crises, the ECB quickly responded. The ECB’s massive QE program helped restrain the shocks to the system. Continue reading "Eurozone: 2017 Spells More Trouble" →

Euro: No Longer a One-Way Bet

Posted on by Lior Alkalay

Lior Alkalay - INO.com Contributor - Forex


It’s been barely five months since the Brexit referendum and yet here we are again, another European referendum, another political battle. This time around, it is Italy’s future in the balance and the Euro’s integrity at stake.

This upcoming referendum, due on Sunday, is a vote for constitutional reform that will abolish Italy’s dual parliamentarian system. Currently, Italy’s Parliament has two chambers, the Senate and the Chamber of Deputies. And, peculiar as it may sound, both have the same powers, but rather than balance they simply paralyze one another.

Why It Matters For The Euro

So, that begs the question, why is a referendum in Italy so important for the Euro? In one word: Banks. In the past few months, the Eurozone economy has started to show some signs of life. Among the data releases, Eurozone Manufacturing PMI rose to 53.7, retail sales in Germany has their strongest monthly gain in five years, and the Eurozone trade balance surplus rose by 37.8% over last year. Even in Italy, the Manufacturing PMI is holding above the 50 level, signaling expansion. All of which is "courtesy of a low Euro” that benefits European exporters. And yet, core inflation in the Eurozone is incredibly low at 0.8% and credit activity is weak, with the M3 level turning stagnant. Even the ECB’s €80 billion in monthly liquidity operations have thus far been insufficient to revive credit growth which is essential for the Euro recovery. At the heart of the problem is Europe’s banking system and its need to capitalize. Continue reading "Euro: No Longer a One-Way Bet" →