In Portfolioticker today
- Today at the stock market
- The portfolio today
- Japan Update
- China Update
Today at the stock market
“U.S. stocks ended up slightly on Wednesday, but off the day’s highs, as worries mounted over President Donald Trump’s agenda and minutes from the latest Federal Reserve meeting suggested policymakers are worried about weak inflation.
“In the minutes from the July meeting, a majority of officials stuck with a forecast that inflation would gradually rise to a 2 percent target over the medium term. However, “many” saw some “likelihood” that it would remain below that level for longer than expected. The minutes didn’t specify when the Fed would begin shrinking its balance sheet this year.
The minutes rekindled debate on the timing for future policy moves, including when the central bank will begin winding down its balance sheet, as economic data continue to paint a mixed picture on the strength of the American economy.
The release interrupted another market session dominated by news relating to President Donald Trump, this time because he disbanded two business advisory councils after a growing number of corporate executives quit in response to his comments about the violence in Virginia last weekend. The moves sparked speculation that the president’s embattled policy agenda may face higher hurdles amid flagging support among business leaders.
Markets had been settling down after a tumultuous few days spurred by heightened tensions between the U.S. and North Korea. In addition, retail sales data released Tuesday showed that American consumers splurged in July, bolstering the prospects of accelerating growth in the second half.
In other markets:
- The Stoxx Europe 600 Index added 0.7% to 379.09, the highest in a week.
- The MSCI All-Country World Index increased 0.5%.
- The U.K.’s FTSE 100 Index surged 0.7%.
- Germany’s DAX Index jumped 0.7% to the highest in more than a week.
Elsewhere, Australian wage growth matched estimates in Q2/2017, rising 0.5% from Q1/2017 and 1.9% from Q2/2016.” Bloomberg
|Index||Ticker||Today||Change||31 Dec 16||YTD|
|S&P 500||SPX (INX)||2,468.11||+0.14%||2,238.83||+10.24%|
The portfolio today
^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting
|Index||Currency||Today||Change||31 Dec 16||YTD|
Portfolio stock prices
PayPal closed on a record high of $60.29 beating its 20 Jul 2017 record of $60.15.
Visa closed on a record high of $103.32, up 0.83% on record of $102.63.
|Stock||Ticker||Today||Change||31 Dec 16||YTD|
^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg
“The Bloomberg Dollar Spot Index (DXY) fell 0.4%.
The EUR gained 0.3% to USD 1.177.
Japan’s JPY rose 0.4% to 110.19 per USD.” Bloomberg
^ AUD movements against the USD today (mouseover for 12 month view) Chart: xe.com
Oil and Gas Futures
Prices are as at 15:49 EDT
- NYMEX West Texas Intermediate (WTI): $46.80/barrel -1.58% Chart
- ICE (London) Brent North Sea Crude: $50.35/barrel -0.89% Chart
- NYMEX Natural gas futures: $2.90/MMBTU -1.36% Chart
AU: Wage Price Index, Australia, June 2017
Press Release Extract [ser_abs1]
“Australia/Sector wage price index (seasonally adjusted)
In the June quarter 2017, the Private sector wage price index rose 0.4% and the Public sector rose 0.6%. The All sectors quarterly rise was 0.5%.
Through the year, the Private sector rise to the June quarter 2017 was 1.8%, the same rate of growth as has been recorded for the last three quarters and the longest period of low growth so far in the series. The Public sector rose 2.4%, and All sectors rose 1.9%.
Australia/Sector wage price index (original)
In the June quarter 2017, wages rose 0.4% for All sectors. Private sector wages grew 0.4%, which continues the low rate of wages growth over the last two years. The Public sector quarterly rise was 0.4%.
The All sectors wage price index through the year rise was 1.9%. Through the year Private sector growth (1.9%) continues to track below Public sector growth (2.5%).
State/Territory wage price index (original)
In the June quarter 2017, the Australian Capital Territory recorded the largest quarterly rise of 0.6%. South Australia, Tasmania and the Northern Territory recorded the lowest quarterly rise of 0.2%.
Rises through the year ranged from 1.4% for Western Australia to 2.1% for South Australia and the Northern Territory.
In the Private sector, the quarterly rise of 0.4% for New South Wales, Victoria and the Australian Capital Territory was the equal highest rise of all states and territories. The lowest quarterly rise of 0.2% was recorded by Queensland, South Australia and Tasmania.
Rises through the year in the Private sector ranged from 1.0% for Western Australia to 2.2% for the Australian Capital Territory.
In the Public sector, the Australian Capital Territory recorded the highest quarterly rise of all the states and territories of 0.6%. The Northern Territory recorded the lowest of 0.1%.
Through the year, the Northern Territory recorded the highest Public sector rise of 3.0%, and the Australian Capital Territory recorded the lowest (1.6%).
Industry wage price index (original)
In the Private sector, Mining recorded the highest quarterly rise of 0.8%. Western Australia was the main driver of wage growth in the Mining industry in June quarter 2017, with some employees receiving their first wage increases in several years. Public administration and safety recorded the lowest growth over the quarter (0.0%). Rises through the year in the Private sector ranged from 1.1% for Mining to 2.3% for Health care and social assistance.
In the Public sector, Electricity, gas, water and waste recorded the highest quarterly rise of 0.8%. Professional, scientific and technical services, Public administration and safety and Education and training recorded the lowest quarterly wages growth of 0.2%.
Rises through the year in the Public sector ranged from 1.6% for Professional, scientific and technical services to 2.8% for Health care and social assistance.”
Australian Bureau of Statistics, “6345.0 Wage Price Index, Australia, June 2017“, 16 Aug 2017 More
EU: Flash Estimate EU and Euro Area GDP. Q2 2017
Press Release Extract [ser_eu1]
“Seasonally adjusted GDP rose by 0.6% in both the euro area (EA19) and the EU28 during the second quarter of 2017, compared with the previous quarter, according to a flash estimate published by Eurostat, the statistical office of the European Union. In the first quarter of 2017, GDP grew by 0.5% in both zones.
Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 2.2% in the euro area and by 2.3% in the EU28 in the second quarter of 2017, after +1.9% and +2.1% respectively in the previous quarter.
During the second quarter of 2017, GDP in the United States increased by 0.6% compared with the previous quarter (after +0.3% in the first quarter of 2017). Compared with the same quarter of the previous year, GDP grew by 2.1% (after +2.0% in the previous quarter).”
Eurostat, “Flash Estimate EU and Euro Area GDP. Q2 2017“, 16 Aug 2017 More
US: New Residential Construction. Jul 2017
Press Release Extract [ser_usnewres]
Privately-owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 1,223,000. This is 4.1 percent (±0.9 percent) below the revised June rate of 1,275,000, but is 4.1 percent (±1.8 percent) above the July 2016 rate of 1,175,000. Single-family authorizations in July were at a rate of 811,000; this is unchanged from the revised June figure of 811,000. Authorizations of units in buildings with five units or more were at a rate of 377,000 in July.
Privately-owned housing starts in July were at a seasonally adjusted annual rate of 1,155,000. This is 4.8 percent (±10.2 percent) below the revised June estimate of 1,213,000 and is 5.6 percent (±8.5 percent) below the July 2016 rate of 1,223,000. Single-family housing starts in July were at a rate of 856,000; this is 0.5 percent (±8.5 percent) below the revised June figure of 860,000. The July rate for units in buildings with five units or more was 287,000.
Privately-owned housing completions in July were at a seasonally adjusted annual rate of 1,175,000. This is 6.2 percent (±14.3 percent) below the revised June estimate of 1,252,000, but is 8.2 percent (±12.6 percent) above the July 2016 rate of 1,086,000. Single-family housing completions in July were at a rate of 814,000; this is 1.6 percent (±11.9 percent) below the revised June rate of 827,000. The July rate for units in buildings with five units or more was 354,000.“
U.S. Census Bureau and the U.S. Department of Housing and Urban Development, “Monthly New Residential Construction“, 16 Aug 2017 (08:30) More
US: FOMC Minutes: 25-26 Jul 2017
Press Release Extract [ser_us_fomc]
“Developments in Financial Markets and Open Market Operations
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets over the period since the June FOMC meeting. The intermeeting period was relatively uneventful. Bond yields in advanced economies increased moderately, in part reflecting evolving market perceptions of prospects for foreign monetary policies. U.S. bond yields rose to a smaller degree, and the value of the dollar on foreign exchange markets decreased. Implied volatility in fixed-income markets remained low. Equity prices rose further, with notable advances in indexes for emerging markets.
The increase in the FOMC’s target range for the federal funds rate at the June meeting was reflected in other money market interest rates, and the effective federal funds rate was near the middle of the new target range over the intermeeting period except on quarter-end. Take-up at the System’s overnight reverse repurchase agreement facility averaged about $200 billion. Conditions in foreign exchange swap markets were fairly stable, and demand at central bank dollar auctions was relatively low. The manager also reported on small-value tests of open market operations, which are conducted routinely to promote operational readiness.
Market expectations for the path of the federal funds rate were little changed. Survey evidence suggested that most market participants now anticipated that the FOMC would announce at its September meeting a date for implementation of a change in reinvestment policy, although a couple of survey respondents expressed the view that the timing could be affected by developments regarding the federal debt ceiling. The survey results also suggested that, while views were somewhat dispersed, respondents typically expected effects on bond yields and spreads on mortgage-backed securities from the change in reinvestment policy to be modest.
By unanimous vote, the Committee ratified the Open Market Desk’s domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System’s account during the intermeeting period.
Staff Review of the Economic Situation
The information reviewed for the July 25-26 meeting showed that labor market conditions continued to strengthen in June and that real gross domestic product (GDP) likely expanded at a faster pace in the second quarter than in the first quarter. The 12-month change in overall consumer prices, as measured by the price index for personal consumption expenditures (PCE), slowed again in May; both total consumer price inflation and core inflation, which excludes consumer food and energy prices, were running below 2 percent. Data from the consumer and producer price indexes for June suggested that both total and core PCE price inflation (on a 12-month change basis) remained at a pace similar to that seen in the previous month. Survey‑based measures of longer-run inflation expectations were little changed on balance.
Total nonfarm payroll employment expanded solidly in June, and the average monthly pace of private-sector job gains over the first half of the year was essentially the same as last year. The unemployment rate edged up to 4.4 percent in June; the unemployment rates for African Americans and for Hispanics declined slightly but remained above the unemployment rates for Asians and for whites. In addition, the median length of time that unemployed African Americans had been out of work exceeded the comparable figures for whites and for Hispanics, a pattern that has prevailed for at least the past two decades. The overall labor force participation rate edged up in June, and the share of workers employed part time for economic reasons rose a bit. The rate of private-sector job openings decreased in May after having risen for a couple of months, while the quits rate and the hiring rate both increased. The four-week moving average of initial claims for unemployment insurance benefits remained at a very low level through mid‑July. Average hourly earnings for all employees increased 2½ percent over the 12 months ending in June, about the same as over the comparable period a year earlier but a little slower than the rate of increase in late 2016.
Total industrial production rose moderately, on balance, in May and June, as an increase in the output of mines and utilities more than offset a net decline in manufacturing production. Automakers’ assembly schedules indicated that motor vehicle production would edge down again in the third quarter, likely reflecting a somewhat elevated level of dealers’ inventories and a slowing in the pace of vehicle sales last quarter. However, broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to moderate gains in factory output over the near term.
Real PCE appeared to have rebounded in the second quarter after increasing only modestly in the first quarter. Much of the rebound looked to have been concentrated in spending on energy services and energy goods, which was held down by unseasonably warm weather earlier in the year. The components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE declined in June but rose, on net, in the second quarter. Light motor vehicle sales edged down further in June. However, recent readings on key factors that influence consumer spending–including continued gains in employment, real disposable personal income, and households’ net worth–pointed to solid growth in total real PCE in the near term. Consumer sentiment, as measured by the University of Michigan Surveys of Consumers, remained upbeat despite having moved down in early July.
Residential investment seemed to have declined in the second quarter. Starts of both new single-family homes and multifamily units rose in June but still decreased for the second quarter as a whole. The issuance of building permits for both types of housing was lower in the second quarter than in the first quarter. Sales of existing homes decreased, on net, in May and June, and new home sales in May partly reversed the previous month’s decline.
Real private expenditures for business equipment and intellectual property appeared to have increased moderately in the second quarter after a solid gain in the first quarter. Nominal shipments of nondefense capital goods excluding aircraft rose again in May, and new orders of these goods continued to exceed shipments, pointing to further gains in shipments in the near term. In addition, indicators of business sentiment remained upbeat. Investment in nonresidential structures appeared to have risen at a markedly slower pace in the second quarter than in the first. Firms’ nominal spending for nonresidential structures excluding drilling and mining declined further in May, and the number of oil and gas rigs in operation, an indicator of spending for structures in the drilling and mining sector, leveled out in recent weeks after increasing steadily for the past year.
Nominal outlays for defense through June pointed to an increase in real federal government purchases in the second quarter. However, real purchases by state and local governments appeared to have declined. Payrolls for state and local governments expanded during the second quarter, but nominal construction spending by these governments decreased, on net, in April and May.
The nominal U.S. international trade deficit narrowed in May, with an increase in exports and a small decline in imports. Export growth was led by consumer goods, automotive products, and services. The import decline was driven by consumer goods and automotive products. The available data suggested that net exports were a slight drag on real GDP growth in the second quarter.
Total U.S. consumer prices, as measured by the PCE price index, increased 1½ percent over the 12 months ending in May. Core PCE price inflation was also 1½ percent over that same period. Over the 12 months ending in June, the consumer price index (CPI) rose 1½ percent, while core CPI inflation was 1¾ percent. The median of inflation expectations over the next 5 to 10 years from the Michigan survey edged up both in June and in the preliminary reading for July. Other measures of longer‑run inflation expectations were generally little changed, on balance, in recent months, although those from the Desk’s Survey of Primary Dealers and Survey of Market Participants had ticked down recently.
Incoming data suggested that economic growth continued to firm abroad, especially among advanced foreign economies (AFEs). The pickup in advanced-economy demand also contributed to relatively strong growth in China and emerging Asia, but growth in Latin America remained relatively weak, partly reflecting tight monetary and fiscal policies. Despite the stronger momentum of economic activity in the AFEs, headline inflation declined sharply in the second quarter, largely reflecting lower retail energy prices, and core inflation stayed subdued in many AFEs. Although inflation was also low in most emerging market economies (EMEs), it remained elevated in Mexico because of rising food inflation and earlier peso depreciation.
Staff Review of the Financial Situation
Domestic financial market conditions remained generally accommodative over the intermeeting period. U.S. equity prices rose, longer-term Treasury yields increased slightly, and the dollar depreciated. The Committee’s decision to raise the target range for the federal funds rate to 1 to 1¼ percent at the June meeting was widely anticipated in financial markets, and market participants reportedly viewed FOMC communications as largely in line with expectations. Financing conditions for nonfinancial businesses and households generally remained supportive of growth in spending.
FOMC communications over the intermeeting period were viewed as broadly in line with investors’ expectations that the Committee would continue to remove policy accommodation at a gradual pace. Market participants generally interpreted the information on reinvestment policy provided in June in the Committee’s postmeeting statement and its Addendum to the Policy Normalization Principles and Plans as consistent with their expectation that a change to reinvestment policy was likely to occur this year. Market participants also took note of the summary in the June minutes of the Committee’s discussion of the progress toward the Committee’s 2 percent longer-run inflation objective and the extent to which recent softness in price data reflected idiosyncratic factors. Overnight index swap rates pointed to little change in the expected path of the federal funds rate on net.
Yields on intermediate- and longer-term nominal Treasury securities increased slightly over the intermeeting period. Although yields fell following the publication of lower-than-expected CPI data, yields were boosted by comments from foreign central bank officials that investors read as pointing to less accommodative monetary policies abroad than previously expected. Measures of inflation compensation based on Treasury Inflation-Protected Securities ticked up since the June FOMC meeting. Despite their intermeeting period gains, longer-term real and nominal Treasury yields remained very low by historical standards, apparently weighed down by accommodative monetary policies abroad and possibly by declines in the long-term neutral real interest rate over recent years.
Broad U.S. equity price indexes rose. One‑month-ahead option-implied volatility of the S&P 500 index–the VIX–remained at historically low levels. Spreads of yields on investment- and speculative-grade nonfinancial corporate bonds over comparable-maturity Treasury securities narrowed a bit on net.
Conditions in short-term funding markets were stable over the intermeeting period. Reflecting the FOMC’s policy action in June, yields on a broad set of money market instruments moved about 25 basis points higher. However, over much of the period, the net increase in rates on shorter-dated Treasury bills was smaller, reportedly reflecting a reduction in Treasury bill supply.
Financing for large nonfinancial firms remained readily available, although debt issuance moderated. Gross issuance of corporate bonds stepped down in June from a strong pace in May, while issuance of institutional leveraged loans continued to be robust. Commercial and industrial lending by banks remained quite weak in the second quarter. Responses from the July Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) indicated that depressed demand was largely responsible, and that banks’ lending standards were little changed in recent months. The most cited reason for the lackluster loan demand was subdued investment spending by nonfinancial businesses, but banks also reported that some borrowers had shifted to other sources of external financing or to internally generated funds.
Financing conditions for commercial real estate (CRE) remained accommodative, although the growth of CRE loans on banks’ books slowed somewhat. Respondents to the July SLOOS reported tightening credit standards for these loans. SLOOS respondents also reported that standards on CRE loans were tight relative to their historical range, and that, on net, demand for CRE loans weakened in recent months. The pace of issuance of commercial mortgage-backed securities (CMBS) through the first half of the year was similar to that seen last year. Delinquency rates on loans in CMBS pools originated before the financial crisis continued to increase.
Financing conditions in the residential mortgage market were little changed, and flows of new credit continued at a moderate pace. However, growth of mortgage loans on banks’ books slowed somewhat in the first half of this year. SLOOS respondents, on net, reported that standards on most residential mortgage loan categories eased slightly.
Consumer credit continued to grow on a year-over-year basis, but the expansion of credit card and auto loan balances appeared to slow from the rapid pace that was evident through the end of last year. In the July SLOOS, banks reported having tightened standards and widened spreads for credit card and auto loans on net. Standards for the subprime segments of these loan types were particularly tight compared with their historical ranges. Reflecting in part continued tightening of lending standards, consumer loan growth at banks moderated further in the second quarter; however, that weakness was partially offset by more robust lending by credit unions.
Since the June FOMC meeting, the broad dollar depreciated 2 percent, weakening more against AFE currencies than against EME currencies. The dollar’s depreciation was driven in part by policy communications from the central banks of several AFEs that market participants viewed as less accommodative than expected as well as by weaker-than-expected CPI data in the United States. The Bank of Canada raised its policy rate in July. Sovereign yields increased notably in Canada, Germany, and the United Kingdom. Changes in foreign equity indexes were mixed over the intermeeting period: European equities edged lower, Japanese equities were little changed, and EME equities increased. European peripheral sovereign bond spreads narrowed over the period, reflecting in part positive sentiment related to the outcomes of the French parliamentary election, Greek debt negotiations, and bank resolutions in Italy. EME sovereign spreads were little changed on net.
The staff provided its latest report on potential risks to financial stability, indicating that it continued to judge the vulnerabilities of the U.S financial system as moderate on balance. This overall assessment incorporated the staff’s judgment that, since the April assessment, vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets. However, the staff continued to view vulnerabilities stemming from financial leverage as well as maturity and liquidity transformation as low, and vulnerabilities from leverage in the nonfinancial sector appeared to remain moderate.
Staff Economic Outlook
The U.S. economic projection prepared by the staff for the July FOMC meeting was broadly similar to the previous forecast. In particular, real GDP growth, which was modest in the first quarter, was still expected to have stepped up to a solid pace in the second quarter and to maintain roughly the same rate of increase in the second half of the year. In this projection, the staff scaled back its assumptions regarding the magnitude and duration of fiscal policy expansion in the coming years. However, the effect of this change on the projection for real GDP over the next couple of years was largely offset by lower assumed paths for the exchange value of the dollar and for longer-term interest rates. Thus, as in the June projection, the staff projected that real GDP would expand at a modestly faster pace than potential output in 2017 through 2019. The unemployment rate was projected to decline gradually over the next couple of years and to continue running below the staff’s estimate of its longer-run natural rate over this period.
The staff’s forecast for consumer price inflation, as measured by the change in the PCE price index, was revised down slightly for 2017 in response to weaker-than-expected incoming data for inflation. As a result, inflation this year was expected to be similar in magnitude to last year, with an upturn in the prices for food and non-energy imports offset by a slower increase in core PCE prices and weaker energy prices. Beyond 2017, the forecast was little revised from the previous projection, as the recent weakness in inflation was viewed as transitory. The staff continued to project that inflation would increase in the next couple of years and that it would be close to the Committee’s longer-run objective in 2018 and at 2 percent in 2019.
The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. On the one hand, many financial market indicators of uncertainty remained subdued, and the uncertainty associated with the foreign outlook still appeared to be less than late last year; on the other hand, uncertainty about the direction of some economic policies was judged to have remained elevated. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. The risks to the projection for inflation also were seen as balanced. Downside risks included the possibilities that longer-term inflation expectations may have edged down, that the dollar could appreciate substantially, or that the recent run of soft inflation readings could prove to be more persistent than the staff expected. These downside risks were seen as essentially counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.
Participants’ Views on Current Conditions and the Economic Outlook
In their discussion of the economic situation and the outlook, meeting participants agreed that information received over the intermeeting period indicated that the labor market had continued to strengthen and that economic activity had been rising moderately so far this year. Job gains had been solid, on average, since the beginning of the year, and the unemployment rate had declined, on net, over the same period. Household spending and business fixed investment had continued to expand. On a 12‑month basis, both overall inflation and the measure excluding food and energy prices had declined and were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance.
Participants generally saw the incoming information on spending and labor market indicators as consistent, overall, with their expectations and indicated that their views of the outlook for economic growth and the labor market were little changed, on balance, since the June FOMC meeting. Participants continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labor market conditions would strengthen somewhat further. In light of continued low recent readings on inflation, participants expected that inflation on a 12-month basis would remain somewhat below 2 percent in the near term. However, most participants judged that inflation would stabilize around the Committee’s 2 percent objective over the medium term.
Data received over the intermeeting period reinforced earlier indications that real GDP growth had turned up after having been slow in the first quarter of this year. As anticipated, growth in household spending appeared to have been stronger in the second quarter after its first-quarter weakness. Reports from District contacts on consumer spending were generally positive. However, sales of motor vehicles had softened, and automakers were reportedly adjusting production and assessing whether the underlying demand for automobiles had declined. Participants noted that the fundamentals underpinning consumption growth, including increases in payrolls, remained solid. However, the weakness in retail sales in June offered a note of caution.
Reports from District contacts on both manufacturing and services were also generally consistent with moderate growth in economic activity overall. Construction-sector contacts were generally upbeat. Reports on the energy sector indicated that activity was continuing to expand, albeit more slowly than previously; survey evidence suggested that oil drilling remained profitable in some locations at current oil prices. The agricultural sector remained weak, and some regions were experiencing drought conditions. A couple of participants had received indications from contacts that business investment spending in their Districts might strengthen.
Nevertheless, several participants noted that uncertainty about the course of federal government policy, including in the areas of fiscal policy, trade, and health care, was tending to weigh down firms’ spending and hiring plans. In addition, a few participants suggested that the likelihood of near-term enactment of a fiscal stimulus program had declined further or that the fiscal stimulus likely would be smaller than they previously expected. It was also observed that the budgets of some state and local governments were under strain, limiting growth in their expenditures. In contrast, the prospects for U.S. exports had been boosted by a brighter international economic outlook.
Participants noted that labor market conditions had strengthened further over the intermeeting period. The unemployment rate rose slightly to 4.4 percent in June but remained low by historical standards. Payroll gains picked up substantially in June. In addition, the employment-to-population ratio increased. Participants observed that the unemployment rate was likely close to or below its longer-run normal rate and could decline further if, as expected, growth in output remained somewhat in excess of the potential growth rate. A few participants expressed concerns about the possibility of substantially overshooting full employment, with one citing past difficulties in achieving a soft landing. District contacts confirmed tightness in the labor market but relayed little evidence of wage pressures, although some firms were reportedly attempting to attract workers with a variety of nonwage benefits. The absence of sizable wage pressures also seemed to be confirmed by most aggregate wage measures. However, a few participants suggested that, in a tight labor market, measured aggregate wage growth was being held down by compositional changes in employment associated with the hiring of less experienced workers at lower wages than those of established workers. In addition, a number of participants suggested that the rate of increase in nominal wages was not low in relation to the rate of productivity growth and the modest rate of inflation.
Participants discussed the softness in inflation in recent months. Many participants noted that much of the recent decline in inflation had probably reflected idiosyncratic factors. Nonetheless, PCE price inflation on a 12‑month basis would likely continue to be held down over the second half of the year by the effects of those factors, and the monthly readings might be depressed by possible residual seasonality in measured PCE inflation. Still, most participants indicated that they expected inflation to pick up over the next couple of years from its current low level and to stabilize around the Committee’s 2 percent objective over the medium term. Many participants, however, saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside. Participants agreed that a fall in longer-term inflation expectations would be undesirable, but they differed in their assessments of whether inflation expectations were well anchored. One participant pointed to the stability of a number of measures of inflation expectations in recent months, but a few others suggested that continuing low inflation expectations may have been a factor putting downward pressure on inflation or that inflation expectations might need to be bolstered in order to ensure their consistency with the Committee’s longer-term inflation objective.
A number of participants noted that much of the analysis of inflation used in policymaking rested on a framework in which, for a given rate of expected inflation, the degree of upward pressures on prices and wages rose as aggregate demand for goods and services and employment of resources increased above long-run sustainable levels. A few participants cited evidence suggesting that this framework was not particularly useful in forecasting inflation. However, most participants thought that the framework remained valid, notwithstanding the recent absence of a pickup in inflation in the face of a tightening labor market and real GDP growth in excess of their estimates of its potential rate. Participants discussed possible reasons for the coexistence of low inflation and low unemployment. These included a diminished responsiveness of prices to resource pressures, a lower natural rate of unemployment, the possibility that slack may be better measured by labor market indicators other than unemployment, lags in the reaction of nominal wage growth and inflation to labor market tightening, and restraints on pricing power from global developments and from innovations to business models spurred by advances in technology. A couple of participants argued that the response of inflation to resource utilization could become stronger if output and employment appreciably overshot their full employment levels, although other participants pointed out that this hypothesized nonlinear response had little empirical support.
In assessing recent developments in financial market conditions, participants referred to the continued low level of longer-term interest rates, in particular those on U.S Treasury securities. The level of such yields appeared to reflect both low expected future short-term interest rates and depressed term premiums. Asset purchases by foreign central banks and the Federal Reserve’s securities holdings were also likely contributing to currently low term premiums, although the exact size of these contributions was uncertain. A number of participants pointed to potential concerns about low longer-term interest rates, including the possibility that inflation expectations were too low, that yields could rise abruptly, or that low yields were inducing investors to take on excessive risk in a search for higher returns.
Several participants noted that the further increases in equity prices, together with continued low longer-term interest rates, had led to an easing of financial conditions. However, different assessments were expressed about the implications of this development for the outlook for aggregate demand and, consequently, appropriate monetary policy. According to one view, the easing of financial conditions meant that the economic effects of the Committee’s actions in gradually removing policy accommodation had been largely offset by other factors influencing financial markets, and that a tighter monetary policy than otherwise was warranted. According to another view, recent rises in equity prices might be part of a broad-based adjustment of asset prices to changes in longer-term financial conditions, importantly including a lower neutral real interest rate, and, therefore, the recent equity price increases might not provide much additional impetus to aggregate spending on goods and services.
Participants also considered equity valuations in their discussion of financial stability. A couple of participants noted that favorable macroeconomic factors provided backing for current equity valuations; in addition, as recent equity price increases did not seem to stem importantly from greater use of leverage by investors, these increases might not pose appreciable risks to financial stability. Several participants observed that the banking system was well capitalized and had ample liquidity, reducing the risk of financial instability. It was noted that financial stability assessments were based on current capital levels within the banking sector, and that such assessments would likely be adjusted should these measures of loss-absorbing capacity change. Participants underscored the need to monitor financial institutions for shifts in behavior–such as an erosion of lending standards or increased reliance on unstable sources of funding–that could lead to subsequent problems. In addition, participants judged that it was important to look for signs that either declining market volatility or heavy concentration by investors in particular assets might create financial imbalances. A couple of participants expressed concern that smaller banks could be assuming significant risks in efforts to expand their CRE lending. Furthermore, a couple of participants saw, as possible sources of financial instability, the pace of increase in real estate prices in the multifamily segment and the pattern of the lending and borrowing activities of certain government-sponsored enterprises.
Participants agreed that the regulatory and supervisory tools developed since the financial crisis had played an important role in fostering financial stability. Changes in regulation had likely helped in making the banking system more resilient to major shocks, in promoting more prudent balance sheet management strategies on the part of nonbank financial institutions, and in reducing the degree to which variations in lending to the private sector intensify cycles in output and in asset prices. Participants agreed that it would not be desirable for the current regulatory framework to be changed in ways that allowed a reemergence of the types of risky practices that contributed to the crisis.
In their discussion of monetary policy, participants reaffirmed their view that a gradual approach to removing policy accommodation was likely to remain appropriate to promote the Committee’s objectives of maximum employment and 2 percent inflation. Participants commented on a number of factors that would influence their ongoing assessments of the appropriate path for the federal funds rate. Most saw the outlook for economic activity and the labor market as little changed from their earlier projections and continued to anticipate that inflation would stabilize around the Committee’s 2 percent objective over the medium term. However, some participants expressed concern about the recent decline in inflation, which had occurred even as resource utilization had tightened, and noted their increased uncertainty about the outlook for inflation. They observed that the Committee could afford to be patient under current circumstances in deciding when to increase the federal funds rate further and argued against additional adjustments until incoming information confirmed that the recent low readings on inflation were not likely to persist and that inflation was more clearly on a path toward the Committee’s symmetric 2 percent objective over the medium term. In contrast, some other participants were more worried about risks arising from a labor market that had already reached full employment and was projected to tighten further or from the easing in financial conditions that had developed since the Committee’s policy normalization process was initiated in December 2015. They cautioned that a delay in gradually removing policy accommodation could result in an overshooting of the Committee’s inflation objective that would likely be costly to reverse, or that a delay could lead to an intensification of financial stability risks or to other imbalances that might prove difficult to unwind. One participant stressed that the risks both to the Committee’s inflation objective and to financial stability would require careful monitoring. This participant expressed the view that a gradual approach to removing policy accommodation would likely strike the appropriate balance between promoting the Committee’s inflation and full employment objectives and mitigating financial stability concerns.
A number of participants also commented that the appropriate pace of normalization of the federal funds rate would depend on how financial conditions evolved and on the implications of those developments for the pace of economic activity. Among the considerations mentioned were the extent of current downward pressure on longer-term yields arising from the Federal Reserve’s asset holdings and how this pressure would diminish over time as balance sheet normalization proceeded, the strength and degree of persistence of other domestic and global factors that had contributed to the easing of financial conditions and elevated asset prices, and whether and how much the neutral rate of interest would rise as the economy continued to expand.
Participants also discussed the appropriate time to implement the plan for reducing the Federal Reserve’s securities holdings that was announced in June in the Committee’s postmeeting statement and its Addendum to the Policy Normalization Principles and Plans. Participants generally agreed that, in light of their current assessment of economic conditions and the outlook, it was appropriate to signal that implementation of the program likely would begin relatively soon, absent significant adverse developments in the economy or in financial markets. Many noted that the program was expected to contribute only modestly to the reduction in policy accommodation. Several reiterated that, once the program was under way, further adjustments to the stance of monetary policy in response to economic developments would be centered on changes in the target range for the federal funds rate. Although several participants were prepared to announce a starting date for the program at the current meeting, most preferred to defer that decision until an upcoming meeting while accumulating additional information on the economic outlook and developments potentially affecting financial markets.
Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in June indicated that the labor market had continued to strengthen and that economic activity had been rising moderately so far this year. Job gains had been solid, on average, since the beginning of the year, and the unemployment rate had declined. Household spending and business fixed investment had continued to expand.
On a 12‑month basis, overall inflation and the measure excluding food and energy prices had declined and were running below 2 percent. Market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance.
With respect to the economic outlook and its implications for monetary policy, members continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, and labor market conditions would strengthen somewhat further. Inflation on a 12‑month basis was expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Members saw the near-term risks to the economic outlook as roughly balanced, but, in light of their concern about the recent slowing in inflation, they agreed to continue to monitor inflation developments closely.
After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members decided to maintain the target range for the federal funds rate at 1 to 1¼ percent. They noted that the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessment of realized and expected economic conditions relative to the Committee’s objectives of maximum employment and 2 percent inflation. They expected that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate, and that the federal funds rate was likely to remain, for some time, below levels that are expected to prevail in the longer run. They also again stated that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data. In particular, they reaffirmed that they would carefully monitor actual and expected inflation developments relative to the Committee’s symmetric inflation goal. Some members stressed the importance of underscoring the Committee’s commitment to its inflation objective. These members emphasized that, in considering the timing of further adjustments in the federal funds rate, they would be evaluating incoming information to assess the likelihood that recent low readings on inflation were transitory and that inflation was again on a trajectory consistent with achieving the Committee’s 2 percent objective over the medium term.
Members agreed that, at this meeting, the Committee should further clarify the time at which it expected to begin its program for reducing its securities holdings in a gradual and predictable manner. They updated the postmeeting statement to indicate that while the Committee was, for the time being, maintaining its existing reinvestment policy, it intended to begin implementing the balance sheet normalization program relatively soon, provided that the economy evolved broadly as anticipated. Several members observed that, in part because of the Committee’s various communications regarding the change, any reaction in financial markets to such a change would likely be limited.
At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive, to be released at 2:00 p.m.:
“Effective July 27, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1¼ percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
The Committee directs the Desk to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”
The vote also encompassed approval of the statement below to be released at 2:00 p.m.:
“Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12‑month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12‑month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1¼ percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.””
US Federal Reserve, “FOMC Minutes“, 16 Aug 2017 (14:00) More
Global: EIU Global Liveability Report 2017
Report Extract [ser_eiu]
Press Release Extract [ser_eiu]
“For the seventh consecutive year, Melbourne in Australia is the most liveable urban centre of the 140 cities surveyed, closely followed by the Austrian capital, Vienna. In fact, only 0.1 percentage points separate the top two cities, and just 0.2 and 0.3 percentage points separate Canada’s Vancouver and Toronto (ranked 3rd and 4th, respectively), from Melbourne. Another Canadian city, Calgary, shares joint fifth place with Adelaide in Australia.
Although the top five cities remain unchanged, the past few years have seen increasing instability across the world, causing volatility in the scores of many cities. In Europe, cities have been affected by the spreading perceived threat of terrorism in the region. At the same time, this year cities such as Reykjavik, the capital of Iceland, and the Dutch capital, Amsterdam, have benefited from an increasing cultural availability and falling crime rates, enabling them to register improvements in living conditions.
Over the past six months 35 of the 140 cities surveyed have experienced changes in their ranking position. This rises to 44 cities, or about one-third of the total number surveyed, when looking at changes over the past 12 months. Overall, the survey shows a higher incidence of positive index movements. In fact, of the 17 cities with an index movement since last year, 12 have seen an improvement in their score, reflecting positive developments in other categories, despite heightened threats of terrorism or unrest with which cities around the world continue to grapple.
The ongoing weakening of global stability scores has been made uncomfortably apparent by a number of high-profile incidents that have shown no signs of slowing in recent years. Violent acts of terrorism have been reported in many countries, including Australia, Bangladesh, Belgium, France, Pakistan, Sweden, Turkey, the UK and the US. While not a new phenomenon, the frequency and spread of terrorism have increased noticeably and become even more prominent.
Western Europe has become a focal point for mounting concerns, and repeated attacks in France and UK have had a contagion effect, raising terror alerts and lowering stability scores in cities across the region. However, there are other factors that could prove to be destabilising. Unrest has grown in some countries, particularly over the migration crisis, and the British vote to leave the EU could pave the way for further uncertainty and political conflict.
Terrorism has also been compounded by unrest and, in more extreme cases, civil war in some countries. Iraq, Libya, Syria and Turkey remain the subject of high-pro le civil unrest and armed conflicts, while a number of other countries, such as Nigeria, continue to battle insurgent groups. Meanwhile, even a relatively stable country such as the US has seen mounting civil unrest linked to the Black Lives Matter movement and the policies proposed by the 45th US president, Donald Trump.
Beyond this, the world has also seen increased diplomatic tensions between countries that are weighing on stability. Russia’s posturing in eastern Europe and the Middle East has been well reported, Iran has seen diplomatic ties improve with some countries and deteriorate with others, and concerns over geopolitical stability are growing in Asia owing to potential flashpoints involving a number of countries, including China and North Korea. It is therefore not surprising that declining stability scores have been felt around the world.
On the flip side, however, cities moving up the ranking are located largely in countries that have enjoyed periods of relative stability after previously reported falls in liveability. These include, for example, Kiev in Ukraine, Tripoli in Libya and Colombo in Sri Lanka. Unfortunately, the improvements have been marginal and have not seen liveability recover from previous levels or resulted in large shifts up the ranking. Amsterdam, Reykjavik, Budapest, Singapore and Montevideo are among those that have seen both their ranks improve. In total, there are 12 cities with scores that have improved over the past 12 months, up from seven.
The impact of declining stability is most apparent when a five-year view of the global average scores is taken. Overall, the global average liveability score has fallen by 0.8% to 74.8% over the past five years. Weakening stability has been a key factor in driving this decrease. The average global stability score has fallen by 2% over the past five years, from 73.4% in 2012 to 71.4% now.
Over five years, 95 of the 140 cities surveyed have seen some change in their overall liveability scores. Of these cities, an overwhelming 66 have seen declines in liveability, but there is a silver lining, as this number is actually down from 69 just six months ago. Two cities in particular, Damascus in Syria and Kiev, have seen significant declines of 16 and 21 percentage points respectively, illustrating that conflict is, unsurprisingly, the key factor in undermining wider liveability.
Although the most liveable cities in the world remain largely unchanged, there has been movement within the top tier of liveability. Of the 65 cities with scores of 80 or more, six have seen a change in score in the past 12 months. While most cities in the top tier have registered an improvement in their scores, two of them, Manchester in the UK and Stockholm in Sweden, have seen their scores decline as a result of recent, high-pro le terrorist attacks.
Over the past few years several US cities have registered declines in their scores. This stems in part from unrest related to a number of deaths of black people at the hands of police of cers. In addition, the country has seen protests held in response to President Trump’s policies and executive orders. Sydney in Australia is another city that has seen a decline in its ranking, reflecting growing concerns over possible terror attacks in the past three years. Sydney now ranks outside the top ten most liveable cities, at number 11, down from seventh place just over a year ago. Nevertheless, with such high scores already in place, the impact of these declines has not been enough to push any city into a lower tier of liveability. Although 17.2 percentage points separate Melbourne in first place from Warsaw in 65th place, all cities in this tier can lay claim to being on an equal footing in terms of presenting few, if any, challenges to residents’ lifestyles.
Nonetheless, there does appear to be a correlation between the types of cities that sit at the very top of the ranking. Those that score best tend to be mid-sized cities in wealthier countries with a relatively low population density. These can foster a range of recreational activities without leading to high crime levels or overburdened infrastructure. Six of the ten top-scoring cities are in Australia and Canada, which have, respectively, population densities of 2.9 and 3.7 people per square kilometre. Elsewhere in the top ten, Finland and New Zealand both have densities ranging between 15 and 18 people/sq km of land area. These densities compare with a global (land) average of 57 people/sq km and a US average of 35people/sq km, according to the latest World Bank statistics. Austria bucks this trend with a density of 106 people/sq km, but compared with megacities such as New York, London, Paris and Tokyo, Vienna’s population of nearly 1.8m (2.6m in the metropolitan area) is relatively small.
It may be argued that violent crime is on an upward trend in the top tier of cities, but these observations are not always correct. Although crime rates are perceived as rising in Australia and Europe, cities in these regions continue to boast lower violent and petty crime rates than the rest of the world. Austria, for example, has one of the lowest murder rates in the world, at just 0.53 per 100,000 people in 2016. Similarly, its capital recorded yet another low-crime year, with most crime categories remaining steady or falling: according to Vienna police statistics, there were 68 recorded crimes against people last year, down from 83 in 2015 and 93 in 2012. In recent years Vienna has seen just one homicide. This compares with 302 recorded homicides in Detroit in the US and 4,308 in Venezuela’s capital, Caracas, in 2016 alone.
Global business centres tend to be victims of their own success. The “big city buzz” that they enjoy can overstretch infrastructure and cause higher crime rates. New York, London, Paris and Tokyo are all prestigious hubs with a wealth of recreational activities, but all suffer from higher levels of crime, congestion and public transport problems than are deemed comfortable. The question is how much wages, the cost of living and personal taste for a location can offset liveability factors. Although global centres fare less well in the ranking than mid-sized cities, for example, they still sit within the highest tier of liveability and should therefore be considered broadly comparable, especially when contrasted with the worst-scoring locations.“
Economist Intelligence Unit, “The Global Liveability Report 2017“, 15 Aug 2017 Report
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