• Current Reports  

    Published on September 19th, 2014

    To the surprise of the market, the first round of the European Central Bank’s keenly anticipated Targeted Longer Term Refinancing Operations turned out to be a damp squib, generating only half the expected level of demand. In the event, banks borrowed just €83bn, well short of the €167bn Bloomberg consensus. Given that in the last three months European banks have repaid more than €80bn borrowed through the earlier 3-year LTROs, the net injection of liquidity into the eurosystem since ECB boss Mario Draghi announced the new facility is negligible. The euro fell on the news, in anticipation of more robust easing measures to come. However the single currency has since clawed back most of its initial losses, as the market wonders what the ECB can try next, and whether monetary policy has reached the limit of its potential to revitalize the eurozone’s stagnating economies...
    Published on September 19th, 2014

    With the Federal Reserve set to halt its quantitative easing program next month, bond investors have started to seriously fret about the timing of the first interest rate hike. The puzzle has been that even as the US economy has strengthened for most of this year, bond yields have declined. As a professor as well as a market economist this is the kind of issue I love to discuss with my students at the Paris-Dauphine University. The product of such an academic approach is that I have an even greater interest in the messages offered up by markets; the problem is that you just need to dig deeper to decipher the signals...
    Published on September 18th, 2014

    The outlook for US inflation and monetary policy was already cloudy, even before the Federal Reserve further muddied the waters yesterday with its conflicting signals. To help clients pierce through the haze, Will and KX have developed a new composite diffusion index to provide a reliable leading indicator of US consumer inflation, which they are publishing for the first time in today’s Chartbook. Based on five components from both the money and the goods and services side of the equation, their index is a handy guide to the strength, or weakness, of underlying inflationary pressures. And right now the index is firmly in positive territory, indicating that US CPI inflation is set to trend higher...
    Published on September 18th, 2014

    The world’s biggest farm is running out of farmers. China produces one-third of global agricultural output, more than any other single country, and is the largest producer of most crops you can think of. But fewer of China’s people are willing to work as farmers these days, as they migrate from rural to urban areas to seek higher incomes. We estimate that China’s farm workforce has declined by about 45mn people over the past decade. So to continue its impressive record of boosting agricultural production, China needs to change how it raises crops—shifting from techniques that rely on lots of labor to ones that use more capital and technology. Since 2008, for instance, the government has encouraged the formation of larger farms, where agricultural machinery can be more easily deployed. If this structural transformation is going to happen, China will need a sustained boom in agricultural capital spending. Such investment should help strengthen gains in domestic food...
    Published on September 18th, 2014

    As investors digested the utterances from yesterday’s FOMC meeting, the broad US dollar index jumped a meaty 1%, gaining against every major currency. At first glance, such a volatile reaction seems odd. After all, the statement was an effective non-event—just another well telegraphed $10bn tapering of asset purchases, that leaves the Federal Reserve on course to end its quantitative easing program next month. If anything, this could have been construed as being mildly dovish as there was an expectation that the language on the shelf-life of zero interest rates would be tweaked (Alan Greenspan did this in 2004 to signal impending rate hikes). In the event, the language stayed the same. So why did the dollar move so violently? There are a few explanations...
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