US dollar to weaken, as Fed aims to let inflation run and keep interest rates low
By Yann Quelenn
The US Federal Reserve wants to let inflation run and keep interest rates low. This, we believe, is for two reasons. First, letting inflation rise will allow erode the US Central Bank’s bond-bloated balance sheet in real terms. Second, hiking interest rates above 2% would trigger a major recession and push debt-service payments to an unsustainable level. (The current Federal Funds rate is 1.16%.)
So at the next meeting of the Fed’s Open Market Committee, on 25-26 July, we believe interest rates will not be increased. This will weaken the USD against the EUR, hiking it to $1.15 for 1 Euro in the short term.
Last week, in testimony to the US Congress, Fed Chairwoman Janet Yellen admitted that stocks markets are overheated, and that strong “valuation pressures” prevail across a range of assets. Nonetheless, Yellen was unclear whether interest rates will rise before year-end. Her stance is a marked departure from policy of the preceding eight years, when the Fed repeatedly boosted stocks through liquidity and verbal interventions.
The US economy’s fundamental outlook is not rosy. Retail sales fell for the second month in a row, despite an expected advance, and other indicators are flat to negative. What the US Fed has called a ‘transitory’ weakness might indeed be a harbinger of recession.
China’s stock markets slide on fears of excess leverage
By Arnaud Masset
Chinese equities tumbled today, as investors worry about the economy’s excess leverage and a domino effect on valuations, once deleveraging actually kicks in. The tech-focussed Shenzhen index fell 4.28% while the Shanghai Composite was off 1.43%.
The concern over debt outweighed enthusiasm over economic growth. In the 2017’s second quarter, the world’s second largest economy grew 6.9% year on year, matching the previous quarter’s performance and beating median forecasts of 6.8%. June retail sales came in higher than expected, at 11% yoy versus 10.6% forecasted. Industrial production expanded 7.6% yoy, beating a forecast of 6.5%.