The news this week was the weakening of the dollar, as the U.S. Dollar Index hit its lowest level since summer of last year. Although the dollar has been losing ground since the beginning of this year, the trend accelerated over the past week.
There were both political and economic reasons for this:
- Politically, the inability of the Trump Administration to pass health care reform in the Senate is causing the market to shift from a “Trump reflation” sentiment to disappointment about the possibility of fiscal stimulus. This could drive a downturn in consumer sentiment, which may stall U.S. economic growth.
- Globally, more hawkish comments recently coming from central banks have strengthened international currencies over the dollar. This includes the European Central Bank, the Bank of England and the Reserve Bank of Australia. As for the Bank of Canada, they not only spoke optimistically but went ahead and raised rates last week in a quick turnaround from their negative comments earlier this year.
Why have the world's central bankers, including U.S. Federal Reserve Chair Janet Yellen, turned more hawkish?
The straightforward answer is that the global economy is in recovery. This is best described by City National Rochdale Managing Director Charles Boettcher in his Market Perspectives video, where he tells us that, while the U.S. stock market has performed well this year, international stocks have done better and emerging market stocks have more than doubled the U.S. stock market's performance.
What does this mean? The rest of the world is no longer leaning on the economic recovery in the U.S., allowing them to raise rates independently. Meanwhile, the future strength of our stock market - along with future corporate earnings - will be critically dependent on much-anticipated corporate and individual tax cuts that are still clouded in uncertainty right now.
That being said, with inflation staying low – none of the countries with bullish outlooks has hit its inflation-rate target – what justifies the flip-flopping of these central bankers?
Here are some possible explanations:
- Instead of measuring inflation through traditional core CPI, the central bankers may be watching asset price inflation, which is the speed of price appreciation in stocks and housing prices. Asset price inflation has indeed been robust around the world and the bankers' intention may be to take some of the air out of those growing bubbles.
- Central bankers in general may just want to bring monetary policies back to normal from the super-low interest rate environment we have been in since the 2008 recession. Many of these central bankers are coming close to the ends of their terms, and so there may be some legacy-building incentives at work as well.
These are just some explanations for the change in sentiment in the financial market. What is your view?
Feel free to write to us at email@example.com and tell us what you think. We'd love to hear from you!
|The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.|