Macro Weekly – Time to worry about bubbles?

door: Nick Kounis , Georgette Boele , Roy Teo

Macro Weekly - 7 July 2014 - Time to worry about bubbles?.pdf (217 KB)
  • Big Picture: The Bank for International Settlements warned about the dangers of easy monetary policy, saying that there is a disconnect between upbeat financial markets and developments in the real economy, as well as about financial imbalances more generally. It also emphasised the risk of normalising monetary policy too late and too gradually. We do not see evidence of significant and widespread asset price misalignments in major economies, while credit growth generally remains weak. Financial risks could well become a problem again some point down the line, but that does not look like an immediate concern.
  • Rates: Meanwhile, for the UK and the US, the start of monetary policy normalisation is edging closer on the basis of traditional targets such as inflation and unemployment. This is in contrast to the eurozone. Indeed, last week’s US labour market data were strong. The unemployment rate in June was already touching the FOMC’s projection for Q4 of this year. We judge that the unemployment rate will continue to fall relatively quickly. This should set the scene for earlier Fed rate hikes than markets are pricing in.
  • FX: The better than expected US data supported the US dollar last week as financial markets adjusted their expectations for short-term rates upwards. Both the ECB and Reserve Bank of Australia left monetary policy unchanged as expected. However, both central banks continue to closely monitor their currencies. The RBA was quite explicit in signalling that a stronger currency is not welcome. Meanwhile, the Swedish krona weakened sharply following the Riksbank’s bigger than expected rate cut.