Grand Central: Rising Dollar and Falling Oil Could Be Recipe for a U.S. Asset Boom

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The Wall Street Journal’s Daily Report on Global Central Banks for Thursday, December 11, 2014:

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Highlights

Hilsenrath’s Take: Rising Dollar and Falling Oil Could Be Recipe for a U.S. Asset Boom
Bank of Canada Says Housing Prices, Debt Pose Stability Risk
China Injects $65 Billion Into Banking System
Weak Demand for Loans Raises Hopes for ECB Stimulus
Russian Central Bank Raises Rates to Address Sliding Ruble

HILSENRATH’S TAKE: RISING DOLLAR AND FALLING OIL COULD BE RECIPE FOR A U.S. ASSET BOOM

The shifting global economic landscape has important implications for how the U.S. recovery – and the trajectory of U.S. dollar asset prices – will evolve in 2015.

A strong dollar and weak growth overseas portend downward pressure on U.S. exports. At the same time, these forces combined with falling commodities put downward pressure on domestic inflation. That could restrain interest rates even if the Federal Reserve wants to start nudging them higher. A strong dollar also points to increased capital flows into the United States. Capital flows and low interest rates, in turn, could be a formula for more consumer spending and asset price appreciation in stocks, real estate and other investment markets.

Some evidence of these trends is already accumulating, such as this WSJ story detailing a surge of Chinese investment in the New York real estate market.

Could that be the start of a new asset boom in the U.S. and a source of future financial instability? It is too soon to say, but it’s something Fed officials will likely be watching for.

Though this is surely no return to the booming 1990s, there are some echoes. In the late 1990s, during the Asian financial crisis, oil prices tumbled, the dollar rose, and the U.S. economy and stock prices accelerated.

Fed Vice Chairman Stanley Fischer is familiar with versions of this economic cocktail more recently. After the 2008 financial crisis, when he served as Governor of the Bank of Israel, Israel experienced a rising shekel, which curbed Israeli exports, a strain for an economy more geared than the U.S. toward selling its goods and services overseas. The strong shekel was the result in part of a domestic energy boom, in the form of new off-shore natural gas production.

Mr. Fischer was one of the world’s first central bankers to raise interest rates after the financial crisis. But low domestic inflation and a strong shekel have led the Israeli central bank to push them back down again. Low rates and capital inflows, in turn, helped to spur a housing boom.

The Bank of Israel intervened in currency markets to slow the shekel’s rise and used supervisory tools to repress the housing boom. The results were mixed. High housing costs have been a nagging problem for the Israeli economy and a longstanding source of concern for the central bank. Israeli exporters still howl about the consequences of a strong currency.

The U.S. economy is different than a small economy like Israel’s. The U.S. is less exposed to trade and the dollar is a reserve currency. The Fed might not use the same tools Mr. Fischer did in Israel, but the U.S. central bank could be on a track to have the same kinds of worries in 2015.

-By Jon Hilsenrath

MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD

Kansas City Fed Labor Index Down in November. Labor market conditions weakened a bit in November, the Kansas City Fed reported Wednesday. The bank said its Labor Market Conditions Indicators index edged down to negative 0.50 for last month, from October’s reading of negative 0.45. The bank’s momentum index was essentially unchanged at a reading of 1.33.

J.P. Morgan Capital Ratio Could Reach 11.5%. J.P. Morgan Chase’s chief financial officer on Wednesday said it is “reasonable” to assume the largest U.S. bank’s capital ratio could go up to a total of 11.5%, just a day after the Federal Reserve said eight of the largest U.S. banks will need more capital to make the financial system less risky.

Fed Needs to Test Drive One of its New Rate Tools. Bank of America/Merrill Lynch analysts are warning the tool the Fed plans to rely on when it begins raising short-term rates is the one that hasn’t really been put through its paces. The Fed has not truly explored the effects of adjusting the interest rate it pays banks for reserves parked on its books as it has tested other new tools designed to help it raise rates when the time comes, bank analysts wrote Wednesday. The firm said it expects the Fed will want to test the effects of a temporary and limited increase in the reserves rate before it starts raising short-term rates broadly.

Central Banks to Start Reporting Large Treasury Positions. The U.S. Treasury said Wednesday that global central banks and foreign governments for the first time are requested to report to the U.S. their large positions in Treasury bonds next year. The rule becomes effective March 10, 2015, according to a Treasury release, representing the latest step by the U.S. to better understand the supply-and-demand dynamics of the market that play a key role in global financing. –Dow Jones Newswires.

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Weak Demand for Loans Raises Hopes for ECB Stimulus. Hopes for more aggressive stimulus measures by the European Central Bank increased on Thursday after demand for the second installment of a four-year lending program for banks fell short of expectations .

China Injects $65 Billion Into Banking System. China’s central bank is pumping about 400 billion yuan (nearly $65 billion) into the country’s banking system, according to people with knowledge of the matter, the latest step aimed at boosting Chinese banks’ lending abilities to help spur the economy.

China to Push Ahead With Economic Overhauls. China’s policy makers pledged to push ahead with market-based overhauls following a meeting on setting economic priorities for 2015, state media said Thursday. After the three-day gathering, the nation’s top leaders vowed to keep steady economic growth next year, saying authorities will maintain a prudent monetary policy and proactive fiscal policy, the official Xinhua News Agency said.

Oil Price Fall Deepens BOJ Policy Board Rift. The continued fall in crude oil prices is deepening a rift among Bank of Japan policy-board members, indicating that some of them may reject any push for extra stimulus next year.

Bloomberg News

BOE Unveils Transparency Push. The Bank of England on Thursday proposed sweeping changes to how it explains its policy decisions, reflecting the increased scrutiny central banks face in the aftermath of the financial crisis. The proposals, many of which will require the approval of Britain’s parliament, will put the BOE in the front rank of central banks worldwide in terms of how speedily and comprehensively it sets out the reasons for officials’ judgments on interest rates and other monetary policy tools.

Bank of Canada Says Housing Prices, Debt Pose Stability Risk. Canada’s central bank said the country’s housing market is as much as 30% overvalued and pushing higher, posing the most serious risk to domestic financial stability . The market is more likely to achieve a soft landing than the destabilizing crash some economists have predicted, the Bank of Canada said Wednesday. That soft landing, however, has yet to materialize in part because mortgage rates, long at ultralow levels, declined even further this year. Competition among retail lenders is also spurring some riskier lending, it said.

Bloomberg News

Russian Central Bank Raises Rates to Address Sliding Ruble. The Bank of Russia raised interest rates by one percentage point on Thursday—its fifth rate rise this year—in a move to rein in inflation and halt a prolonged slide in the ruble . The move wasn’t enough to stem the decline, though, as the currency fell to an all-time low of 55.45 against the dollar following the announcement.

Brazil’s Central Bank Sees Inflation Increasing in 2015, Then Waning. A tighter fiscal policy should help cool down consumer price increases in Brazil next year, but inflation probably won’t reach target until late 2016, the country’s central bank said.

Swiss Central Bank to Keep Lid on the Franc. The Swiss National Bank repeated Thursday it will intervene in the foreign exchange market to prevent the Swiss franc from surpassing 1.20 against the euro, saying the limit remains the “key instrument” to curb upward pressure on the currency. The central bank also held its target range for the three-month London interbank offered rate at 0.0% to 0.25%. The decision marked the 14th successive quarter that the target for the key rate, often referred to by the acronym Libor, has been held steady.

Norway Surprises With Rate Cut to 1.25% From 1.5%. The Norwegian krone slumped to a five-year low against the euro on Thursday after the central bank cut key interest rates, amid slowing domestic growth and the tanking price of oil—Norway’s major export.

Bank Indonesia Keeps Overnight Benchmark Rate Unchanged At 7.75%. Bank Indonesia kept its benchmark rate unchanged at 7.75% Thursday after a 25-basis point increase last month, keeping its tight stance intact as it expects the more-than 30% increase in subsidized fuel prices last month to keep stoking inflation for the next two months – Dow Jones Newswires.

New Zealand’s Central Bank Keeps Interest Rates on Hold, Retains Tightening Bias. The Reserve Bank of New Zealand kept interest rates on hold Thursday and while it retained its tightening bias, it signaled more gradual increases as inflation remains weak and international dairy prices tumble.

Bank of Korea Keeps Base Rate at 2%. South Korea’s central bank on Thursday kept its policy rate unchanged at 2% for a second consecutive month, in line with expectations. All 20 economists polled by The Wall Street Journal expected the Bank of Korea to stand pat through the end of this year while gauging the impact of its August and October rate cuts on Asia’s fourth-largest economy – Dow Jones Newswires.

Hungary to Stay Loose in Pursuit of Inflation Target. Hungary’s interest-rate setters are likely to keep the country’s monetary policy loose and rates at their current level for the foreseeable future to ensure inflation will rise to the central bank’s target, the central bank said on Wednesday. –Dow Jones Newswires

Poland’s Bratkowski Wants Overhaul for Rate-Setting Panel. Poland’s lawmakers should rethink the way the country’s rate-setting panel is formed and increase the role of central bank insiders in the rate-setting process, council member Andrzej Bratkowski told The Wall Street Journal. Nine out of ten current rate-panel members come from outside the central bank and Mr. Bratkowski said a higher number of the bank insiders would make monetary policy more stable and transparent. –Dow Jones Newswires.

GRAND CENTRAL

Pump Prices Prime U.S. Economy for Growth. American workers have been waiting years for a big raise. That bump is finally coming—at the gas pump. If prices stay at their current levels under $3 a gallon, the average American household could save $380 over the coming year, according to research firm ClearView Energy Partners. A separate estimate from IHS Global Insight says the average family could save $750 over the next year. By comparison, the median U.S. income grew by just $181 last year from a year earlier after adjusting for inflation.

FORWARD GUIDANCE

-Bank of Canada’s Poloz speaks in New York at 8 a.m. EST

RESEARCH

Innovation and Incentives: Evidence from Biotech. State-government incentives designed to attract biotechnology investment “appear to encourage growth in the states that offer them,” Enrico Moretti and Daniel J. Wilson wrote in an Economic Letter from the San Francisco Fed. “State subsidies help attract star scientists and increase local jobs, although there is little overall effect on regional salaries. By spurring clusters of innovative industries, these states reap further benefits from economic growth spilling over to other local service sectors. Of course, for state policymakers these benefits must be weighed against the cost of the subsidies — that is, the benefits of spending those funds differently — which is outside the scope of our analysis.”

Managing House Price Booms in Emerging Markets. For the past decade, house prices have steadily increased in the vast majority of the 30 countries that make up the IMF’s House Price Index for Emerging Markets released today at a conference organized by the IMF and the Indian Institute of Management in Bangalore, India, writes Min Zhu, deputy managing director of the IMF on its iMFdirect blog. He said the index shows a lull in the aftermath of the global financial crisis, followed by an increase for nine consecutive quarters since 2012. The IMF finds that since 2009, house price increases have been higher in countries with more rapid credit growth.

COMMENTARY

Employers Will Have to Raise Wages. They Just Don’t Know It Yet. “In effect, there is a standoff between Corporate America and America’s workers,” the New York Times’ Neil Irwin writes in The Upshot. “Businesses see demand for their products and want to expand. After years of stagnant wages, workers aren’t prepared to accept these jobs on the terms they are being offered. Eventually some employers will decide that they are leaving too much business on the table by not offering the pay and benefits and training that will fill their vacant openings. If that happens on a wide enough scale, it will mean that the long-awaited gains in wages for ordinary workers will finally start to arrive.”

Addressing Long-Term Unemployment in the Aftermath of the Great Recession. “The presence of large numbers of long-term unemployed represents a fundamental challenge to policymakers in designing labor market institutions that help reintegrate the long-term unemployment into the labor market,” Lawrence F. Katz, Kory Kroft, Fabian Lange and Matthew Notowidigdo write in a voxeu.org column.

BASIS POINTS

–The global economy grew at a slightly faster pace in the third quarter, aided by a modest pickup in the eurozone and a less deep contraction in Japan. Figures released by the Organization for Economic Cooperation and Development Thursday showed the combined gross domestic outputs of the Group of 20 largest economies–which account for 90% of world activity–increased by 0.9% from the three months to June. G-20 output grew by 0.8% in the second quarter.

–Turkey’s economy grew in the third quarter at its slowest growth pace in two years, as weak consumer spending aggravated the challenges facing a once-booming emerging market economy.

-Iceland’s government signaled this week that it is closing in on a plan that would unfreeze the assets of three failed banks for creditors owed tens of billions of dollars.

-Ex-Bundesbank Chief Karl Otto Pöhl Dies at 85. Mr. Pöhl, who warned against rushing into a common European currency, led the German central bank from 1980 to 1991. He died Tuesday at the age of 85.

–Happy birthday to the Central Bank of the United Arab Emirates, which began operating on Dec. 11, 1980.

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