Friday, 17 August 2018

On the dollar and disinflation

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Anthony Peters looks at the frankness of Evans, the fusion of Heinz and Kraft and the fire in UK property.

Just when you thought it was safer to be out of the water, Chicago Fed President Charles Evans steps into the limelight and declares “I see no compelling reason for us to be in a hurry to tighten financial conditions…” and went on to suggest that “Economic conditions are likely to evolve in a way such that it will be appropriate to hold off on raising short-term rates until 2016.”

He explained that opinion with an oblique reference to the Fed’s the dual remit bit which deals with inflation. CPI stubbornly refuses to return to within the target area of 2.0% and it would appear that Evans doesn’t see that happening any time soon. On that basis, and not without reason, he can see no compelling reason for an early move. In his estimation, it will be 2018 before inflation creeps back above 2.0%.

He is also aware of the effects of dollar strength on price formation, a subject which appears to have been largely disregarded by those in the markets who have decided that June or September are sure-fire candidates for a fist tightening move. Thus he concluded: “Since last summer, the dollar has appreciated nearly 23% against major currencies… The stronger dollar presents a clear disinflationary pressure through its influence on U.S. import prices.”

It has been a while since any member of the FOMC has spoken quite so clearly on the subject of the US and its economy being as much effect as it is cause on the global economic stage. That said, Evans is very much on the dovish end of the scale and I doubt that the likes of Jeff Lacker of the Richmond Fed, a prize hawk, would rush to support his opinion.

Thus. we must conclude that there is still little consensus on the FOMC as to when and how to move and given that the balance of members still appears to be on the dovish side of neutral, it might still be too early to go piling out of financial assets.


None of that helped US markets on Wednesday where the administration’s decision to show military colours in Yemen drowned out all other noises. The Nymex WTI oil contract leapt $2.00 from its intra-day low of US$47.00 to close at just above US$49.00 pbb (it has continued on and is at London open trading at just above US$51.00 ) and on the back of that equities took it on the nose. The Dow shed 292.60 points or 1.62% to 17,718.54 points with only two of its 30 stock ending in positive territory. Those were – surprise, surprise – the two resident energy groups Exxon and Chevron.

For equity investors it was an opportunity missed for the announced merger of Kraft and Heinz, albeit in the private equity space, would normally have given stocks a warm and fuzzy feeling. It is hard to think of two more popular household names and the thought of combining them would, under other circumstances, have had the market humming. Moreover, for the merger to take place with Warren Buffet’s blessing would have added a bit of icing. In the event, geo-politics spoilt the party and the celebration of baked beans and poison yellow macaroni cheese will have to wait.

Kraft has been in and out of third party ownership over the years and I remember it being bought by Philip Morris in 1988 as a counterbalance to R.J. Reynolds’ acquisition of Nabisco.

Brand food producers have always been popular as stable cash flow generators within conglomerates, but they also bring problems with them when overly smart people try to get them do things they were not made for. Consumers tend to be reluctant to adopt “new” versions of old, much loved products. Coca Cola found that out to its own, extremely expensive, detriment. So did Levi’s. A joint Kraft/Heinz should be strong, brand protecting, unit. Surely it will remain private for two or three years but an eventual IPO will surely bring fireworks to rival the hottest tech gig.

Property combustion

A propos fireworks: UK commercial property is en fuego with money pouring in at a breathtaking rate. My little spies confirm that the big buyers are of course the Chinese who are normally regarded as pretty canny investors. Yet, the yields they are buying seem to be scaring the living daylights out of the old and adventure holders.

On the opposite side of the trade are the hedge funds who were in there two or three years ago and who are now taking profits. One of the two must surely be wrong so it might be time to read the runes and to reduce any strong overweight in the sector. Not time to go short but certainly worth thinking about taking just a few chips off the table.

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