Fed Chair Powell To Emerging Markets: You Are On Your Own

Over the weekend, when commenting on the ongoing rout in emerging markets, Bloomberg published an article titled "Rattled Emerging Markets Say: It's Over to You, Central Bankers." Well, overnight the most important central banker of all, Fed Chair Jay Powell responded to these pleas to "do something", and it wasn't what EMs - or those used to being bailed out by the Fed - wanted to hear.

As Powell explained, speaking at a conference sponsored by the IMF and Swiss National Bank in Zurich, the Fed's gradual push towards higher interest rates shouldn’t be blamed for any roiling of emerging market economies - which are well placed to navigate the tightening of U.S. monetary policy. In other words, with the Fed's monetary policy painfully transparent, Powell's message to EM's was simple: "you're on your own."

Arguing that the Fed's decision-making isn’t the major determinant of flows of capital into developing economies (which, of course, it is especially as the Fed gradually reverses the biggest monetary experiment in history) Powell said the influence of the Fed on global financial conditions should not be overstated, despite Bernanke taking the blame five years ago for the so-called taper tantrum.

"There is good reason to think that the normalization of monetary policy in advanced economies should continue to prove manageable for EMEs,” Powell said, adding that “markets should not be surprised by our actions if the economy evolves in line with expectations.

Powell added that the Fed can help "foster continued financial stability" as policy normalization continues by communicating "our policy strategy as clearly and transparently as possible to help align expectations and avoid market disruptions."

Alas, that's not what markets cared about, or wanted to hear, and instead Powell's unwillingness to suggest a slowdown in the Fed's tightening plans, EMs be damned, were enough to propel the dollar to new highs...


... in the process again slamming the EM complex, which as shown below has been a bloodbath over the past month - as dollar has soared against most developing-nation currencies - and explains the escalating rout among emerging markets.

As discussed previously, the FX rout has also spread to EM bond markets as debt sales from countries such as Russia and Argentina have been canceled or postponed recently as potential buyers have balked at the prospect of faster inflation and widening budget deficits.

Meanwhile, as the Fed refuses to change course, other policy makers have been forced to step in to counter the sharp, sudden capital outflows, with Argentina’s central bank abruptly raising rates three times, to 40% to halt a sell-off in the peso.

Russia has also put the brakes on further monetary easing. Turkey, which is a unique basket case in that Erdogan is expressly prohibiting the central bank from doing the one thing it should to ease the ongoing panic, i.e., raise rates, is seeking to bring down its current account deficit. Overnight, we learned that Indonesia was burning reserves to prop up its currency.

Meanwhile, also overnight, JPM CEO Jamie Dimon said it’s possible U.S. growth and inflation prove fast enough to prompt the Fed to raise interest rates more than many anticipate, and it would be wise to prepare for benchmark yields to climb to 4%. Such a scenario would be a disaster for EMs:

A sustained move higher would pressure local currencies and lure away foreign investors. The International Monetary Fund warned last month that risks to global financial stability have increased over the past six months.

“Central banks may have to respond with interest rate hikes if the sell-off intensifies,” said Chua Hak Bin, a senior economist at Maybank Kim Eng Research in Singapore. Those most vulnerable include Ukraine, China, Argentina, South Africa and Turkey according to the Institute for International Finance.

Needless to say, hiking rates just as the global economy is starting to slide is just the catalyst needed for a global recession.

Meanwhile, there are capital markets to think of: if and when the contagion begins, and the selling spills over from EMs to development markets, the Fed will have no choice but to step in, something Powell himself hinted at:

I do not dismiss the prospective risks emanating from global policy normalization. Some investors and institutions may not be well positioned for a rise in interest rates, even one that markets broadly anticipate. And, of course, future economic conditions may surprise us, as they often do.

He was referring to the following divergence between hedge fund and "Real Money" positioning on EMs, where as JPM noted over the weekend, the "smart money" is well ahead of the curve.

As for the indicator that markets should keep an eye on to decide when it's time to panic, we reported yesterday that Bank of America is keeping an eye on one specific catalyst for imminent contagion: "EM FX never lies and a plunge in Brazilian real toward 4 versus US dollar is likely to cause deleveraging and contagion across credit portfolios."

 

Comments

spastic_colon Tue, 05/08/2018 - 08:21 Permalink

" Markets should not be surprised by our actions if the economy evolves in line with expectations."

100% agree

and every insider will have already known..............

zvzzt techpriest Tue, 05/08/2018 - 14:33 Permalink

note on the converting of buses, take a look at (second hand) shipping containers. Very well suited for (temporary) living quarters and strong as hell. Probably cheaper but of course somewhat less mobile. No maintainance (so cheap for storage) and no road-tax/.gov bollocks. 

Link: https://www.portablespace.co.uk/shop/containers-for-sale/used

(Added benefit, if you surround them with sacks of sand/rock you have a very decent bunker... )

In reply to by techpriest

techpriest zvzzt Tue, 05/08/2018 - 15:20 Permalink

I have read a couple of books on the topic. For a typical container, the paint is toxic (not rated for living), so you have to sand blast it. Next, if you cut the container walls you affect the structural integrity of the container, so you need to add structural support. By the time you are done, it isn't cheaper to use a container over other options. That said, it isn't hard to move a container as it is a standard shipping container, so long as you don't add anything to the outside.

In reply to by zvzzt

Son of Captain Nemo Tue, 05/08/2018 - 08:22 Permalink

Chairman Powell IS aka "Satoshi Scrotumoto"!...

https://www.newsbtc.com/2018/05/07/fedcoin-ex-u-s-federal-reserve-gover…

Why crypto?... Cause we've already loaned out all the Gold Silver and Platinum... And all that is left is salted bullion with IOUs as far as the eye can see! Which only leaves "30 year" $Ts!... I know... I'm laughing uncontrollably too if I'm ANYONE OCONUS!!!

That's why Trump backed off Rocket Man and is asking Xi today avec beautiful chocolate cake (https://www.zerohedge.com/news/2018-05-08/trump-speak-xi-today-says-goo…) for another unconditional Au loan... Or have the BTC mining servers returned to China (https://www.zerohedge.com/news/2018-01-05/bitcoin-miners-migrate-china-…)...

BOTH WOULD BE EVEN BETTER?!!!

 

MusicIsYou Son of Captain Nemo Tue, 05/08/2018 - 10:16 Permalink

Those dolts really think they have something there with their cryptocurrency that they acquired to escape corruption, and yet incidentally bitcoin is measured in dollars.  But cryptocurrency such as bitcoin is merely a device to control inflation through removing dollars from circulation, much like a savings account. However , eventually cryptocurrency is going to go to zero. But you can not tell any of this to cryptocurrency lovers, because they are immensely financially stupid people.

In reply to by Son of Captain Nemo

Son of Captain Nemo MusicIsYou Tue, 05/08/2018 - 10:36 Permalink

You left out one of the most important features of it's existence and the reason it was created in the first place... And that "was" to divert foreign investors among them the 3 most important AND THE ONLY ONES THAT MATTER at this point with sound money Russia, Iran and China -RIC to divest themselves of their native currencies for a "Trojan Horse" that the Fed can keep inflating by purchasing it with QE$, and then dump at opportune times of their own choosing. ...

My point with the above reference to the PBOC forcing out all the Federal Reserve/U.S. Treasury/Langley/NSA mining services in early January from China was the biggest "watershed" to be sent back home "kicking and screaming" while "Donny boy" continued his idle threats to Russia and China's little neighbor... Was no coincidence!...

Not forgetting what has already happened with SWIFT among those 3 and the unification through the Petro Yuan/Rouble in the last 12 months alone!

In reply to by MusicIsYou

mily Tue, 05/08/2018 - 08:27 Permalink

Meanwhile in the UK, leaning more on "commie" side

Recommendations include:

  • Give £10,000 to all young adults at the age of 25, funded by a new "lifetime receipts tax" that would replace inheritance tax
  • Scrap council tax and replace it with a new property tax targeting wealthier homeowners
  • Use the proceeds from property tax reform to halve stamp duty for first-time buyers and increase public funding for social care
  • Make earnings of those above state pension age subject to National Insurance contributions

http://www.bbc.co.uk/news/business-44029808

Davidduke2000 Tue, 05/08/2018 - 08:27 Permalink

does this crazy lunatic has any evidence anybody asked him for a favor?? he ask them to buy his printed crap.

My recommendation to the emerging markets, drop the us dollar and run fast before they damage you. 

Thautikus Tue, 05/08/2018 - 08:35 Permalink

Emerging markets? More like Centrally Controlled Markets.

Will these countries never learn, as long as you accept the US Dollar as the reserve currency for trade you will be at the mercy of the Federal Reserve.

This is 2018 and there are countless ways you can conduct nation to nation trade that have nothing to do with the US Debt Note.

Time for the USA to stand on its own, remove the US Dollar as reserve currency and lets just see how markets react to an unpayable national debt and a currency no one needs.

JibjeResearch Thautikus Tue, 05/08/2018 - 10:48 Permalink

Yes, correct.  I'm looking forward to how well EMs have prepared for this.  Russia, China, India have done the preparation.  Iran is heading toward those nations.., how about the rest of the EMs?

J.Powell plays a USD reserve card, if the EMs survived, the USD reserved is no more!

If the EMs survived, China/Russia will be much stronger!

 

In reply to by Thautikus

Ricki13th Tue, 05/08/2018 - 08:41 Permalink

Why do you think the US is escalating things with Iran and Syria. The reset is about to happen (around late summer) this year. Oil prices are going to continue to surge and forced interest rate hike in the coming months will cause a global debt crisis.

Dilluminati Tue, 05/08/2018 - 08:42 Permalink

Oh I'll use this article to tell Americans you are on your own!

Broward School Officials: Parkland Gunman Assigned to Deferred Disciplinary Program Supported by Obama

http://www.breitbart.com/big-government/2018/05/07/broward-school-offic…

Sanctuary Cities, lawless socialists, and chaos as Christians come under attack.

https://www.irishpost.com/news/piers-morgan-outraged-met-galas-catholic…

and

https://www.theblaze.com/video/socialism-fail-venezuelans-eat-dogs-cats…

YOU NEED TO ARM YOURSELF BEFORE IT IS TOO LATE!!!

https://www.cheaperthandirt.com/category/firearms/handguns/revolvers/do…

These are the best sellers!

Buy with Cash...

 

Batman11 Tue, 05/08/2018 - 09:11 Permalink

You can't use capital controls and we will run monetary policy for our benefit.

The money rushes into emerging markets and then it rushes out.

Their economies collapse.

 

Herdee Tue, 05/08/2018 - 10:04 Permalink

"IF" the economy evolves. Trouble is, the stochastic models that they use don't work so they don't see what's happening. The utter bullshit that the economy is strong is the biggest fantasy they preach. You hear it on CNBC.

Gophamet Tue, 05/08/2018 - 10:08 Permalink

Just an elitist science project paid for by the blood of the exploited. Need to cut some big fucking holes in their golden parachutes!

JibjeResearch Tue, 05/08/2018 - 10:40 Permalink

The question for all of us is....

Who have the financial means to deal with 1. high interest rate, 2. higher prices for imported goods, 3. layoff, 4. possible lowered GDP, 5. increased deficit and debt, 6. higher borrowing cost?

This is a fact!  The tax payers will pay the bills.

 

Let it Go Tue, 05/08/2018 - 10:49 Permalink

The world is currently engaged in a massive game of speculation that contains a lot of risks. A massive number of short positions have formed against the dollar which will cause the dollar to strengthen as they unwind. Currencies are under assault in places where the economy is weak and the issuer is buried in debt from borrowing dollars they can never repay.

A global slowdown combined with rising interest rates in the U.S. and the Fed’s QT (quantitative tightening) has resulted in emerging markets beginning to lose their lifeline of inflows. This could lead to a large shift in the value of many currencies. More on what to expect in the article below.

http://Stronger Dollar Is Problem For Global growth.html