Yellen losing dollar bet as its rise slows growth and inflation

JAN 25, 20162:05 PM

[WASHINGTON] Federal Reserve Chair Janet Yellen and her colleagues have so far found themselves wrong-footed by the stronger dollar after they raised interest rates last month for the first time since 2006.

In spite of suggestions by some officials that the US currency's rise would soon run out of steam, the dollar has appreciated by some 2 per cent since the central bank last met on Dec 16, measured on an effective exchange rate-basis.

Coming on top of a 11 per cent increase in the year prior, the latest advance will curb already slowing economic growth and put downward pressure on an inflation rate that the Fed judges is too low as it is.

"It's a big move in a month," said Robert Mellman, a senior US economist at JPMorgan Chase & Co in New York, adding that was a key reason why the bank recently pushed back its forecast of the Fed's next rate rise to June from March. "The cumulative effects of a stronger dollar on the economy and inflation are substantial."

ON HOLD

Ms Yellen and her fellow officials are almost universally expected to hold rates steady at their first gathering of the year on Tuesday and Wednesday.

Investors though will be scouring the statement released afterward for hints that the Fed is backing away from its base case of four quarter percentage-point rate increases in 2016.

This year's bout of turbulence on world financial markets - the dollar and Treasury debt prices have surged while equity and commodity prices have plunged - has prompted investors to scale back their expectations of Fed action. They now see at most only two rate hikes this year and put the odds of March move at 26 per cent. That's down from 46 per cent this time last month, according to trading in the federal funds futures market.

'DEVELOPMENTS ABROAD'

When the Fed last confronted unsettled financial markets and an uncertain global economic outlook in September, it postponed an expected rate increase and said it was "monitoring developments abroad."

After markets calmed down, policy makers boosted rates in December, with Ms Yellen extolling the strength of the domestic economy in comments to reporters after the decision.

Morgan Stanley & Co economists in New York expect the Fed to again give a nod to international and market concerns in their statement this week, but without closing the door to a March rate increase.

Ms Yellen will not be holding a press conference after this week's meeting. She will though get a chance to more fully explain the Fed's thinking when she appears before the House Financial Services Committee on Feb. 10 to deliver the central bank's semi-annual report to Congress.

In a speech on Nov 12, Fed Vice Chairman Stanley Fischer said computer calculations by the central bank show that a 10 per cent rise of the dollar lowers US gross domestic product by more than 1.5 per cent after three years, mainly by reducing exports.

SLOWER GROWTH

GDP is projected to have grown by just an annualized 0.8 per cent in the fourth quarter, according to the median forecast of economists polled by Bloomberg. The government is scheduled to release the numbers on Jan 29.

A dollar rise also temporarily reduces inflation by lowering the price of imports, Mr Fischer said. Fed calculations suggest that a 10 per cent appreciation depresses core inflation by about 0.3 per cent over a year.

Core inflation, which excludes volatile food and energy costs, stood at 1.3 per cent in November from the prior year, well below the Fed's 2 per cent goal.

In separate comments earlier this month, St Louis Fed President James Bullard and San Francisco Fed President John Williams both suggested that they did not anticipate a major increase in the greenback in the future.

"I wouldn't expect a lot of appreciation in the dollar going forward, because markets have already priced in what is going to happen with relative monetary policy" in the US and Europe, Mr Bullard said in Memphis, Tennessee, on Jan. 14.

EMERGING MARKETS

The currency's latest rise though has come not so much against the euro, but against the currencies of commodity exporters such as Canada and Asian nations that are suffering the fallout from slower Chinese demand, JPMorgan's Mellman said.

Movements in the US currency are the most important thing to watch in determining the pace of Fed rate rises in 2016, according to Michael Salm, co-head of fixed-income at Putnam Investments LLC in Boston.

"When the dollar rises, it slows things down, it's a form of tightening on its own," he said. "The single, most-important macro global indicator this year is the dollar."

BLOOMBERG

    
 

Higher FD rates offer a reprieve in volatile times

Maybank, StanChart offering more attractive fixed deposits as interest rates rise and riskier environment prompts investors to hold more cash

By

Jamie Lee leejamie@sph.com.sg@JamieLeeBT

Banks have put out their promotional fixed-deposit (FD) rates in the lead-up to Chinese New Year that reflect higher funding costs and greater competition. 

ST PHOTO

 When cash is king

JAN 25, 20165:50 AM

Singapore

BANKS have put out their promotional fixed-deposit (FD) rates in the lead-up to Chinese New Year that reflect higher funding costs and greater competition.

The offer meets demand from investors in this volatile market environment who would rather batten down the hatches than go bargain hunting. And they would not be alone. Investors upped the proportion of their portfolios held in cash to 5.4 per cent - the third highest percentage since 2009 - the global fund manager survey from Bank of America Merrill Lynch showed this month.

The surest sign of rising deposit rates comes from those revised by Singapore's largest retail bank DBS - which does not need, and says it does not compete for, fixed deposits.

Even so, the least aggressive of the lot has raised its six-month rates to 0.2 per cent per annum for any amount from S$1,000 to a dollar shy of a million dollars. This rate was up from 0.15 per cent per annum.

Most of the other banks - and, in particular, the foreign lenders - tier their January offers based on timeframe, and sums. Direct comparisons are difficult. Some banks stretch out the tenor a month longer than the usual 6-12 months, and minimum sums are not consistent. Priority customers at certain banks get preferential rates, too.

For a customer with S$25,000 to set aside for about half a year, Maybank and Standard Chartered stand out. Maybank offers 1.6 per cent per annum for a six-month FD, while Standard Chartered pays an interest of 1.65 per cent per annum if a customer parks his cash with it for seven months.

"Demand for Sing-dollar time deposits remain healthy as the first quarter is typically when customers receive their bonuses," said Choong Wai Hong, head of community financial services, Maybank Singapore. "The Chinese New Year festive period also sees banks offering seasonal gifts to reward customers when they deposit larger amounts in Sing-dollar time deposits."

UOB and OCBC also said they see a healthy and stable FD portfolio.

The toss-up goes beyond deciding among equities, bonds, cash, or the best promotional gift from the bank.

In the rising-interest-rate environment, investors may see a further lift in deposit rates, and may opt to take shorter tenors of 6-12 months, and have that cash rotated into another FD with better rates later. The trade-off is to accept a lower rate for the short-tenor FD.

"FD rates in Singapore will rise in the next few years, due to a generally increasing interest-rate environment as well as other factors, in particular current investor concerns and uncertainties around the direction of global equities and impacts flowing from a slowing China. This will be a gradual rise but it also won't reach levels seen during the turn of the millennium," said Jonathan Chng, senior market analyst at East & Partners Asia.

If the same customer wants to stay invested in S$25,000 for longer, Maybank is also dangling attractive rates. Its 12-month FD will offer 1.9 per cent per annum, while its 24-month FD will pay 2 per cent per annum.

The bank has seen just about two- thirds of customers looking at longer- term deposits. "Maybank has always offered attractive rates to customers, and we do not expect this to change," said Maybank's Mr Choong.

Standard Chartered has seen good response to its fixed-deposit offers, with a slight shift towards a mid-term tenor, its spokeswoman said. The bank offers 1.85 per cent per annum for S$25,000 held over 12 months.

Hong Leong Finance, which was the first to launch a promotional rate at the end of 2015, also said its 13-month and 18-month deposit products have been well received. Customers with S$200,000 lying around can keep that with Hong Leong for 18 months to reap an interest of 1.99 per cent per annum.

Other banks see customers flocking to shorter-term tenors. "The general market sentiment is that rates will further increase. This has impacted depositors' decisions when taking up fixed deposits, which are currently geared towards shorter-term commitment," said Charles Wong, head of retail banking, Citibank Singapore.

The fixed-deposit market will continue to be competitive, given this volatile market environment, said Philip Lim, head of retail banking in Singapore, ANZ. In hopes that customers are looking beyond rates, ANZ offers a fixed-deposit product that pays the entire interest on the same day that the funds are placed in the account.

Similarly, Matthew Colebrook, head of retail banking and wealth management, HSBC Singapore, said rising interest rates would make it more attractive to save in a deposit account because of the interest yields.

"Having said that, considering the gradual pace of increase in interest rates and impact of inflation, the real value of cash and deposits is expected to remain slack for a certain period of time," he said. "We advise clients to have a diversified portfolio compared to concentration in cash or fixed deposits."

    
 

How a 20-year-old NYU student paid his $48,000 tuition bill in a year

• Kathleen Elkins
 
•  

• Jan. 15, 2016, 1:04 PM
• 464,289
 
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Eric HuNYU sophomore Eric Hu is paying his tuition as he goes.

New York University is notoriously expensive.

Its tuition and fees are among the highest in the US, at about $48,000 a year. On top of that, the cost of living in New York City makes room and board pretty pricey: $17,580. After factoring in books, transportation, and personal expenses, students can expect to pay $70,974 a year, the university predicts.

That could be a recipe for a student-loan horror story.

But not for one NYU sophomore: Long Island native Eric Hu is paying his tuition bill as he goes.

"My parents pay for living costs, and I pay off the tuition part," he tells Business Insider. After working several jobs his freshman year, he says, he was able to pay off the entire year's tuition by the beginning of his sophomore year — and he's on track to do the same for the 2015-2016 school year.

We spoke with the 20-year-old media culture and communications major about how he managed to cover a $48,280 bill while living in one of the most expensive cities in the world. Here's how he did it:

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He took advantage of scholarships.

Hu received three scholarships: a $1,000-a-year merit scholarship from NYU's Steinhardt School, a $10,000 Brookhaven Science Associates scholarship, and a $2,500 Cold Spring Harbor Laboratory scholarship. He directed the full BSA and Cold Spring scholarships toward freshman tuition, meaning his award totaled $13,500 for the year.

He also received $6,000 worth of financial aid his freshman year.

Pictured is one of Hu's shots of Washington Square Park, close to NYU's campus.

Eric Hu

Hu does photography on the side and sells his prints.

He found ways to earn money.

While the scholarship money helped, Hu still owed $28,780 for the year. 

He started looking for work-study job opportunities available through NYU the summer before his freshman year. "It was a win-win," he says. "I'd be able to gain experience in the field, and not only help my parents by paying for tuition, but help myself in the future by not getting strapped down by student debt."

Finding an on-campus job was not as simple as he expected it to be: "I applied for three work-study jobs and got shot down by all three. That's when I decided I needed to take a different route and look outside of NYU administration."

Using the New York City-based startup WayUp, which helps place college students and recent graduates in jobs and internships, Hu started finding job opportunities with a variety of companies. His freshman year, he held four positions — including as an intern in social media and customer relations at Magisto and as a sales account manager at Fresh Prints — and worked 20 to 40 hours a week, depending on need.

His freshman-year schedule "was pretty insane," he acknowledges, but NYU's flexible class structure helped curb the insanity. "Most of my classes were rehearsals or studios, so that meant flexible hours that are concentrated on a few days, rather than having multiple classes spread out each day like in a conventional schedule." As for his grades, "I'm never truly satisfied," he says. "I think I definitely did the best of my ability considering the amount of time I devoted towards athletics, music, and work."

Shutterstock

NYU, in Manhattan.

He pieced together different jobs to earn enough.

Between the four jobs he found through WayUp, Hu earned about $26,000 his freshman year. He earned another $6,000 with a work-study opportunity he was eventually allotted — and another $2,000 doing freelance photography. "A lot of students, small companies, hackathons, and events need photographers," Hu says. "Most of my commissioned shoots have been results of referrals by friends and followers on Instagram."

Eighty percent of that $34,000 went toward tuition ($27,200), and he earned the remaining $1,580 needed to fully pay off his tuition bill at the start of his sophomore year.

As a sophomore, he's working significantly less — 15 to 30 hours a week — but earning more. "The jobs I've been working this year have been higher-level jobs," he says. "Naturally, it pays more per hour and requires more analytical skills, rather than 'grind work.' Fewer hours, but more pay — hopefully this is a trend I can keep up."

He planned out his days to maximize earning.

"Surprisingly I didn't have too much trouble with time management," Hu says. "Of course, in the beginning it's shell shocking — you're thrown into college, which is hard enough as is, and then you're in New York City, where there is literally no coddling at all. I took a step-by-step approach to everything. Even to this day, what I'll do at night is plan out the entire next day. I'll make sure every waking moment is assigned to doing something productive."

"Every day is so different," he says, but here's what one might look like during crew season — he's a fall-season rower and spring-season coxswain for NYU — on a day with morning class:

5 a.m. Alarm sounds.

"I'll wake up for crew practice, brush my teeth, get dressed, and sprint to the garage where the vans drive us to New Jersey for practice."

9 a.m. Heads to class.

"I'll take the world's quickest shower and run to class, struggling to eat my granola bars along the way."

11 a.m. Starts work.

"This year I'm doing a lot more remote work, but sometimes I have to be in the office, either WeWork Park South or WeWork Williamsburg."

7 p.m. Eats, studies, and relaxes.

"I go home for dinner with friends, study for two hours, and complete any assignments I can. I also take another shower."

11 p.m. Sleep.

"Regardless of how much work I have left or how many emails I have to answer, my head will hit the pillow at 11 p.m. There's very little that can get in the way of my getting the rest I need, because that's really what fuels my ability to get things done during the day."

He lived below his means.

"My parents raised me to be very conservative with my money," Hu says. "In high school I never spent anything at all."

Despite earning nearly $34,000 as a college freshman, Hu maintained conservative spending habits. "A golden rule I always follow is, never spend more than what you have," he says.

This doesn't mean there is zero wiggle room in his budget. "I like to work towards buying at least one thing that I want to have each month," he says. "I'm only human, and there are definitely luxury items that entice me. Part of the reason I work so hard outside of school is so that I can afford things like camera gear, concert tickets, new clothes, or a gym membership. Fun things motivate me."

Some of his bigger purchases have more than paid for themselves over time, such as his expensive camera gear: "Last year, I spent around $5,000 on a camera, five lenses, and a tripod. Through paid photo gigs, portrait shoots, and event coverage, I made most of it back. Having that camera has led to many more opportunities in the workplace, such as jobs at Elementem Photography and DxO Labs — with those opportunities combined, I've at least tripled my return from my initial investment."

Eric Hu

Hu is a sales and marketing consultant for the photography company DxO.

He followed a clear financial plan.

A $28,780 expense is an overwhelming amount for just about anyone to cover. For sophomore year, he owes even more, since he receives only the $1,000-a-year merit scholarship and $2,000 in financial aid. He'll be responsible for $45,280.

Hu tackles it by crunching the numbers and creating a clear financial plan.

"I like to break down every paycheck in percentages," he says. "For tuition, I know I have to meet a certain quota, and I'll divide it up by 12 (months) and know exactly what needs to be paid every 30 days or so. Usually that means around 80% of what I make."

Once he covers tuition, his next focus is his retirement account: "From there, I'll move either $100 or $200 towards my Roth IRA. After that I'll put $116 or so into the monthly unlimited MetroCard to get around, and ration out another $100 for the food bill. I have the cheapest meal plan so that I can still afford to have breakfast and lunch on campus but am also able to spend less by making myself dinner in my dorm. Twenty-five dollars per week on groceries is more than enough for me!"

Of equal importance to his concrete financial plan is his mindset: "Something the book 'Rich Dad Poor Dad' taught me is to never think whether or not I can afford something, but how I will afford it. It breeds creativity, determination, and a rewarding lifestyle."

Some of the smartest minds in finance are making a prediction about China that was once taboo

• Linette Lopez
 
•   

• 9h
• 18,002
 
• 7

Reuters

It was once taboo to say that China could be a deflationary force, dragging the world into a slowdown as its own economy modernized.

Serious economists and investors pooh-poohed the idea, saying that China's economy just didn't have that kind of global impact. Just last weekend in a note to clients, Deutsche Bank's Torsten Slok said the idea was overblown.

But it seems like all of that is changing. The once taboo deflation talk is all over the World Economic Forum at Davos, and the people who are doing the talking are some of the most brilliant minds in the market.

"I think the Chinese situation with the currency is very important," said Ray Dalio, founder of $160 billion investment firm Bridgewater Asset Management.

"If there is significant currency weakness for the yuan that will mean more imported deflation, and it will make things more difficult."

A force to be reckoned with

The idea that China could spread its malaise to the rest of the world has been discounted for years. The Economist argued that such claims were "inflated" as recently as September.

The Chinese government has done its part too. Last March, Chinese Premier Li Keqiang, who is responsible for the country's economy, said in no uncertain terms that China wasn't exporting deflation to the rest of the world.

It's 2016's volatile markets that have changed that.

At Davos, legendary hedge fund manager George Soros called China one of the "three major root causes" of global deflation, along with commodity prices and competitive currency devaluation.

And one could argue strongly that China is involved in those other two forces as well.

As China's economy goes through the painful transition from an investment-based economy to one based on consumer spending, its demand for materials — especially commodities — that it once consumed in great volume has decreased, suppressing prices and hurting commodity sellers.

Meanwhile, China's currency, the yuan, has been depreciating significantly against the dollar since December. The Chinese government's expensive attempt to counteract that has caused volatility in global markets, and concerns over how much of its reserves China will have to expend keeping the yuan stable — keeping the world stable.

That doesn't mean the yuan isn't still going to fall though. 

REUTERS/Christian HartmannGeorge Soros.

We're hardly through it

Celebrated China analyst Charlene Chu wrote earlier this year that, as the Chinese government runs out of good options to stimulate the economy, the yuan is now part of its "playbook."

"In our view, a much larger move [in the yuan] than 2015's 4.6% is likely over 2016-17, the size and timing of which will be driven by the degree of capital outflows and extent of deceleration in GDP growth," Chu wrote.

That puts the third deflationary force Soros was talking about into play — competitive currency devaluations. As China's yuan falls, so might its neighbors' or trading partners' currencies.

Mark Wilson/GettyUS Treasury Secretary Jack Lew.

Again, this isn't to say that China is allowing the yuan to slide totally on purpose.

The government has expressed a desire to keep the currency stable and spent $108 billion in December alone doing so — so this isn't about China "winning" as GOP presidential candidate Donald Trump might put it.

China's currency depreciation now, said Treasury Secretary Jack Lew in a CNBC interview from Davos, is more due to its economic slowdown. The thing is, though, no one really understands how they're handling it.

"If they could be clearer about what they're doing, I think that it will be helpful. I can't tell you that I have 100% certainty of where they're going," he said. "I can tell you what they've announced as their policy. I can tell you what they've said in meetings, and I think their activities, their policies, and their communication have been confusing."

So prepare for a wild ride.

SEE ALSO: Wall Street is rolling its eyes at this comment from the vice president of China, but it actually makes sense

NOW WATCH: China is full of weirdly empty 'ghost cities' — here are the biggest ones

More: China China Markets and Economy Davos Davos 2016