It has been quite a busy period of central banks' policy
stances and we have heard a bit from ECB, Fed and BoJ recently. The ECB talked
about corporate bond purchasing program with the general feeling that it
exceeded expectations. The Fed made some changes to its language obviating the
external risks but the market response remained mostly unconvinced pertaining
to the next tightening move. Finally, while the investors were expecting some
action from BoJ, the market's reaction was an obvious disappointment. This can
be portrayed as a case of mismanagement of expectations.
After the BoJ's announcement, markets were eyeing on the US
data and particularly the Q1 GDP result. The growth number of +0.5% qoq was
disappointing as the expectations were at +0.7%. This is due to the reduction
in business fixed investments. The inflation data released gave an upside to
USD strength and the Treasury yields. The Q1 Core PCE came out at +2.1% qoq
which is the highest level achieved in last 4 years. It can be inferred that
any near term strength in core inflation is going to be temporary because the
residential rents' growth and the rate of health care spending is slowing which
forms a large chunk of the core PCE deflator.
The Employee Cost Index (ECI) released earlier this week
showed a mildness in worker compensation. This is a good enough evidence of a
very little relationship between unemployment rate and wage growth. The
Phillips curve is in doubts again!
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