Where We Stand

A key driver was the mini-taper tantrum spurred by ECB official comments indicating that the central bank was on a gradual path toward the exit. The yield on the 10-year German Bund, the benchmark in Europe, is lower for the third consecutive day. The ECB may have spurred the rise in yields, but it will likely resist the premature tightening of financial conditions.  

The key metric is not growth, which continues somewhat above trend, meaning the output gap is closing. The ECB’s mandate to price stability. By the ECB’s own reckoning,it has not achieved its goal. Inflation is not on a sustainable and durable path toward the target of near but below 2%.  

The mini-taper tantrum meme has been superseded by three developments in the US: Yellen’s semi-annual testimony before Congress last week, disappointing US inflation and consumption data, and now, the collapse of the Senate’s effort to repeal and replace the Affordable Care Act. These developments are uniformly dollar negative. Last year’s euro high near $1.1615 is coming into view and then the high from August 2015 near $1.1715 will be targeted. There continues to be interest in $1.20 strikes for 2-3 months. 

Many observers have argued that there was a shift in the Fed’s view that Yellen articulated in her testimony. In particular, many economists and journalists claim she expressed “increasing concern” about the softer inflation readings. We demur and do not think that there was a fundamental change in the Fed’s stance between the June 14 FOMC statement when it hiked interest rates, and Yellen’s testimony last week.  

Core measures of inflation did ease in the four months from February through May. Yellen said, “It is something we are watching very closely…” This is repeating what was in the FOMC statement: The Committee will carefully monitor actual and expected inflation developments relative to its symmetrical inflation goal.”