Fed Chief Pick Points to Stocks Echoing Past: Cutting Research

Financial markets may repeat their historical response to the appointment of a new Federal Reserve chairman when Ben S. Bernanke’s successor is announced.

That’s according to a former Fed economist who notes equities rallied about 6 percent in the month after the selections of Paul Volcker, Alan Greenspan and Bernanke.

“All three nominees were deemed acceptable by the markets and either unlikely to deviate from the policy course set by their predecessor (Greenspan and Bernanke) or about to set out to achieve a desirable result (Volcker and his inflation fight),” Roberto Perli, a Washington-based partner for Cornerstone Macro LP, said in an August 6 report.

Bond yields did not exhibit a consistent pattern and behaved more in line with the policy preferences of the nominee as well as specific economic conditions of the time, Perli said. The yield on the 10-year Treasury rose when Volcker was named chairman in anticipation of tighter monetary policy, while they fell when Greenspan was picked because he was seen as likely to maintain a moderate policy course.

Bernanke’s term ends Jan. 31, and while drawing parallels with history can be risky, Perli said a case could be made that market behavior will be similar this time around.

So long as the next chairman isn’t viewed as someone who will tighten policy quickly, then stock investors will stay focused on the improving outlook for economic and earnings growth, he said.

The bond market may be more influenced by the choice of the nominee, according to Perli. If President Barack Obama chooses Fed Vice Chairman Janet Yellen or former Fed Vice Chairman Donald Kohn then investors would continue to restrain bond yields on the bet that there will be no interest-rate hikes for a couple of years, he said. If Harvard University professor Lawrence Summers was the choice, they might fear earlier tightening and bond yields would rise.

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A new revolution in technology has the potential to transform and strengthen the global economy, according to UBS AG.

Mobile and so-called cloud technology could bring as many as 3 billion people into the world economy and advanced robots could work without stopping, UBS AG economist Andrew Cates said in a July study. 3D printers could remove 90 percent of waste from some manufacturing processes and North American oil production could climb more than 100 percent driven by hydraulic fracturing and horizontal drilling, he said.

The impact of such developments could be an increase in global economic growth of around 0.5 to 0.7 percentage points than otherwise, while inflation could be one percentage point lower, Singapore-based Cates said.

Investors would benefit as global earnings growth could be boosted by around 5 percent in coming years, UBS said. The dollar will also gain as the U.S. economy is likely to be the main beneficiary of technology and bond yield curves will be flatter, it said.

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The pulling power of the U.S. economy has diminished even as its recovery gains momentum.

“A stronger U.S. economy is an important part of our expectation of healthier global growth,” said Gustavo Reis, an economist at Bank of America Merrill Lynch in New York. “But the oomph to the rest of the world will probably be somewhat less than in the recent past.”

While still the world’s largest economy, the ability of the U.S. to serve as a locomotive for global growth has slipped because of weaker trade and commodity linkages, according to Reis.

Having run a current account deficit of about 7 percent of gross domestic product before the financial crisis, the U.S. is now less a source of global final demand, Reis wrote in an Aug. 2 report. There are signs of strength in other nations, with consumption composing a rising share of Asian trade.

The Americans are also likely changing the focus of their economy, with residential investment likely to grow 18 percent in 2014 compared with a 2.5 percent increase in consumption.

The impact the U.S. has on commodity markets has also moderated, with Asia and the Middle East set to provide the bulk of oil consumption in coming years. The oil boom in the U.S. also narrowed the nation’s energy deficit.

Still, it continues to loom large in financial markets, with U.S. assets accounting for almost half of Bank of America’s global liquidity measure. A risk is that a withdrawal of monetary stimulus may have a spillover effect elsewhere.

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Immigration may help offset the risks of aging populations in advanced countries by bringing in young workers who tend to be active in the labor force.

So say Citigroup Inc. economists Nathan Sheets and Robert A. Sockin in an Aug. 5 report, which concludes filling the void of retired workers with foreigners is feasible and desirable.

They estimate about one-third of the economic growth of the U.S., euro-area and U.K. in the past decade can be attributed to immigration. More rapid immigrant inflows in coming decades will mean a similar boost, Sheets and Sockin said.

“The key point is that immigrants are disproportionately of working age and, accordingly, are very active in the labor force,” the economists said. “This seems to be exactly what the advanced economies are likely to need in the decades ahead.”

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