We have spent a lot of time talking about the unintended consequences of accommodative global central banking policies. Skyrocketing pension liabilities and the numerous corresponding reach for yield/duration trades, which have resulted in several of their own off-shooting market bubbles (in fact we just wrote about how one of the bubbles is bursting just yesterday “P2P Meltdown Continues: LoanDepot’s CDO Collapses Just 10 Months After Issuance”), is just one of the many unintended consequences.
But, as Deutsche Bank’s European equity strategist, Sebastian Raedler, points out today, even if central banks wanted to steepen the yield curve they likely can’t. Raedler disputes the common explanation that low bond yields are due to discretionary central bank policies and argues instead that the recent fall in bond yields has been due to sustained weak global growth. This suggests low bond yields are not principally due to discretionary central bank policies (which could be reversed at will), but to the weakened global growth picture, to which central banks have only responded by making policy more accommodative. Of course, if Raedler is correct, the question then becomes why continue with accommodative policies if they’re not driving incremental economic growth but clearly creating detrimental asset bubbles?
Raedler argues that global bond yields have fallen with central banking target rates but both have really just followed slowing global economic growth.
Israel kept its benchmark interest rate on hold in October but gave a healthy upgrade to its annual GDP forecast for this year.
Policymakers at the Israeli central bank cited muted August inflation and encouraging indicators for its decision to keep its main policy rate at 0.1 per cent in October – it has been at that level since February 2015.
Along with the decision, the Bank said it now expects economic growth to accelerate to 2.8 per cent this year, from an earlier forecast of 2.4 per cent and 3.1 per cent in 2017 from 2.8 per cent.
The central bank thinks inflation will average just 1 per cent annually next year, within its 1-3 per cent target range. Consumer prices will be pushed up by the recovery in global commodity prices and as the economy reaches full employment, said the BoI.
The forecast cited political risks as the biggest threats to the moderate global economy recovery, citing the “added uncertainty in recent months due to the UK decision to leave the European Union”:
This uncertainty concerns both the measures to be taken by the UK and the EU as part of the Brexit process and the expected implications of those measures.
IMF economists noted in their July survey that in view of the Brexit decision, there is greater likelihood of lower scenarios in relation to their base forecast for the global economy.
The Hungarian central bank capped the amount commercial banks can keep at its 3-month deposit facility.
S&P upgraded Hungary from BB+ to BBB- with stable outlook.
Bank of Israel will move to 8 meetings per year starting in 2017, down from 12 currently.
S&P raise the outlook on Russia’s BB+ rating from negative to stable.
The South African Reserve Bank signaled a potential end of the tightening cycle.
In the EM equity space as measured by MSCI, Brazil (+5.5%), Turkey (+5.0%), and Peru (+4.9%) have outperformed this week, while Qatar (-0.6%), Hungary (flat), and South Africa (+0.3%) have underperformed. To put this in better context, MSCI EM rose 3.6% this week while MSCI DM rose 2.1%.
In the EM local currency bond space, Brazil (10-year yield -36 bp), Turkey (-26 bp), and Hungary (-17 bp) have outperformed this week, while Ukraine (10-year yield +9 bp), Mexico (+2 bp), and China (flat) have underperformed. To put this in better context, the 10-year UST yield fell 7 bp this week to 1.62%.
In the EM FX space, ZAR (+3.5% vs. USD), RUB (+2.3% vs. USD), and CLP (+2.1% vs. USD) have outperformed this week, while MXN (-0.6% vs. USD), PHP (-0.4% vs. USD), and CNH (-0.4% vs. USD) have underperformed.
The Hungarian central bank capped the amount commercial banks can keep at its 3-month deposit facility. Those deposits stand at HUF1.6 trln today, and the central bank said it would lower that amount to HUF900 bln by year-end. This unconventional policy is akin to monetary easing, as it pushes funds out of its deposit facility and into government bonds and the interbank market. The end result should be lower government borrowing cost, lower lending rates, and a weaker forint.
Norway has kept its interest rates changed this month, remaining the only major Nordic central bank not to move into negative interest rate territory.
The Norges Bank opted to keep its main deposit rate on hold at 0.5 per cent, in line with analyst forecasts ahead of the decision. It comes despite the central bank saying earlier in the summer that it would likely reduce interest rates barring any major economic shock.
“Our current assessment of the outlook suggests that the key policy rate will most likely remain at today’s level in the period ahead,” said central bank governor Øystein Olsen.
In a statement on Thursday, the central bank said despite inflation running higher in recent months, “there are signs that growth in the Norwegian economy is picking up at a slightly faster pace than projected in June”.
Policymakers added that the next move would likely be down rather than up, leaving the door open to sub-zero rates:
The yield on the 10-year Japanese government bond briefly rose above zero Wednesday for the first time since March after the Bank of Japan said it would introduce a 10-year interest-rate target, part of a new policy framework aimed at stoking inflation.
In its latest monetary-policy assessment, the BOJ said it would aim to keep the 10-year rate around zero. It also said would keep its annual bond-buying target unchanged at 80 trillion yen ($785 billion) and left its deposit rate unchanged at -0.1%.
Japanese stocks rose after the decision, led by shares in major banks, whose profit margins should benefit from higher long-term rates. The yen was down after the announcement.
The dollar was recently at Y102.50 after falling ahead of the BOJ decision to as low as Y101.00, the lowest since Sept. 7, according to EBS. That compared with the dollar at Y101.72 late Tuesday in New York. The dollar has fallen 15% against the yen so far this year.
Stocks moved slightly higher Tuesday ahead of Wednesday’s interest rate decision from the Federal Reserve.
The Nasdaq rose 0.1%, while the Dow Jones industrial average and the S&P 500 climbed by lesser amounts, the broad S&P 500 ending just fractionally positive.
With the Fed’s two-day meeting underway, Wall Street’s focus is on the Fed and its chairperson Janet Yellen. The question is whether the U.S. central bank, which has held off on interest rate increases this year, will stand pat again or surprise markets and increase borrowing costs. Low interest rates from the Fed are designed to boost growth, bolster employment and provide a lift to risk assets, like stocks.
A rate hike tomorrow, however, is not expected by Wall Street, although investors expect the Fed to signal that one rate hike is still on the table for 2016. Futures markets are pricing in just a 15% probability that the Fed will hike rates Wednesday, according to CME Group, although the market is pricing in 50%-plus odds of a rate increase at the Fed’s December meeting.
Investors are also gearing up for a meeting of the Bank of Japan Wednesday. The BoJ is still struggling to jump start growth and boost inflation in Japan. Investors are split on what the BoJ’s next move will be, as they debate whether the BoJ will cut short-term rates, currently at -0.1%, further into negative territory. Investors will also watch to see if the BoJ boosts or tweaks its asset-purchase program or announces any fresh ideas to stimulate the economy.
Amid strong speculation the Bank of Japan will further loosen credit at Wednesday’s monetary policy meeting, a former board member cautioned further stimulus may send the wrong message to the market.
Speaking at a web seminar in Tokyo, Keio University professor Sayuri Shirai on Tuesday warned the flexible bond-buying target that many market participants expect the BOJ to adopt will be confusing. Shirai was a member of the BOJ policy board until March.
The central bank’s annual bond-buying target is set at 80 trillion yen ($786 billion) per year. Many economists and market players believe the BOJ broaden the target range to 70 trillion yen 90 trillion yen. Shirai stressed the buying target “should not be ambiguous” because it “is an indicator that shows the BOJ’s stance toward monetary easing.
“A target that stretches [above and below the present target] is not appropriate as an indicator of monetary policy.” If such a target is introduced, the market will be confused as to whether the BOJ is taking a more accommodative policy a or tighter one, which could contribute to market volatility, she said.