With Yellen hell-bent on tightening into Trump’s fiscal stimulus, and inflationary impulses popping up all around the world, ECB president Mario Draghi better note some serious downside looming (after leaving rates/taper unchanged) that opens the door to his un-tapering or the stagflationary pressures building everywhere willcome back to bite his precious asset prices.
As we noted earlier, with the market not expecting any changes from the ECB this morning, so far that is precisely what it got, when moments ago the ECB announced that it kept all of its rates unchanged as expected, keeping the rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility at 0.00%, 0.25% and -0.40%, respectively.
In additional language relating to non-standard measures, the ECB also said that “it will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017 and that, from April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary” and “in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.“
It also said that “the net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP” and cautioned that “if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.”
In other words, it may move QE up or down, depending on what happens with inflation, in line with the ECB’s December announcement.
With Trump’s border tax adjustment looking increasingly likely, the stock market – as JPM has warned in recent days – is starting to fade the relentless Trumponomic, hope-driven rally since election day instead focusing on the details inside the president-elect’s proposed plans. And, as explained earlier in the week, if the border tax proposal is implemented, economists at Deutsche Bank estimate the tax could send inflation far above the Federal Reserve’s 2% target and drive a 15% surge in the dollar.
While this would be bad for stocks, as a 5% increase in the dollar translates into about a 3% negative earnings revision for the S&P 500 all else equal, a surge in inflation would also wreak havoc on bond prices, and send interest rates surging, at least initially, before they subsquently plunge as a result of a rapidly tightening, deep “behind the curve” Fed unleashes a curve inversion and recessionary stagflation becomes the bogeyman du jour.
The Bank of Japan revised its economic outlook for the first time in 19 months during the two-day policy meeting that ended Tuesday. But that is apparently the only step the central bank is taking at this time.
“The headwinds seen in the first half of this year have ceased,” BOJ Gov. Haruhiko Kuroda told reporters following the meeting. Markets were riled by heightened concerns directed at emerging economies at the beginning of 2016, only to be shocked in June by Britain’s referendum to exit the European Union. The BOJ was forced to loosen its policy in July, raising its target for exchange-traded fund purchases.
During the second half of 2016, the economic landscape has slowly brightened, beginning with U.S. readings. The Japanese economy has followed suit with increased exports and production. Consumption also recovered from a slump caused by a soft stock market and inclement weather at the beginning of the year.
“Japan’s economy has continued its moderate recovery trend,” the BOJ said in a statement published after the meeting. The central bank had previously qualified that view by highlighting sluggish exports and production.
he driving catalyst behind the furious market rally since the presidential election has been the market’s hope that Trump will unleash a “huge”, still undetermined, debt-funded financial stimulus package, which will grease the volatile handover from monetary to fiscal policy, boosting inflation and rerating risk assets higher. Indeed, the market was so transfixed by this hope, that it has so far ignored all warning signs, duly noted previously on this website.
As we first demonstrated, there was a massive $12 trillion debt difference between the plan that Trump espoused, which envisioned a $5 trillion cumulative increase in debt…
Debt Under Central Estimate of Candidates’ Proposals (Percent of GDP)
… compared to the budget blueprint approved by the house earlier this year, which in turn seeks to reduce the deficit versus current projections by $7 trillion over the next ten years, mainly through spending cuts: the result is a $12 trillion “hole” between the Trump and the House budgets.
Details of the December 2016 ECB governing council meeting 8 December 2016
Main refi rate 0.0%
Dep rate -0.4%
Marginal lending facility 0.25%
QE kept at €80bn until April 2017 then will continue at €60bn until the end of Dec 2017, or beyond if necessary
Will comment further at the presser
Monetary Policy Decisions
8 December 2016
At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.
Chief Credit Strategist Charles Himmelberg says 2017 will be “High growth, higher risk, slightly higher returns”
Slightly higher returns relative to 2016. “Best improvement in the opportunity in global equities is in Asia ex-Japan.”
Fiscal stimulus in the U.S. will help reflate the economy
No imminent trade war on the horizon, any re-negotiation of agreements currently in place (like NAFTA) to focus on attempts to improve the prospects for the U.S. manufacturing
The Emerging Markets risk ‘Trump tantrum’ is temporary
Forecasts ($/CNY at 7.30 in 12 months) a depreciation for yuan well beyond forward market pricing
Monetary policy will increasingly focus on credit creation
2017 will confirm that the U.S. corporate sector has emerged from its recent ‘revenue recession’
Forecasting large boosts to public spending in Japan, China, the U.S., and Europe, which should fuel inflationary pressures in those economies
Commodity-sensitive segments of the credit market have suffered pain in 2016, there hasn’t been much in the way of contagion… expect more of the same in 2017, with the credit cycle not making a turn for the worse
Conditional on a large fiscal stimulus in 2017, the FOMC will be obliged to respond more aggressively to an easing of financial conditions, all else equal … cautions that it’s no sure bet that financial conditions will ease in the year ahead, noting the recent rise in bond yields and the U.S. dollar
Deutsche Bank strategist George Saravelos says to stop whining about globalisation
Its not irreversible
Globalization ebbs and flows over long cycles
And right now it is ebbing, and Trump’s election win will see an acceleration of this shift: “the peak and potential unwind of globalization.”
Saravelos writes in his note: “Deglobalization Is Here: What It Means for Global Macro:”
The weakness in global trade, the rise of anti-globalization politics and the decrease in capital mobility all point towards a reversal of the neo-liberal word order constructed since World War II. In this note we introduce a framework to think about the impact of de-globalization on global macro
First, we argue de-globalization will shrink international trade imbalances. Because these are mirror images of international capital flows, de-globalization should also shrink the pool of global savings. Surplus nations such as Germany and Japan will have to spend more while deficit nations such as the US will have to pay more to borrow, which means Treasury yields will rise
Sluggish economic growth and a shift to fiscal stimulus measures such as those proposed by Donald Trump are bad for global creditworthiness, Moody’s has warned, as it reported that the proportion of countries with a “negative” credit outlook has climbed to its highest level since 2012.
Some 26 per cent of countries rated by Moody’s now have a “negative” outlook, up from 17 per cent at the end of last year.
In its annual Global Sovereign Outlook report, the ratings agency said the global outlook for sovereign ratings for the next 12 to 18 months is negative, blaming a combination of low growth, spending plans that will increase public debt, and “rising political and geopolitical risks”.
Sovereign bond prices have tumbled in the last week after Donald Trump’s victory in the US presidential election, as investors predict his proposals for a fiscal stimulus package will bring an increase in inflation and higher interest rates.
Moody’s said such plans can have a positive impact if they increase productivity growth, but added that government debt levels are already high around the world, and said “any increase in debt to finance current spending that has little lasting benefit to economic growth prospects would be negative”.
Goldman Sachs: The week ends with the October US employment report, which we expect to show that the US economy added 185kjobs last month, 4.9% on the unemployment rate and 0.3% on average hourly earnings.
BofA Merrill: We look for nonfarm payroll growth of 170,000 in October, in line with the recent 6- month trend and up from 156,000 in September. We expect private payroll growth to have constituted 165,000 of this gain with a modest 5,000 gain in government payrolls. Our equity analysts have only seen mixed signals related to holiday hiring so far, but there have been some news reports of stronger seasonal hiring, presenting upside risk to our forecast. The underlying rate of job growth should remain robust based on our forecast for October and especially given the possibility of an upward revision to September jobs. As we argued in Nonfarm payrolls myths and realities, there tends to be a pattern of upward revisions to September in the order of about 30,000 jobs. We expect the unemployment rate to remain unchanged at 5.0% with the labor force participation rate holding at 62.9%. The labor force participation rate will be an important indicator to watch given the 0.1pp increase last month. We expect a trend-like 0.2% mom gain in average hourly earnings, leaving the year-over-year rate to fall to 2.5% from 2.6%, and we think average weekly hours will remain unchanged at 34.4.
Barclays: we look for nonfarm payrolls to rise by 175k. We expect 165k of these gains to come from the private sector – in particular, service-providing employers – with government payrolls adding the remaining 10k. Elsewhere in the report, we expect the unemployment rate to decline by one-tenth, to 4.9%, average hourly earnings to rise by 0.3% m/m and 2.6% y/y, and the average workweek to remain unchanged at 34.4 hours. On balance, overall job growth of 175k would confirm ongoing strength in the labor market. The increase in payrolls, combined with the ongoing improvement in wages, should boost household income and keep consumption on track. We also believe at these numbers employment growth is sufficient to keep the Fed on track for a December rate hike.