Tagged: Carney

Hands up if you’re not easing, Part… oh I’ve lost count

Sweden’s Riksbank have joined the easing party, announcing yesterday that not only have they cut interest rates into negative territory, to -0.10%, but also that they would indulge in a spot of QE. They left the door open to further rate cuts, and further QE – even at “short notice”(i.e. intra-meeting). The krona duly fell 2% against the dollar, equities hit a new high, and 10yr bond yields fell almost 10bps. So far, so what, you might say. We know this story now: “Deflation gripping the world, particularly Europe – hit that printing button!”. A 2% move in the SEK is not out of the ordinary, so it would seem the market is indeed becoming inured to all of this easing.

Let’s just take a step back for a second though. Sweden buying government bonds – is this the same Sweden that has a debt to GDP ratio of just under 40%, one of the lowest in Europe? The country where house prices barely dipped during the crisis and are now at record levels? (See chart below from the excellent interactive house price tool on the Economist website)

House prices


To be fair to the Riksbank, their lurch into QE is thus far only small – at 10bn SEK for a government bond market that’s about 1 trn in size, they’re not exactly “doing a Draghi”. Not yet, anyway. They did say they were looking into a Funding for Lending scheme, and lending 100bn SEK to banks over a four year period. So their intention to signal easing of policy is clear.

So the question remains, why did they do it? It’s that old chestnut, inflation again. Slightly strangely, the Riksbank barely altered their inflation forecasts:

Riksbank forecasts


But the fact is that inflation has been stubbornly below their 2% target for some time. Ever since the financial crisis, in fact, when core inflation spiked above 2% but has been declining ever since:

Sweden CPI


The difference between Sweden and the Eurozone is that in April 2010 the Riksbank began hiking rates, taking them up to 2% by the middle of the next year. Now, almost four years later, they still face a deflationary threat. They’ve been roundly criticised for hiking back then, and failing to cut quickly enough ever since. Will the criticism keep their pedal to the metal? Are they doomed to be forever fighting the last war?

This is relevant for the ongoing round of central bank easing because it could mean that they are cutting at the wrong part of the cycle. That would mean even more stimulus going into economies where it will ultimately feed through at the point when it’s least needed.

This is why the Fed’s recent work on the relevance of monetary policy lags is so important. Spot inflation is lower because of the collapse in the oil price, but as the BIS pointed out, the speed and depth of the decline is likely to be driven by financial liquidity rather than supply/demand fundamentals. Once that stabilises, so will inflation, and over time, given base effects, the hit to inflation will prove temporary.

Mark Carney seems to have been reading from the same manual as the Fed, with his opening remarks at the BOE Inflation (or should that be Deflation??) Report yesterday:

‘the effects of these large, one-off falls in prices [from commodity prices are] likely to dissipate in around a year, we will look through them.’

Central banks should be forward looking, and the most important part of the Inflation Report was not the incredulous headlines about the UK entering deflation, but the fact that the BOE now see the output gap at only 0.5%, down from the 1% estimate just three months ago. So half of the output gap is estimated to have closed in that period! Wages are going up, with the BOE forecast for unit labour costs up 0.5% pt in 2016 and 2017.

The point is – spot inflation may be lower, but you can’t ignore improving developments in the labour market. This is very reminiscent of Yellen’s December Fed statement, and we wait to see if she will reiterate this in her semi-annual testimony on February 24th. We may get a hint with the release of the January Fed Minutes next Thursday. When it comes to market pricing, the first Fed hike is priced by September of this year, while the BOE first hike is now around April of next year. The truth of the matter is that both may go somewhere in the middle of that period – enough time for the base effects from oil to fall out of the inflation data, and enough time for a tightening labour market to show signs of wage increases. Maybe don’t book a long Christmas holiday for 2015 just yet….you might miss all the action in December!

Rates on hold forever

And so the worm has turned… even the hawks at the BOE have thrown in the towel with the “risk of low inflation becoming more persistent”, leading to a unanimous 9-0 vote to do nothing with interest rates. These minutes were all about inflation, and nothing else, whereas previously the Minutes have been devoted to trying to understand how much slack was in the labour market. The hawks shifted their vote because although they still think this fall in inflation could be a blip, and wages are indeed going up, they were worried that a rate hike might tip the balance for inflation back down again.

Is it any wonder that the market is spooked by lower inflation, when the central bankers clearly are?

Watch out this afternoon for the Bank of Canada – core inflation is running near target but of course the economy will be severely impacted by the oil price fall. If they switch to an easing bias, then the Canadian dollar will get beaten up even further, and expect other petro-currencies like the NOK to follow suit.

In the midst of what appears to be a central bank panic about the ghost of deflation, will the Fed stay firm? If so, then the dollar is going to the moon….

—– Key sections of the BOE Minutes below ——

There was some concern about the recent pace of decline in all measures of inflation expectations, in the United Kingdom and internationally, especially as there could be more downside news on inflation to be digested.

Inflation is going to zero soon: CPI inflation was expected by Bank staff to reach a trough of around zero in March, as lower oil prices fed through to petrol

In addition to lower utility bills, food prices, oil, and GBP strength, Bank staff’s central estimate was that around ½ percentage point of the deviation of inflation from the target reflected the weakness of domestic cost growth, a key element of which was wages.

It’s all about the risk to wages Inflation had fallen globally and was expected to reach its trough in the United Kingdom in the early part of the year when a large proportion of pay claims were settled. It was therefore possible that the pace of nominal wage growth would be weaker than otherwise and that this would feed into lower subsequent price inflation. In addition, the continued decline in oil prices was likely to contribute to a reduction in capital investment in the UK oil industry. Alongside these developments, it appeared that downside risks to the euro area had increased. Together, these factors could result in inflation persisting below the target for longer than previously expected

BUT there are 3 positives from the lower oil price:

First, the Committee judged that the lower oil price would, if sustained, act as a stimulus to growth in the United Kingdom and its main trading partners via its effect on the costs of production and real incomes. One early manifestation of this was that nominal incomes were likely to have been growing at a significantly faster rate than consumer prices in the second half of 2014. Second, market interest rates had fallen sharply and were already passing through to lower fixed rate mortgages. Demand would be stimulated further were Bank Rate to follow the path implied by market yields, although inflation
expectations had also fallen so the effect on real interest rates was smaller. Third, the early signs of a pickup in private sector average weekly earnings growth tentatively suggested that slack was either lower or being absorbed more quickly than previously thought.

And the hawks switched their vote because they got scared:

For the two members who had voted in the previous month for an increase in Bank Rate, the decision this month was finely balanced. They believed that the sharp fall in inflation to below the 2% target was probably driven largely by temporary factors and was unlikely materially to affect the behaviour of households and businesses in such a way that it became self-perpetuating. They also noted the most recent evidence that wage growth was more buoyant than they had expected. Nevertheless they noted the risk that low inflation might persist for longer than the temporary factors implied and concluded that this risk would be increased by an increase in Bank Rate at the current juncture.



The Day Today 15 Jan 2015

* India unexpectedly cuts 25bp to 7.75% due to lower inflation, the stock market and the rupee rally

* S Korea cuts its GDP and inflation forecasts by 0.5 pct pts

* Fed Beige Book shows signs of wages increasing

* You know this story by now: Yields on Finland 5yr yield Swiss 7yr turn negative

* Finland emerges as the big protestor against Greece bailout deal

* Carney points out that the Scottish referendum result was a good one given the oil price slide: “It is a negative shock to the Scottish economy, but it is a negative shock substantially mitigated by the fiscal arrangements in the UK,”

* Catalonia to hold early election on Sept 27

* Russia to use reserves from its $88bn reserve fund to defend the rouble

* McKinsey sees declining global population hitting GDP growth by 40% over the next 50 years

* For the first time more new businesses in America are dying than are being created

* Chinese yuan in the top 5 traded currencies last year, says EBS

* Positive correlation between the dollar and the S&P is at its highest since 2003 – it used to be negative, will it switch back again? ask BAML


The Day Today 26 Nov 2014

* Talks between Saudi Arabia, Venezuela, Russia and Mexico end in stalemate, agreeing only that prices below $80 were “not good” and vowing to meet again in 3 months’ time. Let’s see whether OPEC can thrash anything out today
* Nigeria devalues currency by 10% and raises rates to record levels as oil prices drop

* Merkel hits diplomatic dead-end with (fluent German speaker) Putin
* France suspends delivery of Mistral warship to Russia

* Bundesbank now joins the ranks saying corporate debt is overpriced

* US new mortgage lending hits 13year low, NY Fed

* BOE next move is going to be a hike, says Carney

* More scorn heaped upon Juncker’s “subprime gimmick” investment fund

* RBA’s Lowe says AUD should fall in line with commodity prices [just keep banging that drum eh]

The Day Today 21 Oct 2014

* Growth slows to lowest level since Q1 2009 at 7.3%
* Retail Sales and Fixed Asset Invmt also slowed

* Misery widespread at all types of hedge fund: ‘Top firms including Jana Partners LLC, Discovery Capital Management LLC and Paulson & Co. have posted losses ranging from 5% to 11% for the month, according to investors.’ Losses stemmed from decisions on Fannie Mae, the collapse of the Abbvie/Shire deal, as well as disappointing Chinese and European growth

Views from Robin Hood Conference:
* Paul Tudor Jones (-0.9% year to Oct 10th) :
– US equities will outperform other equity markets for rest of the year
– USD rally is probably over
– Still short JPY because of BOJ easing; 15% JPY decline = 1% rise in CPI
– Credit bubble will burst
– US is headed towards Greek levels of debt
* Einhorn :
– Long renewable energy companies
– Owns warrants on Greek bank stocks
– Betting on declines in French sovereign debt

* Explanations for last week’s move in US 10yr Tsys: computers, excess of futures orders, or regulation?

* Turn to ETFs when there’s no liquidity: high turnover in junk bond ETFs during periods of market stress such as last week, say Fitch

* ECB starts buying covered bonds of Spain, Germany and France, of 1-6yr maturity

* Germany risks recession, in Bundesbank’s bleak outlook

* Carney launches review after CHAPS payment system goes down for more than nine hours

* ‘Australia’s central bank repeated that the nation’s currency is still too strong to help rebalance the economy and discussed the need for banks to maintain high lending standards’