Central Banks Are In Sync On Need For Fresh Stimulus (#GotBitcoin?)
It is unclear whether fine-tuning rates will be enough to revive decade-old expansions. Central Banks Are In Sync On Need For Fresh Stimulus (#GotBitcoin?)
Central banks world-wide are poised to unleash some of the most aggressive monetary stimulus since the financial crisis a decade ago.
But the circumstances are different now, with policies aimed more at breathing life into decade-old expansions rather than at averting an economic collapse. And it is unclear whether the central bankers’ depleted tools will be adequate.
“We see the economy as being in a good place and we’re committed to using our tools to keep it there,” Federal Reserve Chairman Jerome Powell told Congress July 10, indicating the U.S. central bank is ready to cut interest rates later this month.
The European Central Bank also sent a clear easing signal in the minutes of its June meeting, which said there was broad agreement among officials that they “needed to be ready and prepared” to reduce rates and resume asset purchases to provide more stimulus.
Already some central banks in the Asia-Pacific region have lowered rates this year, including Australia—which has cut rates twice to 1%—New Zealand, India, Malaysia and the Philippines. Central banks in Korea and Indonesia reduced rates last week, as did South Africa’s.
“The uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside,” Philip Lowe, Australia’s central bank governor, said on July 2.
Mr. Powell and other Fed officials have noted the decadelong U.S. expansion remains solid but faces risks from slowing global growth and trade-policy uncertainty. Minutes of their June meeting pointed to signs of economic cooling, including weak shipments and orders of new capital goods, lower profit-growth forecasts from private-sector analysts, declines in manufacturing activity and soft U.S. export sales. A rate cut would be an attempt to prevent the outlook from worsening.
“What central banks are trying to do is get ahead of the curve. We have not seen a substantial deterioration in the economy,” said Neil Shearing, chief economist at consulting firm Capital Economics.
But there are risks to this strategy. With policy rates already low in the U.S. and below zero in Japan and much of Europe, fresh stimulus could fuel destabilizing bubbles in housing and other assets. Negative rates hurt banks in Europe by forcing them to pay central banks to store surplus funds. And if recessions do hit, central banks would find themselves with less ammunition to support their economies.
It is also unclear how much more stimulus can be squeezed out of such policies. Dallas Fed President Robert Kaplan said in an interview last week that for all the concerns businesses are raising about the policy environment, “cost and availability of capital is not one of them.”
And central banks have little influence over the uncertainties stemming from the U.K.’s planned departure from the European Union and the U.S.-China trade dispute.
“Although central banks are certainly worried about trade wars, hard Brexit, etc., what really concerns them is lack of firepower,” said Kenneth Rogoff, an economics professor at Harvard University. “There is a strong easing bias given that the last thing any central bank wants to do is create a recession that they might not have the tools to adequately handle.”
Another change from a decade ago is the lineup of top central bankers making the decisions. Mr. Powell has spent most of his 18 months as Fed chief unwinding the crisis- and recession-era stimulus measures of former Fed Chairman Ben Bernanke. International Monetary Fund Managing Director Christine Lagarde, who is poised to succeed ECB President Mario Draghi in November, will inherit any easing policies he launches before departing.
For now, fine-tuning rates may be enough. The global economy is slowing but doesn’t appear to be near a recession or destabilizing crisis, and unemployment is quite low in most developed economies. Inflation has weakened below the 2% target that most large central banks consider optimal but the danger of outright price declines, known as deflation, appears remote.
Fed officials have signaled they are ready to lower their policy rate this month by a quarter percentage point from its current range between 2.25% and 2.5%, while indicating the potential for additional reductions. It would be the Fed’s first rate cut since 2008.
Analysts expect the ECB to reduce its already negative policy rate by its September meeting, and they don’t rule out a cut before then in light of data indicating Germany’s economy, the largest in the eurozone, possibly contracted in the second quarter. It could also restart bond purchases after ending them last December.
“Central banks are doing their best to deal with the bad hand that they have been dealt,” Claudio Borio, chief economist at the Bank for International Settlements, a Switzerland-based consortium of central banks, said in a recent interview.
“The room for further action is still there. It hasn’t been exhausted by any means, but of course the longer you proceed along this path, the narrower the path will get,” he said.
ECB Signals Rate Cut, Possible Stimulus Relaunch (#GotBitcoin?)
Central bank is examining a return to asset purchases, a major policy shift.
The European Central Bank signaled Thursday that it is preparing to cut short-term interest rates for the first time since 2016 and restart a giant bond-buying program, in a significant policy shift that aims to insulate the wobbling eurozone economy from global headwinds ranging from trade tensions to Brexit.
The move underscores the ECB’s activism under its departing President Mario Draghi, whose aggressive stimulus policies recently caught the attention of President Trump. Mr. Trump attacked Mr. Draghi in a series of tweets last month, complaining that the Italian official had weakened the euro at the expense of U.S. firms, but later suggested he might like to hire Mr. Draghi for the Federal Reserve.
The ECB’s decisions over the coming weeks will be felt long after Mr. Draghi steps down in October.
While it stopped short of immediate action, the ECB’s clear signal of intent raises the pressure on other major central banks, including the Fed, to follow suit with interest-rate cuts. The Fed is widely expected to lower interest rates for the first time in over a decade when it meets next week.
In a statement, the ECB said it was “determined to act” to prop up inflation rates that have persistently undershot the central bank’s target of just below 2%. It said it was expecting to keep its key interest rate at minus 0.4% or lower through the first half of 2020.
The economic outlook “is getting worse and worse,” especially in manufacturing, Mr. Draghi said at a press conference on Thursday. “Basically we don’t like what we see on the inflation front.” The ECB aims to keep inflation just below 2% but it has missed that target for years, and the economic slowdown puts it further out of reach.
The ECB said it had asked staff committees to examine policy options including the possible design of a new bond-buying program. It has previously used such language to signal that fresh action is imminent.
The ECB’s next policy meeting is on Sept. 12. “It now increasingly looks as if the September meeting will not only bring a single measure but rather a package of several measures,” analysts at ING Bank said.
Investors initially cheered the news, sending bond prices up and some yields to fresh lows, while also lifting European bank stocks and selling the euro. But those moves all reversed as it became clear that Mr. Draghi would present no details of the stimulus package for now.
Germany’s 10-year government bond yield hit a record low of minus 0.461% but later rose again as some investors sold bonds, settling at minus 0.406% in the afternoon. Similarly, the euro also fell to its lowest level in more than two years, but bounced back to be up 0.24% on the day at $1.117.
Major central banks, from Asia to Europe, have signaled a return to ultralow interest rates in recent months amid mounting threats in the global economy. Central bankers are eager to act early to safeguard the long economic expansion because they appear to have limited policy space to counteract any recession with interest rates already low.
The eurozone economy is still expanding and its inflation rate is above 1%, not far from the ECB’s target. That is a marked change from the ECB’s last major round of stimulus in early 2016, when the currency union was flirting with deflation, or a cycle of falling prices.
Still, economic indicators have started to flash red in recent months as the region’s export-focused firms emerged as victims of the trade tensions between the U.S. and China.
The ECB’s early signal could help to reassure investors that the central bank still has the firepower to cope with fresh turbulence.
A move in September would simplify the early part of the term of Mr. Draghi’s likely successor, International Monetary Fund Managing Director Christine Lagarde, by not confronting her with immediate decision about how to handle Europe’s slowdown. A former lawyer and French finance minister, Ms. Lagarde has no experience in central banking, although Mr. Draghi called her an outstanding choice on Thursday, pointing to her work at the IMF.
But it also raises legal and practical questions about how much more the ECB can accomplish with its current toolbox. The bank’s key interest rate is already below zero and its balance sheet has swollen to around 40% of eurozone economic output, double that of the Federal Reserve.
“The ECB is still very optimistic and positive about the results delivered by negative interest rates and asset purchases. I’m more skeptical in this respect,” Juergen Stark, the ECB’s former chief economist, said in a recent interview.
A 0.1 percentage point interest-rate cut, which is being priced in by investors, “is nothing, there will be no impact,” Mr. Stark said. Meanwhile, a fresh round of bond purchases “will continue disturbing markets, and prices do not reflect the risk anymore,” he said.
The ECB phased out its controversial €2.6 trillion bond-buying program, known as quantitative easing or QE, in December, amid signs that the region’s economy was strengthening. To restart the program, the ECB would likely need to alter self-imposed rules that prohibit the bank from buying more than 33% of any individual government’s debt.
Doing so would likely trigger fresh legal concerns in Germany, whose top court is still assessing lawsuits that challenge the legality of QE. A hearing in the case is scheduled for next week.
In an ominous signal, Mr. Draghi indicated that some ECB officials had opposed parts of the bank’s policy statement on Thursday. German central-bank President Jens Weidmann has been an outspoken critic of the ECB’s bond purchases, although he has softened his tone in recent months.
Critics argue that the ECB’s easy-money policies hurt the region’s economy over time, including by keeping unproductive “zombie” companies alive, which weighs on the region’s growth prospects.
“All this is not thought through, [it is] just to be activist and show we are not at the end of our toolbox,” Mr. Stark said.
Investors In Europe Pin Hopes On Government Stimulus
Increased state spending could give Europe’s sluggish growth rate a boost, though some investors remain skeptical that debt-wary governments will follow through.
Signs that European governments may loosen their purse strings are giving investors hope that regional stocks, which had a banner 2019, could drive higher again this year.
European stocks posted their best performance in a decade last year. While there has been some pullback in recent days following the U.S. killing of a top Iranian general, they remain near all-time highs. That performance came despite sluggish economic growth.
Getting stocks to propel higher however, may require faster growth. Some see that slug of faster economic activity coming from a possible government ramp up in stimulus spending.
“Whichever way you slice it, there is a much greater burden on governments to do more” said Anik Sen, global head of equities at PineBridge Investments.
PineBridge’s multiasset portfolio has been snapping up housing and infrastructure stocks in the U.K., where freshly elected Prime Minister Boris Johnson has put the country ahead of other European governments with augmented spending ambitions on things like railways, roads and hospitals.
During the European sovereign-debt crisis in the early part of the last decade, governments in the region adopted austerity budgets to rein in spending and calm bond markets. Many investors now say such frugality has been counterproductive, limiting the pace of recovery, and are advocating for a new slug of state-driven growth. European Union rules require governments to keep budget deficits below 3% of gross domestic product.
Some analysts point to the U.S., where the fiscal deficit for the past two years has been about 7% of GDP. Investors say tax cuts and ramped up military and health care spending has fed through to higher corporate profits, helping to fuel the stock market rally.
A factor driving the conversation about big spending in Europe is fear that the European Central Bank is running low on ammunition, after it plunged interest rates deeper into negative territory with only a modest boost in growth. The bank’s new president Christine Lagarde called on governments in the eurozone to increase spending at her first public speech in November 2019.
Germany’s finance ministry has signaled limited support for more spending. Last summer, German officials said the government was working on proposals for a €50 billion ($55.7 billion) fiscal expansion should the country run into a prolonged economic downturn. On Wednesday, fresh figures showed Germany’s new industrial orders continued to slide, dropping by 1.3% month-on-month in November.
“The big litmus test over the next year is probably Germany. The question is whether or not they’re going to do it,” said James McCormick, global head of desk strategy at NatWest Markets. He is optimistic, expecting Germany will increase fiscal spending by 0.8% of gross domestic product in 2020. The frugally minded country has run a budget surplus in recent years, despite calls by others in Europe for it to spend more to lift the regional economy.
If Germany does deliver fiscal stimulus, Mr. McCormick expects to see the German 10-year bund yield rise out negative territory—where it has been since May 2019. He also expects the banking sector, which has remained depressed on weak global growth, rising just 8.2% in 2019, to benefit from faster growth.
Paul Flood, portfolio manager at Newton Investment Management, has been buying up wind and solar energy stocks in anticipation of broader European spending. Renewables now make up 12% of his multiasset income fund.
“The green economy is likely to be a key beneficiary,” he said, noting the rising popularity of the Green Party in Germany. The party could be a player in coalition talks in the next election, slated for 2021, though elections could come sooner given tensions in Chancellor Angela Merkel’s ruling alliance.
The U.K., which sits outside the eurozone and is set to leave the EU later this month, has been the most aggressive among major European economies about loosening the purse strings. Mr. Johnson has pledged to spend £80 billion ($105.4 billion) on infrastructure projects focused on the north of England.
Housing and infrastructure stocks have already surged. Cement maker Steppe Cement Ltd. shares have rallied 27.6% since Dec. 12. Shares in Ireland-based materials company CRH PLC have risen 16.4% since October.
Promises of increased spending in Europe have come and gone before, leaving some cautious. Neil Dwane, global strategist at Allianz Global Investors, is waiting for more indicators before changing investment strategy. “We’re simply fleshing out some of the scenarios,” he said.
James Athey, a senior investment manager at Aberdeen Standard Investments, isn’t holding his breath that Germany will increase spending.
“The word fiscal just gets thrown around with gay abandon,” he said. “I think the market is set to be disappointed in Europe.”