We have long spoken of our thoughts on negative interest rate policy (NIRP), quite frankly we do not believe it is an effective strategy to avoid the deflationary spiral, or spur growth. Unfortunately for the likes of the BoJ and eurozone, there was very little ammunition left on the table to deploy. In Denmark, where negative rates were adopted almost four years ago, studies show that NIRP is counter-productive as the private sector for example is actually saving more than when rates were positive!
With roughly $10tn worth of negatively yielding government debt (14 major nations have at least one negatively yielding benchmark debt instrument), what amazes us is the investor appetite for such products. A study carried out by rating agency Fitch shows that investors are losing ~$24bn annually by holding such securities. In fact insurance companies, pensions funds and banks appear to be moving onto higher yielding alternatives, such as US Treasuries, in order to maintain profits or even plug their deficits. What is the result? Well this only then makes it harder for the US to raise rates.
NIRP did get a mention earlier this year when Fed Chair, Yellen told congress that the central bank was “taking a look” at NIRP. Her views since changed as the global backdrop recovered somewhat, so the Fed are now “not actively” considering it. Atlanta Fed President, Lockhart earlier this week stated that he does “not think negative interest rates are in the offing here in the United States anytime soon.” Global growth concerns seem to have reemerged this month as weaker data out of the US, considered as the driving force of global growth has dampened sentiment. As the market continues to push the probability of a Fed fund rate hike into the back-end of this year, with some market makers calling for May 2017, one has to wonder whether the Fed also have too few tools to unleash.
Yesterday saw the ADP employment change reading, a precursor for the highly anticipated change in non-farm payroll (NFP) disappoint; with only 156k jobs created in April, versus market expectations for a +195k. We look to the NFP release tomorrow for more clues on the US domestic front, where the market consensus is for +200k jobs.