A big day for central banks across the globe, kicked off with the Bank of Japan, which, as expected, held rates at -0.1% and maintained its policy on 10-year yield at 0%. The BoJ appeared to have changed its tune on the country’s economic outlook following the unleashing of PM Abe’s USD 120bn fiscal package; forecasting a sizeable impact from the stimulus. Central bank officials noted decreasing, but still significant overseas risks to the Japanese economy, adding that “active government spending” would support domestic demand. Having become the largest holder of ETFs across Japan, the BoJ unveiled its ETF lending program, first announced in April. Lending operations will be held “periodically” initially and then daily on request, once counterparts become familiar with the system. Our concerns for the country's economy remain as growth continues to show signs of slowing and inflation remains painfully low. However, we wait and see how effective the stimulus package will be, as it may provide the central bank a small margin of leeway.
Elsewhere, against a broader global easing bias, the Riksbank hiked rates by 25bps to 0% (deposit rates remain in negative territory); following half a decade of negative interest rates. Having been priced in across markets, the hike did not come as a shock, especially following November’s acceleration of CPIF towards the nation’s 2% inflation target. The central bank highlighted: “Inflation has been close to the Riksbank’s target of 2% since the start of 2017, and the Riksbank assesses that conditions are good for inflation to remain close to the target going forward”. Riksbank expects to hold the repo rate at zero “in the coming years”, and maintained its QE programme until the end of 2020.
Closer to home the UK’s retail sales figures for November disappointed. Moreover, market makers have raised their concerns over a no-deal Brexit next year and thus downside risks to growth. The BoE did not surprise with a cut today, despite two members pushing for an immediate cut. The chances of a cut in 2020 have become increasingly more likely. The central bank stated that monetary policy stimulus may be required if Brexit uncertainty remains entrenched, or global growth fails to stabilise. Of interest is the BoE’s request to the FCA to launch an investigation into the audio broadcast scandal, where traders were apparently given an unfair advantage on the BoE’s press conference due to high-speed live audio feed.
Across the pond Fed officials appear upbeat about the US economy with Chicago Fed Evans noting that the US’s economic outlook is good, adding that monetary policy is “at a good setting”, but inflation remains too low. Meanwhile, New York Fed President Williams reiterated that monetary policy is in a good place, and forecast US growth to be about 2% next year, unemployment will remain close to 3.5% and inflation will approach the Fed’s 2% target. Richmond Fed president Barkin said he will re-evaluate his stance on interest rates when for example Sino-US and USMCA trade deals resolve, thus boosting growth by reducing uncertainty. Of note, he said, “I think if you look at the numbers, you’d say we’re doing about as well as any Fed has ever done”. The central bank will likely remain on course despite the upcoming election and impending impeachment vote, to which markets appear unfazed. Bloomberg is pricing in the probability of one cut next year.
Over the past decade central banks have cut rates more than 50 times and deployed trillions of dollars’ worth of quantitative easing, the Fed, ECB and BoJ combined have printed close to USD 11tn worth of QE. Following the Global Financial Crisis and with lack of fiscal scope, central banks, particularly the Fed became key to economic and financial markets and their influence a decade later is widely accepted as the norm. At the turn of the decade, however, central banks appear to have little room to manoeuvre, with the G-7 nations now held at rates below 2% and QE fuelled countries are sitting on exorbitant balance sheets which could more than likely create financial imbalances. Having restarted expanding its balance sheet (not QE) the greatest concerns are that the Fed has little ammunition to defend against a recession, and the ECB and BoJ are barely able to deal with an economic shock. It is our belief that central banks will remain key drivers of financial markets going forward, and despite recessionary fears abating, will continue to face a huge challenge ahead in a low growth, benign inflation yet positive employment backdrop. The next phase, which we would like to refer to as the Sino-US “tech war”, may also create immeasurable downside risks.