Monetary policy U-turn?

Monetary policy U-turn?

Shane Canavan Weekly bulletin March 2019
The start of 2019 has seen a stark U-turn in global monetary policy. Slowing global economic growth, geopolitical risks and market tantrums at talk of normalising monetary policy have resulted in central bankers reverting to dovish agendas. This is in stark contrast to the hawkish policies of late 2018 when the ECB announced the ending of its quantitative easing and the Fed defiantly delivered its fourth rate increase of the year.
Fresh stimulus

This week saw the ECB announcing a fresh stimulus for European banks only months after committing to reduce its balance sheet. The ECBs decision to launch a third round of TLTROs (Targeted longer-term refinancing operations) came as a surprise to the market causing the Euro to weaken and the five year swap rate to turn negative for the first time since April 2017. Despite being welcomed by the market there are questions around the programme’s effectiveness with evidence that banks are using such funds to hoard government debt rather than lend to the real economy.

Expectations for a rate increase have also been delayed until late 2019 at the earliest. This comes as the ECB was forced to ‘substantially’ downgrade its growth projections with Draghi claiming that the slowdown in international demand is compounding domestic risks, particularly in the manufacturing sector. GDP estimates are now at 1.1% for 2019, 1.6% for 2020 and 1.5% for 2021. As late as December the ECB was anticipating growth of 1.7% for this year. However, even the updated estimates may turn out to be too optimistic given their underlying assumption that global trade will rebound strongly over the second half of this year – something that is largely dependent on the specifics of US-China trade negotiations. As such there remains the possibility that the ECB will have to restart its quantitative easing program later this year.

Is the end in sight for the US-China trade war?

There are reasons to be optimistic that a US-China trade deal is close. A deal is overdue with mounting evidence that the dispute is adversely affecting both economies, as well as the wider global economy, with the OECD cutting growth forecasts for almost every large economy. In China, exports witnessed their largest YoY fall in three years causing February’s trade surplus to fall to an 11 month low. Mr Li, the Chinese prime minister, even went as far as to acknowledge the impact that trade tensions were having on companies by announcing a sizable corporate tax cut.

In the US Friday’s unemployment data provides yet more evidence that the US economy is slowing. The 20,000 reported jobs created are the weakest in 17 months and well below estimates of 180,000. This will add further weight to the Feds recent dovish tone. Yet, with unemployment at 3.8% and wage growth at its fastest pace since mid-2009 the Fed may not have the luxury of dragging their feet on further rate increases for too long.

Brexit continued…

Next week will see a number of key UK parliamentary votes on Brexit. On Tuesday Parliament will vote on Mrs May’s deal. Despite a softening tone from hard-line Brexiters and desperate pleas from cabinet ministers, it appears that the Government is heading for another defeat. Should this transpire, which is by no means certain, then Wednesday would see a vote on whether the UK would leave with no-deal. This is expected to be rejected by Parliament leading to a further vote on Thursday on whether or not to extend Brexit beyond the current deadline of 29th March. However, it is unclear what will be demanded/expected in return for such an extension. A vote accepting Mrs May’s deal or extending Article 50 will be welcomed by the markets with the pound likely to benefit. Either way one may naively hope that the end of the week would bring some welcomed clarity.

The parliamentary votes will overshadow the Chancellor’s Spring Statement on Wednesday, which is expected to be uneventful given the continued uncertainty surrounding Brexit. However, the Chancellor is likely to highlight that despite ongoing economic and political uncertainty the public finances are well positioned to support an end to austerity – just as long as a deal is secured. The Chancellor is not the only policy maker keen for a deal to be agreed. With wage inflation expected to exceed 3.00% this year, the Bank of England is also eager to address underlying economic pressures.

Looking to the week ahead, all eyes will be on the UK Parliament. However, Tuesday will see GDP figures released alongside sector specific data. GDP is expected to stay steady at 0.2%. In the Eurozone industrial production figures will be released on Wednesday and are forecast to show a welcomed reversal of December’s fall – although German data remains a concern.

For more information, please contact Shane Canavan, Director at JCRA, at shane.canavan@jcrauk.com.

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