The European Central Bank announced this morning that they were holding rates steady, meeting market and analyst expectations for their July meeting. The main refinancing rate remains at 0%, the deposit rate is steady at minus 0.4%, the marginal lending facility rate at 0.25% and the ECB held their Quantitative Easing position at a monthly €80 Billion. None of this came as a surprise to world markets which have thus far stabilized since the surprising Brexit vote in June.
Caution was the order of the day as the Central Bank adopted a "wait and see" attitude, postponing any decisions until their September 8th meeting. There's growing speculation that an increase in Quantitative Easing could be announced then, however in his post-announcement speech Mario Draghi stated, "We confirm that the monthly asset purchases of 80 billion euros are
intended to run until the end of March 2017, or beyond, if necessary,
and in any case until the Governing Council sees a sustained adjustment
in the path of inflation consistent with its inflation aim."
Haven't we heard that before? It sounds very similar to the tune sung by the US Federal Open Markets Committee throughout the final year of QE3 here in the States. Essentially, yes they have an end-date, yes there's a fixed amount planned into the process, but oh by the way, that end date will ultimately be data dependent based upon the prospects for normalized inflation, defined both in Europe and in the US as 2%. With the current rate of inflation in the Eurozone sitting at 0.1% following a year of deflation, that March 2017 target looks like a pipe-dream.
Draghi briefly addressed Brexit in his speech, saying "All we can say is that it is a risk that has materialized and it is a downside risk." This, too, is inline with the wait-and-see attitude that permeated the speech, and it's consistent with the approach being taken in the UK and US. With the pending start of UK separation delayed until some time in 2017, fears of immediate turmoil have abated and none of the Central Banks are eager to take any action that might upset the tentative stability world economies have experienced over the last 3 weeks. The word from all of them is that additional data is needed before any action (if action is warranted) can be considered.
With no major policy changes coming out of the ECB this month, the focus will now shift to Janet Yellen and the FOMC announcement on July 27th. As with the ECB, no policy changes are anticipated in the US either, although the robust reaction of the stock market this month, combined with good corporate earnings and relatively good economic data have analysts anticipating a softening of the extreme dovish tone in their guidance on interest rates. At this point, the market has factored in a 19.5% probability of a rate hike on September 21, up from 12% a week ago. A December 14th rate hike probability has jumped to 40%, up from 30% last week. It will be interesting to check these numbers following Yellen's announcement next week.
For now, it looks like the remainder of the summer will be uneventful from a Central Bank perspective. That leaves only earnings and economic data to drive the markets, and both have been trending positive for much of July.
Happy Trading.
Showing posts with label Yellen. Show all posts
Showing posts with label Yellen. Show all posts
Thursday, July 21, 2016
Thursday, July 14, 2016
Bank of England Holds Rates Steady; Signals August Stimulus
Despite market estimates of an 80% chance for a rate cut today, the Bank of England held rates steady at 0.5%. With new Prime Minister Theresa May signaling a slow and cautious path towards Brexit and also signaling an invocation of Article 50 no earlier than 2017, the central bank's delay in lowering interest rates makes sense.
Only 2 1/2 weeks have passed since the Brexit vote, and that is an insufficient amount of time to gather enough data to make an informed projection on the economic climate for the next six to twelve months. The MPC (Monetary Policy Committee) next meets on August 4th, giving them additional time to gauge the reaction and potential impact.
Additionally, despite the immediate reaction worldwide on June 24 and 27, markets in the UK and around the world have since stabilized and, in fact, rebounded significantly. In the Forex market, the British Pound did indeed take a significant hit against both the Euro and the US Dollar, however the currencies have since stabilized albeit at the lower levels experienced immediately following the vote.
Given the slight trade imbalance the UK currently experiences, that overall drop in the Pound is actually very good for their exports. It provides an immediate boost to UK-based corporations and, in that context, is a nice stimulus without the Central Bank taking any actions at all. Coupled with that, initial fears that companies would seek to relocate out of the UK have since abated. To that point, JP Morgan Chase CEO Jamie Dimon specified in today's earnings call that he had no intention of leaving the UK despite rumors to that effect on June 24th. Following the initial shock of the vote, we now see other companies taking a step away from the ledge, realizing that the new dynamic offers tremendous opportunity, not peril.
What the Bank of England has done by standing pat is afforded themselves some options later in the year should the British economy weaken to the point where a stimulus in the form of a rate cut becomes necessary. Lowering that key rate today would have left the Central Bank with no room left to move as the UK approaches what will certainly be a period of uncertainty after they invoke Article 50. Remember, the BoE already provided a significant stimulus on July 5th when they eased capital requirements for commercial banks, effectively providing a £150 Billion short-term stimulus.
The change in capital requirements on 5 July was seen as a direct attempt to prevent a repeat of the 2008 crisis in which banks ceased lending. Whether or not that move is sufficient only time will tell, however as of today the signal is that the MPC is thus far satisfied with the short-term results.
Today's decision underscores a strengthening in the overall financial stability of the UK and stands in stark contrast to some dire warnings issued by Governor of the Bank of England Mark Carney just a week ago: “The number of vulnerable households could increase due to a tougher economic outlook and a potential tightening of credit conditions. In particular there is growing evidence that uncertainty about the referendum has delayed major economic decisions, such as business investment, construction and housing market activity. The UK has entered a period of uncertainty and significant economic adjustment." The wording is particularly harsh coming from such a prominent member.
There's no word as to what measures the Committee are considering in August, however according to officials there was significant discussion of it in today's meeting: “Most members of the committee expect monetary policy to be loosened in August. The committee discussed various easing options and combinations thereof. The exact extent of any additional stimulus measures will be based on the committee’s updated forecast, and their composition will take account of any interactions with the financial system.”
The August 4th meeting comes only a week after the US Federal Opens Markets Committee (FOMC) meets. Fed Chair Janet Yellen typically addresses the economic environment in Europe and the UK in her post-meeting announcement, so it will be worth listening to that release for clues as to any action the Bank of England may feel necessary. Given the interrelationships between the various central banks and the global impact each of their decisions have, it would be a mistake to focus only on the MPC for guidance as to what the future economic environment may entail.
Also of interest is the next European Central Bank (ECB) meeting, scheduled for 21 July. Again, listening to Mario Draghi's perspective will add further insight. It's likely that, between the ECB and FOMC, we should have a fair idea of the direction the Bank of England may take on August 4th.
Happy Trading.
Only 2 1/2 weeks have passed since the Brexit vote, and that is an insufficient amount of time to gather enough data to make an informed projection on the economic climate for the next six to twelve months. The MPC (Monetary Policy Committee) next meets on August 4th, giving them additional time to gauge the reaction and potential impact.
Additionally, despite the immediate reaction worldwide on June 24 and 27, markets in the UK and around the world have since stabilized and, in fact, rebounded significantly. In the Forex market, the British Pound did indeed take a significant hit against both the Euro and the US Dollar, however the currencies have since stabilized albeit at the lower levels experienced immediately following the vote.
Given the slight trade imbalance the UK currently experiences, that overall drop in the Pound is actually very good for their exports. It provides an immediate boost to UK-based corporations and, in that context, is a nice stimulus without the Central Bank taking any actions at all. Coupled with that, initial fears that companies would seek to relocate out of the UK have since abated. To that point, JP Morgan Chase CEO Jamie Dimon specified in today's earnings call that he had no intention of leaving the UK despite rumors to that effect on June 24th. Following the initial shock of the vote, we now see other companies taking a step away from the ledge, realizing that the new dynamic offers tremendous opportunity, not peril.
What the Bank of England has done by standing pat is afforded themselves some options later in the year should the British economy weaken to the point where a stimulus in the form of a rate cut becomes necessary. Lowering that key rate today would have left the Central Bank with no room left to move as the UK approaches what will certainly be a period of uncertainty after they invoke Article 50. Remember, the BoE already provided a significant stimulus on July 5th when they eased capital requirements for commercial banks, effectively providing a £150 Billion short-term stimulus.
The change in capital requirements on 5 July was seen as a direct attempt to prevent a repeat of the 2008 crisis in which banks ceased lending. Whether or not that move is sufficient only time will tell, however as of today the signal is that the MPC is thus far satisfied with the short-term results.
Today's decision underscores a strengthening in the overall financial stability of the UK and stands in stark contrast to some dire warnings issued by Governor of the Bank of England Mark Carney just a week ago: “The number of vulnerable households could increase due to a tougher economic outlook and a potential tightening of credit conditions. In particular there is growing evidence that uncertainty about the referendum has delayed major economic decisions, such as business investment, construction and housing market activity. The UK has entered a period of uncertainty and significant economic adjustment." The wording is particularly harsh coming from such a prominent member.
There's no word as to what measures the Committee are considering in August, however according to officials there was significant discussion of it in today's meeting: “Most members of the committee expect monetary policy to be loosened in August. The committee discussed various easing options and combinations thereof. The exact extent of any additional stimulus measures will be based on the committee’s updated forecast, and their composition will take account of any interactions with the financial system.”
The August 4th meeting comes only a week after the US Federal Opens Markets Committee (FOMC) meets. Fed Chair Janet Yellen typically addresses the economic environment in Europe and the UK in her post-meeting announcement, so it will be worth listening to that release for clues as to any action the Bank of England may feel necessary. Given the interrelationships between the various central banks and the global impact each of their decisions have, it would be a mistake to focus only on the MPC for guidance as to what the future economic environment may entail.
Also of interest is the next European Central Bank (ECB) meeting, scheduled for 21 July. Again, listening to Mario Draghi's perspective will add further insight. It's likely that, between the ECB and FOMC, we should have a fair idea of the direction the Bank of England may take on August 4th.
Happy Trading.
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