The Global Markets Weekly – 7/6/12

Posted July 6, 2012 by Editor

Fill in the Dots: BoE…ECB…PBOC…Fed??

Last week policy action was taken by the ECB, the BoE and the PBOC to support growth.  None of these actions were a surprise and they were reactions to the dimmer global growth outlook.  In the case of the BoE, there is a sense at DE that this may be the last dose of gilt purchases.  The BoE may become increasingly reliant on direct action to boost bank lending via its innovative funding for lending scheme.[private]

However, for the ECB, there is room to do considerably more.  The policy rate could be cut another 25 bps, most likely at the September meeting.  Even though the ECB only gave a faint signal that they were willing to resume bond purchases, DE expects them to eventually do so.  Under the ECB’s mandate to prevent disinflationary risks (from slower growth), the ECB has a clear rationale to act.  This is particularly important if markets become nervous as they wait for the bailout funds to be tapped to help the distressed peripheral banking sectors.

In the case of China, the PBOC’s rapid interest rate cuts (two in the last four weeks) reveal the implicit admission that the policy easing of the first few months this year was insufficient to reverse the GDP slowdown.  More will probably be done near-term, with most of the action concentrated on the monetary policy front.  Both further interest rate cuts and cuts in reserve requirements are expected by DE.

And the Fed?  Another month of disappointing employment readings increases the pressure on the Fed to “do something,”  In less than 8 weeks, consensus forecasts of Q2 GDP growth have slid from a 2 ½% range to about 1 ½% with little sense that GDP growth will pick up much in the near-term.  While DE leans towards a possible balance sheet expansion (QE3) at the August 1 announcement, the FOMC may defer a month to September when the meeting will be followed by the quarterly press conference, giving the Fed more leeway to explain why they did what they did.  And it may not be “just” QE.  Perhaps the Fed will take a clue from the BoE and develop a program that more closely ties central bank support to those banks willing to make more loans to the private sector.

• § U.S.: This week’s data are and limited Fed-speak are unlikely to sway expectations as investors await important retail sales report at mid-month.  However, the risk in the trade report is that the global slowdown will impact May exports more than expected, leading to another downward adjustment to already very soft Q2 GDP growth.  A final curve ball would be the discovery the Fed is contemplating other new initiatives (like the BoE’s funding for lending program) from the FOMC minutes of the June meeting.
• § Eurozone:  Investors are looking for more clarity (and details) regarding the use of the bailout funds for recapitalizing the Spanish banks and changes to the Greek bailout from the upcoming finance ministers meetings.  On the data front, Eurozone IP may avoid a further fall, given the surprising gain in German IP.
• § UK:  More upbeat production signs may emerge, boosted by favorable Jubilee effects.  Mfg and construction output as well as exports in the visible trade could show some bounce.  Consumer readings have been soft but volatile, with the upcoming retail sales survey likely to be much weaker.  The RICS home price signals will be mixed.
• § Japan:  The BOJ has little hard justification to ease policy at this week’s meeting.  A move would probably not reflect a change in the inflation outlook but increased collateral risks from the European crisis.  The one indicator update of note will be a steady machinery orders report.
• § Emerging Markets/Regions:  Four central banks meet this week–Indonesia, Russia, South Korea and Brazil.  While the first three are expected to keep policy unchanged, another interest rate cut is expected in Brazil.

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