Busting the inflation ghost
- Central banks are wondering what measures still could help stimulate growth
- The situation is not yet bad enough to make helicopter money necessary
- Japan stimulus package might be smaller than expected
- Prospects for continued US monetary normalisation are good
- In the UK, the picture looks different and immediate easing might be appropriate
By Neil Staines
Egon: Don’t cross the streams
Egon: It would be bad.
— Ghostbusters, 1984
In the 1984 film Ghostbusters (watch the official trailer here, but please come back), there was a running strap line, with reference to the ghostbusting proton beams, to never ‘cross the streams’ from their energy weapons. The consequences were portrayed as being so bad as to cause “life as you know it to stop instantaneously and every molecule in your body [to explode] at the speed of light”. At the end of the film, however, the situation gets so bad that they decide to cross streams anyway.
In recent posts (for example here my piece about the race to the bottom in New Zealand and Australia) we have stressed the significance of monetary policy on financial markets and, as monetary policy reaches its useful limits, the significance of the monetary interaction with fiscal policy. While there has been much talk of the prospect of the "crossed streams" of helicopter money, we are unsure as to whether the situation is bad enough. At least yet.
The importance of monetary stimulus to market pricing, however, was further highlighted last night as reports from Nikkei News suggested that the stimulus package by the Japanese government, or reinvigoration of Abenomics (following prime minister Shinzo Abe’s recent, convincing election victory) may only total JPY 6 trillion, after the same news service had reported JPY 20 to 30 trillion over recent weeks.
Reports of the higher amounts had driven USDJPY up to the recent highs of 107.50, while last night’s disappointment took us back to 104 this morning.
“US economy a bright spot amid global uncertainty” — US Treasury Secretary Jack Lew
After a quiet last week, this week's data calendar should bring economic attention back to the US. With consumer confidence, services PMI and new home sales today, the Fed on Wednesday and Q2 GDP on Friday, the focus will likely swing back to the relative prosperity of the US and, after a very narrow range for US yields last week (10’s stuck in a 1.55 - 1.60 range), the prospects for continued US monetary normalisation.
Q2 GDP in the US is expected to highlight the resumption of US growth in the 2.5% (annualised) region, and despite the looming presidential elections (and barring a global catastrophe), we expect the Fed to come under increasing pressure to raise rates.
“Adversity brings out the reverse of the picture” — Charles Caleb Colton
In the UK, the picture is quite the opposite. At the start of last week, MPC member Weale (and historically referenced as one of the ‘hawks’) stated that “wage and productivity growth may argue against a rate cut” and that “any weakness may not be as severe as previous recessions”.
However, this week Weale has indicated to the FT that he is now in favour of immediate easing, citing last week’s awful PMI data as a prime reason to act. While the case for lower rates is perhaps more moot, it is likely that next week's’ "Super Thursday" (as we discussed last week) will bring further QE, possibly lower rates, and likely a lower GBP.
Whether the UK choose to cross the monetary and fiscal ‘streams’ will thus be up to the Chancellor at the autumn statement, however, it is increasingly likely that easier fiscal policy is in train amid the heightened Brexit uncertainty. In the near term we view this as GBP negative – albeit likely against a backdrop of higher volatility.
One more technical point worth making in the current environment is the recent rise in USD Libor rates. Much of the related commentary assesses the impact of new money market fund regulation on the front end of the US curve. Rises in Libor spreads have historically, however, been a precursor to higher FX volatility and more pronounced risk aversion.
We are of the opinion that broad financial market risk aversion is likely to pick up over the Summer, and while we do not yet see the imminent need for governments and central banks to "cross the streams" of monetary and fiscal policy, risk asset markets are increasingly likely to face a (total protonic?) reversal.
— Edited by Clemens Bomsdorf
Neil Staines is head of trading at The ECU Group