Article / 26 July 2016 at 12:30 GMT

Busting the inflation ghost

Head of Trading / The ECU Group plc
United Kingdom

  • 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


Remember? The renowned car from the 1984 movie Ghostbusters
looked like this remake. Photo: iStock 

By Neil Staines

Egon: Don’t cross the streams

Peter: Why? 

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

When is it necessary to cross the streams? Photo: iStock

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

Relevant articles for you


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer
- 沪ICP备13028953号-1

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail