zaterdag 1 juli 2017

“Tightening” Slugfest Erupts behind the Fed

July rate hike “in the bag” for Canada. Bank of England, ECB scramble. It has been a veritable slugfest by central bank chiefs today and yesterday: Fed Chair Yellen, ECB President Draghi, Bank of England Governor Carney after his chief economist suddenly turned hawkish last week, and Bank of Canada Governor Poloz. And there are rate hikes in the air. Bank of Canada’s Poloz didn’t want to “prejudge” the rate decision in July, he told CNBC yesterday, but “extraordinarily low interest rates”, the BoC had cut twice in 2015 in response to the oil bust, “have done their job.” And “certainly we need to be at least considering that whole situation now that the excess capacity is being used up steadily.” Chief economist and strategist Stéfane Marion and senior fixed income economist Paul-André Pinsonnault, at Economics and Strategy, National Bank of Canada, saw it this way in their note some time ago: “July rate hike: It’s in the bag.”
Mr. Poloz went out of his way yesterday during an interview with CNBC to keep the July interest rate decision meeting “live” by downplaying last week’s feeble CPI report to instead emphasize his more bullish outlook for the Canadian economy. With the Bank of Canada acknowledging that most of the transition is completed and reiterating its expectation of above-potential growth in the coming quarters, the current stance of monetary policy is no longer justified. The time has come to remove the 2015 rate cut insurance policy and return the overnight rate to 1%. A rate hike by the Bank of Canada on July 12 appears to be a foregone conclusion (it would take a disastrous jobs report on July 7 to prevent such a move). We think that this will be followed by another rate hike in October. Poloz also has his eyes on the Canadian housing bubble. In April, he warned that home prices are in “an unsustainable zone,” that the market “has divorced itself from any fundamentals that we can identify,” that there was “no fundamental story that we could tell to justify that kind of inflation rate in housing prices,” and that it was absolutely time to “remind all the folks that the prices of houses can go down as well as up.”
So one more reason, a huge reason, to tighten. ECB President Draghi added fuel to the fire on Tuesday. Earlier this year, the ECB tapered its QE program from €80 billion a month in asset purchases to €60 billion. So Draghi’s assessment yesterday that “deflationary forces have been replaced by reflationary ones” spooked markets. Was he preparing the markets for cutting QE further and raise rates? After the ECB saw the whirlwind that his statement had caused, senior officials came out today to calm the markets, concerned that investors had “misjudged” Draghi’s carefully nuanced speech and had responded too forcefully. Draghi must have thought that his message, telegraphed in vague ways before, should have been baked into the prices, but it wasn’t. Bank of England’s Carney caused the pound to leap when he said that continued growth in the UK would eventually lead the BoE to raise rates, or as he said, that “some removal of monetary stimulus is likely to become necessary.” At its last meeting, the Committee voted 5-3 to keep rates at 0.25%. But a week ago, BoE’s dovish chief economist, Andy Haldane turned hawkish and said he’d seriously considered voting for an interest rate hike in that meeting, thus opposing Carney. A rate hike “would be prudent relatively soon,” he said. “Certainly, I think such a tightening is likely to be needed well ahead of current market expectations.”
So at the August meeting? Carney’s words today, suggesting that he might support a rate hike, were seen by the markets that the first rate hike has now moved closer. Fed Chair Yellen said absolutely nothing to dispel the notion that the Fed is on a mission to remove accommodation by raising rates and unwinding QE. Speaking in London yesterday, she reiterated that the Fed would continue to raise interest rates “very gradually” and that the $4.5 trillion in securities on the Fed’s balance sheet as a result of QE would be unwound “gradually and predictably.” The Fed already announced the nuts and bolts of that plan, including how it will be phased in. Now it’s just a question of when it will start, my guess: in September.
# So this is now the pattern: The Fed is well ahead of the other central banks, with four rate hikes under its belt and the QE-unwind planned in detail and ready to be kicked off as soon as September. And the other central banks are now beginning to fall in line. The Bank of Canada never engaged in QE and its policy rate is currently 0.5%. It might hike rates twice this year, and the Fed once more. This would narrow the gap to about a quarter point. The BoE and particularly the ECB are still miles behind. The ECB is likely to lag the furthest for the longest, given the precarious nature of the sovereign debt crisis that QE has only papered over. But it looks like the tightening era has begun, though markets are far from having come to grips with it. The Fed’s QE-Unwind may start in September....