Monday, March 9, 2015

Central Banks: Diverging
China’s government is predicting a “new normal” for the Chinese economy with growth continuing to slow. The PBOC started lowering interest rates late last year, signaling that China’s central bank will do whatever it takes to slow the slowdown. At the same time, the US monetary authorities are preparing to transition from the new normal of NZIRP (near-zero interest rate policy) back to the old normal of rising interest rates as the US economy shows signs of stronger self-sustaining growth, led by the labor market.

The ECB and the BOJ remain committed to their ultra-easy monetary policies. Last week, the ECB confirmed that its new QE program will start today. The BOJ remains on course with its QQEE, which is the expanded and extended version (since October 31, 2014) of its QQE program (first announced on April 4, 2013). The resulting freefalls in the euro and the yen may be starting to boost the exports of both the Eurozone and Japan, as we discussed last week. Here’s a brief review of the latest developments among the major central banks:

(1) US. The 2/27 WSJ reported that after Fed Chair Janet Yellen’s congressional testimony on February 24 and 25, Fed “officials fanned out to drive home the message that they are likely to start raising short-term interest rates later this year.” They included Fed Vice Chairman Stanley Fischer and the leaders of the Atlanta, St. Louis, and San Francisco Fed banks.

I’m sure we will shortly hear from many of them about their reaction to the latest stronger-than-expected employment report. In his Barron’s column this week, Randy Forsyth probably expressed the widespread consensus view:
When the Fed’s policy-setting panel gathers on March 17 and 18, there’s a good chance the ‘patient’ will be gone. That would leave the path open for the FOMC to lift its target for the federal-funds rate at the June 16-17 confab from the near-zero level that has prevailed since the crisis days of December 2008.
That assessment was instantly discounted in the bond market on Friday.

(2) Eurozone. Even though the ECB’s QE program will start this week, ECB President Mario Draghi came close to declaring “Mission Accomplished” at his press conference last week:
First of all, let me say, our monetary policy decisions have worked, and it’s with a certain degree of satisfaction that the Governing Council has acknowledged this. … The market reaction to the announcement, the expectation first and the announcement second, of our asset purchase program has also been quite effective and quite positive.
The ECB said it expects real GDP to grow 1.5% this year, 1.9% in 2016, and 2.1% in 2017. That 2017 forecast marked the first time since the end of 2007 that ECB economists have been so bullish. They also predicted that inflation, which is forecast at zero this year, should gradually move towards the ECB’s target of just below 2% by 2017.

Last August, Draghi indicated that QE was coming and that the goal was to devalue the euro to stimulate exports and revive inflation. The euro is down 22% since last year’s high of $1.39 on May 6 to $1.09 currently. That mission was certainly accomplished.

(3) Japan. The BOJ has also accomplished a dramatic depreciation of the yen, which is down 36% since late 2012. Haruhiko Kuroda, governor of the BOJ, never specifically stated that the bank’s goal was to devalue the yen. How do you say, “Who is kidding who?” in Japanese. Despite the plunge in the yen, which lifted import prices, the BOJ hasn’t accomplished its goal of boosting inflation.

As noted in the 3/7 issue of The Economist:
The BOJ’s target, laid down in 2013, was to raise core inflation (a measure that includes energy but excludes fresh food) to 2% by April. It remains far short of that goal. In January, core prices rose by a mere 0.2% year on year, excluding the effect of a recent increase in the consumption tax.
The “core core” CPI, which excludes energy as well as fresh food, was at 0.4%, much closer to zero than 2%.

(4) China. Last Thursday, Reuters reported:
China plans to run its biggest budget deficit in 2015 since the global financial crisis, stepping up spending as Premier Li Keqiang signaled that the lowest rate of growth in a quarter of a century is the ‘new normal’ for the world's No.2 economy. Speaking at the opening of the country's annual parliamentary meeting on Thursday, Li announced a growth target of around 7 percent for this year, below the 7.5 percent goal that was narrowly missed in 2014.
Li actually sounded quite alarmed:
The downward pressure on China's economy is intensifying. Deep-seated problems in the country's economic development are becoming more obvious. The difficulties we are facing this year could be bigger than last year.
The article noted:
The fight against pollution and corruption have contributed to the slowing economy, as Beijing has clamped down on dirty industries, and the fear of being caught in the anti-graft net has had a chilling effect on some business activity.
On February 28, the PBOC cut interest rates for the second time in three months. Last week, the WSJ Grand Central observed:
For much of last year, the PBOC, under long-serving Governor Zhou Xiaochuan, insisted on targeted efforts rather than broader moves like rate cuts out of concern that broadly easing credit would worsen debt problems. The central bank is acceding to demands from the Chinese leadership to reduce financing costs for businesses and bolster growth, according to officials and advisers to the bank. A rate cut in November was the first such move in two years and was followed last month by an across-the-board measure lowering the amount of money banks need to hold in reserve, thereby freeing up more funds for lending.
(Based on an excerpt from YRI Morning Briefing)

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