Macro Weekly Are central banks losing the plot?
Group Economics
Nick Kounis +31 20 343 5616
16 October 2015 Central banks are under fire. The Fed seems to be moving away from its long-flagged idea of raising interest rates this year. Meanwhile, the ECB is edging towards stepping up a QE programme that many say is not working in any case. Inflation is below central bank targets in both cases. We think the criticism is harsh. A Fed delay and more ECB QE both look reasonable given the changing environment, with increased downside risks, tighter financial conditions and greater disinflationary pressure. Fed communication could improve though, while the ECB should be quicker and more decisive in policy easing. ‘You don’t know what you’re doing!’
Central banks missing inflation targets
Failing football managers in English football are often jeered by
% yoy
the crowd in the stadium with the chant ‘you don’t know what you’re doing!’ over and over again. Many commentators seem to be having the same reaction to the big central banks right now. Both the Fed and the ECB have come in for criticism and their credibility – crucial for any central bank to operate successfully – has come into question. Change in course being read as failure The critique by the cynics goes something like this. The Federal Reserve has lost its nerve. It did not have the courage to raise interest rates at the September FOMC meeting and now seems to be moving away from its long-flagged idea of
4 3 2 1 0 -1 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Eurozone HICP US core PCE Target Source: Thomson Reuters Datastream, ABN AMRO Group Economics
raising interest rates this year. The FOMC’s communication has been erratic, sometimes putting investors on the wrong foot. Meanwhile, the ECB appears to be moving towards a stepping up and extension of its QE programme. ‘Why step up a programme that has not worked in the first place?’ the critics argue.
China and EM sentiment to stabilise over time If Fed rate hikes will inevitably rattle emerging markets, it could be asked whether delaying rate hikes is a pointless exercise that just kicks the can down the road. There is some truth in this of course. However, hopefully, any Fed delay will buy time for emerging markets to get on to a stronger footing. One
When the facts change… This criticism seems to be harsh. The legendary economist John Maynard Keynes famously asserted ‘when the facts change, I change my mind, what do you do sir?’ And the facts
necessary condition for this would be signs that China’s growth momentum is becoming less negative, so investors become more confident in a soft landing or gradual slowdown scenario. We think this is likely in the coming months.
have changed over recent months. The global growth outlook has weakened. Downside risks to China and other emerging markets have come into sharper focus. The stress this caused in markets – which has only really eased since the Fed changed course – led to a tightening of financial conditions. The fall in commodity prices and global manufactured goods prices has intensified disinflationary forces.
Better credit data, property stabilisation There are already some tentative signs of improvement. For instance, this week, we saw stronger Chinese credit data in September. The broadest aggregate financing measure rose to 1.3 trillion yuan from 1.08 trillion in August. M1 money supply growth also accelerated. This also follows some signs that the property market – a key driver of the weakness in the economy
The counterfactual What is sometimes missed in this debate is what would have
– is stabilising. However, it will take a while before the picture becomes clearer.
happened if central banks behaved differently . For instance, if the Fed had gone on to hike in September, would emerging market tensions have severely escalated leading to broader financial stress? Well of course nobody really knows, but was it a risk that was worth taking?
US domestic data have also become more cloudy Another reason for the Fed to wait is uncertainty about the recent momentum in the US economy. Over the last few days,
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Macro Weekly - Are central banks losing the plot? – 16 October 2015
a number of reports have also muddied the US economic
Eurozone bank lending rates to companies
growth outlook. Retail sales rose by just 0.1% in September
Loans up to EUR 1m, %
after being flat in August. This follows a number of other weak reports. For instance, nonfarm payrolls slowed in August-
7
September and the ISM manufacturing index reached
6
stagnation levels in September. Most evidence suggests the
5
economy slowed in Q3. Our sense is that this will prove to be a temporary phenomenon as domestic fundamentals are strong.
4
However, the weaker data does create some uncertainty,
3
which may also take time to clear.
2 03 04 05 06 07 08 09 10 11 12 13 14 15
The Fed’s communication strategy
Loans up to 1 year
Loans 1-5 years
Overall then, there seems to be a good case for the Fed to wait and see , especially with inflationary pressures still
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
subdued. Having said that, the message from the FOMC remains rather unclear and its communication strategy could be improved. One of the big communication issues right now is that there are a number of different messages because the Committee is divided.
Bank lending rates have also fallen Meanwhile, the ECB’s QE programme has had a depressing effect on core government bond yields and credit spreads. This is reflected in sharp falls in bank lending rates, especially in the
Splits in the FOMC
periphery. Since the middle of last year, rates on small
This is especially the case with regards to the ten voting
business loans have fallen by around 80bp in the eurozone,
members. Three of the ten (Brainard, Tarullo and Evans) have
and more than 100bp in the periphery.
clearly stated they favour a delay to 2016. Meanwhile, the influential President of the New York Fed, William Dudley, has
Stronger headwinds imply more QE
cast doubt on whether the Fed would raise rates this year. On
The reason for stepping up QE is not that the programme is
the other hand, three voting members (Lockhart, Lacker and
not working, but rather that the forces weighing on growth and
Williams) have stuck with a 2015 view. The Fed’s Vice Chair Stan Fisher has also signalled he was in favour a hike this year, but also stressed that this depended crucially on the assumption that the economy and labour market would remain solid. Without ECB QE the outlook would be worse On the other side of the Atlantic, the criticism of the ECB has focused on the effectiveness of its QE programme. The argument is made that the ECB’s QE programme has failed because the inflation outlook has deteriorated. However, this seems to ignore what would have happened without the stimulus.
inflation have increased. As well as slower global growth, the Fed’s likely delay in raising interest rates has pushed down the dollar and hence strengthened the euro. The ECB needs to do more to counteract this. Dovish commentary from ECB officials Indeed, ECB officials stepped up their dovish rhetoric this week. ECB Governing Council member Ewald Nowotny sounded more worried than before about the inflation outlook. He said that the ECB was ‘clearly missing’ its inflation target. This was partly due to oil prices, which the ECB could not control, however he also pointed out that core inflation was also ‘clearly’ below target. He concluded that additional steps are necessary to help the ECB
Euro would be much higher
reach its objective.
Take the euro. Before speculation that the central bank would embark on asset purchases built from the Summer of 2014
More decisive action
onwards, the EUR/USD was close to the 1.40 level. Ongoing
The ECB indeed looks set to miss its target, yet many officials
strength in the euro would have added to the disinflationary
have said that further easing is premature at this stage. We
pressures, meaning inflation would now be even lower.
expect to see an expansion and extension of the ECB’s QE
Similarly, the growth outlook would be weaker. For instance,
programme in December, but the central could have already
net exports contributed 0.5% to annual growth in Q2,
acted in September given the inflation outlook in our view.
compared to being neutral to growth at the start of last year.
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Macro Weekly - Are central banks losing the plot? – 16 October 2015
Main economic/financial forecasts GDP grow th (%)
2013
2014
2015e
2016e
1.5
2.4
2.7
2.9
United States
-0.2
0.9
1.6
2.0
Eurozone
Japan
1.6
-0.1
0.7
1.2
Japan
0.17
United Kingdom
2.2
2.9
2.8
2.6
United Kingdom
0.58
China
08/10/2015 15/10/2015
United States Eurozone
3M interbank rate
08/10/2015 15/10/2015
+3M
+12M
2015e
0.32
0.32
0.4
0.8
0.4
2016e 1.0
-0.05
-0.05
0.00
0.00
0.00
0.00
0.17
0.2
0.2
0.2
0.2
0.58
0.7
1.5
0.7
1.7
7.7
7.3
7.0
6.5
World Inflation (%)
3.1 2013
3.2 2014
3.0 2015e
3.5 2016e
+3M
+12M
2015e
2016e
United States
1.5
1.6
0.2
2.1
US Treasury
2.10
2.02
1.9
2.5
1.9
2.6
Eurozone
1.3
0.4
0.1
1.4
German Bund
0.59
0.56
0.4
0.9
0.4
1.0
Japan
0.3
2.8
0.6
1.0
Euro sw ap rate
0.98
0.95
0.7
1.2
0.7
1.2
United Kingdom
2.6
1.5
1.1
1.9
Japanese gov. bonds
0.33
0.32
0.7
1.0
0.7
1.0
China
2.6
2.0
1.5
2.0
UK gilts
1.82
1.77
2.0
2.6
2.0
2.7
World Key policy rate
4.3 15/10/2015
3.9 +3M
3.7 2015e
3.8 2016e
08/10/2015 15/10/2015
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.25
0.25
1.00
EUR/USD
1.13
1.14
1.12
1.00
1.12
1.00
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
119.9
118.9
128
135
128
135
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.53
1.55
1.67
1.43
1.67
1.35
Bank of England
0.50
0.50
0.50
1.50
EUR/GBP
0.74
0.74
0.67
0.70
0.67
0.74
People's Bank of China
4.60
4.35
4.35
4.35
USD/CNY
6.35
6.34
6.40
6.55
6.40
6.55
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
Key Macro Events Day
Date
Time
Country
Key Economic Indicators and Events
Period
Latest outcome
Consensus
ABN AMRO
Monday Monday Monday Monday Monday Monday Monday Monday
19/10/2015 19/10/2015 19/10/2015 19/10/2015 19/10/2015 19/10/2015 19/10/2015 19/10/2015
04:00:00 04:00:00 04:00:00 04:00:00 04:30:00 09:00:00 15:45:00 16:00:00
CN CN CN CN CN CH EC US
GDP - % yoy Retail sales - % yoy Industrial production - % yoy Fixed asset investment - % yoy Bloomberg GDP Monthly Estimate - % yoy Total Sight Deposits bn ECB announces weekly QE details NAHB home builders' confidence index
Q3 Sep Sep Sep Sep
7.0 10.8 6.1 10.9 6.64
6.8 10.8 6.0 10.8
6.8
Oct
62.0
61.0
60.0
Tuesday Tuesday Tuesday
20/10/2015 20/10/2015 20/10/2015
06:30:00 14:00:00 14:30:00
NL HU US
Consumer confidence - index Base rate -% Housing starts - % mom
Oct Oct 20 Sep
5.0 1.35 -3.0
1.35 1.2
1.35 1.0
Wednesday Wednesday Wednesday Wednesday
21/10/2015 21/10/2015 21/10/2015 21/10/2015
01:50:00 13:00:00 16:00:00
JP TR CA BR
Merchandise trade exports - % yoy Repo rate - % Policy rate - % Policy rate - %
Sep Oct 21 Oct 21 Oct 21
3.1 7.5 0.5 14.25
7.5 0.5 14.25
7.5
Thursday Thursday Thursday Thursday Thursday Thursday Thursday
22/10/2015 22/10/2015 22/10/2015 22/10/2015 22/10/2015 22/10/2015 22/10/2015
08:45:00 10:30:00 13:45:00 13:45:00 15:00:00 16:00:00 16:00:00
FR GB EC EC US EC US
Business confidence manuf. - index Retail sales - % mom ECB refinancing rate - % ECB Deposit rate - % FHFA house price index - % mom Consumer confidence Existing home sales - % mom
Oct Sep Oct 22 Oct 22 Aug Oct Sep
104.0 0.2 0.05 -0.20 0.6 -7.10 -4.8
0.05 -0.20 0.5 -7.50 0.7
0.05 -0.20
Friday Friday Friday Friday Friday
23/10/2015 23/10/2015 23/10/2015 23/10/2015 23/10/2015
10:00:00 10:00:00 10:00:00 15:00:00 15:45:00
EC EC EC BE US
PMI manufacturing - index PMI services - index Composite PMI output Business confidence - index Markit - Flash PMI
Oct P Oct P Oct P Oct Oct P
52.0 53.7 53.6 0.0 53.1
51.8 53.2 53.5
51.5 53.5 53.3
-7.80 0.5
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