- ECB Meeting – Some Further Thoughts
Having had an extra couple of days to digest the European Central Bank’s (ECB) announcement and subsequent press conference, we think that ECB President Draghi will have enjoyed a glass of Chianti this weekend, quietly happy with the job he did last week. For a start, he avoided committing the ECB to any action, even though most investors are expecting that an extension of QE will eventually be forthcoming. That in itself has introduced a more two-way tone to markets in the past few days. Secondly, he has engineered a steepening of the yield curve, which helps the beleaguered Banking sector and offers them some respite from the effects of negative rates. Thirdly, he has given markets an idea of what life may be like when the ECB finally do stop buying bonds, or when they start their own tapering programme. Fourthly, the market probably now needs to start debating when that tapering may occur, rather than blindly believing that QE will forever be extended and/or increased. Fifthly, Draghi again pointed to the fact that central banks on their own cannot boost world economic growth, and that help is needed on the fiscal side. This argument is increasingly gaining traction and appears to be gaining credence amongst government officials. Lastly, and in quite a clever move, the back up in yields has already eased the fears of investors about bond scarcity. Remember, the ECB currently cannot buy bonds whose yield is lower than the deposit rate of -0.40%. The rise in yields in the last few days has just increased the amount of bonds the ECB can buy. Every cloud has a silver lining. Continue reading
Posted in Economy, Fixed Income, Markets, Uncategorized
Tagged brexit, Central Banks, ECB, Economy, Economy update, Europe, European markets, european politics, Eurozone, Fixed Income, market volatility, markets, monetary policy, politics, QE
1. No change in the ECB’s deposit rate
As expected by the majority of market commentators and participants, the ECB (European Central Bank) today decided to leave interest rates unchanged. That means the deposit rate remains at -0.40%. ECB President Mario Draghi has mentioned in the past that although the ECB believe that negative deposit rates have had a beneficial impact, they are also aware that negative rates are affecting the profitability of the European Banking sector. However, the ECB did note that they see “rates at present or lower levels for an extended period and well past the QE horizon”. This highlights that the ECB still maintains an easing bias and potentially leaves the door open for further rate cuts, if deemed necessary by the ECB Governing Council. Given what we said earlier about the effect of negative rates on the Banking sector, we doubt that rates will be cut further. Continue reading
- Forthcoming ECB Meeting – What Might Happen?
The ECB approach their meeting this week in a good position. Recent data has shown that, so far, the impact of Brexit on European economic activity has been minimal, with August Purchasing Manager Indices (PMI’s) holding around the average for 2016. So no pressure for immediate or significant action. What will concern the ECB is the recent inflation data, which showed minimal pick-up at the headline level, whilst the core rate actually fell on an annualised basis. The September 2016 meeting has long been seen by market commentators as the meeting at which the ECB will announce an extension and/or enhancements to their Quantitative Easing (QE) programme, but some are now speculating that any announcement will be postponed until the December meeting. With purchase under the QE programme surpassing €1trn on September 1st, investors remain concerned that the ECB will run out of bonds to buy. Here we rank the options available to the ECB, ranking from most unlikely to most likely: Continue reading
Posted in Economy, Fixed Income, Markets, Uncategorized
Tagged Capital Markets, Central Banks, corporate bonds, currencies, ECB, Economy, Economy update, Europe, European markets, Eurozone, Fixed Income, Global, Purchasing Manager Indices, volatility
We continue to believe credit sectors offer value compared to government securities. With approximately 35% of the global treasury market trading at negative nominal yields and US Treasuries of 10 years and below trading at negative real yields (using core PCE as the inflation measure), government securities have never looked less attractive. We have never believed that it makes sense to pay a borrower for the privilege of lending them money.
Corporate credit continues to be moderately attractive. Corporate balance sheets are strong and profits may increase as economic growth improves, the value of the dollar moderates and energy prices stabilize. Second quarter earnings, although still weakened by the energy sector, have come in better than expected with 70% of companies reporting positive earnings surprises, compared to a long-term average of 63%. In addition, the US Bureau of Economic Analysis (BEA) increased its estimate of first quarter corporate earnings growth in its annual 2016 adjustment.
Recent US economic data indicate that the US may deliver growth of over 2% as well as modestly higher inflation for the second half of the year, for overall 2.0% GDP growth over the next 12 months.
Solid employment should continue to support consumption and the housing market; inventory restocking and government spending should also contribute to growth. Importantly, while employment gains have decelerated as the economy nears full employment, monthly payrolls gains need not match the 230,000 average of the past few years to achieve further declines in the unemployment rate. As long as non-farm payroll employment grows by at least 100,000 per month, the unemployment rate should continue to decline.