October 31, 2016, 4:15pm EST
As we discussed on Friday, the dominant theme last week was the big run-up in global yields. This week, we have four central banks queued up to decide on rates/monetary policy.
With that, let’s take a look at the key economic measures that have been dictating the rate path or, rather, the emergency policy initiatives of the past seven years. Do the data still justify the policies?
First up tonight is Australia. The RBA was among the last to slash rates when the global economic crisis was unraveling. They cut from 7.25% down to a floor of just 3% (while other key central banks were slashing down to zero). And because China was quick to jump on the depressed commodities market in 2009, gobbling up cheap commodities, commodities bounced back aggressively. And the outlook on the commodity-centric Australian economy bounced back too. Australia actually avoided official recession even at the depths of the global economic crisis. With that, the RBA was quick to reverse the rate cuts, heading back up to 4.75%. But the world soon realized that emerging market economies could survive in a vacuum. They (including China) relied on consumers from the developed world, which were sucking wind for the foreseeable future.
The RBA had to, again, slash rates to respond to another downward spiral in commodities market, and a plummet in their economy. Rates are now at just 1.5% – well below their initial cuts in the early stages of the crisis.
But the Australian economy is now growing at 3.3% annualized. The best growth in four years. But inflation remains very low at 1.7%. Doesn’t sound bad, right? The August data was running fairly close to these numbers, and the RBA CUT rates in August – maybe another misstep.
The Bank of Japan is tonight. Remember, last month the BOJ, in a surprising move, announced they would peg the 10 year yield at zero percent. That has been the driving force behind the swing in global market interest rates. At one point this summer $12 trillion worth of negative yielding government bonds. The negative yield pool has been shrinking since. Japan has possibly become the catalyst to finally turn the global bond market. But pegging the rate at zero should also serve as an anchor for global bond yields (restricting the extent of the rise in yields). That should, importantly, keep U.S. consumer rates in check (mortgages, auto loans, credit card rates, etc.). Also, importantly, the BOJ’s policy move is beginning to put downward pressure on the yen again, which the BOJ needs much lower — and upward pressure on Japanese stocks, which the BOJ needs much higher.
With that, the Fed is next on the agenda for the week. The Fed has been laying the groundwork for a December rate hike (number two in their hiking campaign). As we know, the unemployment rate is well into the Fed’s approval zone (around 5%). Plus, we’ve just gotten a GDP number of 2.9% annualized (long run average is just above 3%). But the Fed’s favorite inflation gauge is still running below 2% (its target) — but not much (it’s 1.7%). Janet Yellen has all but told us that they will make another small move in December. But she’s told us that she wants to let the economy run hot — so we shouldn’t expect a brisk pace of hikes next year, even if data continues to improve.
Finally, the Bank of England comes Thursday. They cut rates and launched another round of QE in August, in response to economic softness/threat following the Brexit vote. There were rumors over the weekend that Mark Carney, the head of the BOE, was being pushed out of office. But that was quelled today with news that he has re-upped to stay on through 2019. The UK economy showed better than expected growth in the third quarter, at 2.3%. And inflation data earlier in the month came in hotter than expected, though still low. But inflation expectations have jumped to 2.5%. With rates at ¼ point and QE in process, and data going the right direction, the bottom in monetary policy is probably in.
So the world was clearly facing deflationary threats early in the year, which wasn’t helped by the crashing price of oil. But the central banks this week, given the data picture, should be telling us that the ship is turning. And with that, we should see more hawkish leaning views on the outlook for global central bank policies and the global rate environment.
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