Central Banks were and are firmly in focus, with important policy speeches from the ECB last week and an expected rate cut from the FOMC in the week ahead; in addition to forthcoming rate decisions from the Bank of Japan and the Bank of England. We’re also in the middle of a fortnight of PMI releases which began last week with a number of downside surprises, notably in Germany, and a downward revision to global growth, raising concerns that a similar narrative will play out across the US and China in the week ahead; also ahead are a range of inflation data, the much-watched non-farm payrolls and resumed trade talks in Shanghai.
Last week saw a very slight rise in US Treasury yields in the belly of the curve ahead of the Fed meeting: with 1-month and 30-year yields almost unchanged and the 10-year only moving a little over 1 basis point. Equities broadly performed, with the S&P 500 up 1.65%, more than retracing last week’s losses to again surpass the 3,000 level. However, most of the market action and reporting was focused on Europe, where the ECB was unusually poignant in both their concerns over growth and inflation and their emphasis on again doing “whatever it takes” (to reference the last time such a strong stance was taken by Draghi in 2012). Markets interpreted a commitment to introduce further easing from the September 12th meeting and onwards.
But we were left questioning as to what form this might take. Beyond further policy rate cuts, there is a range of further measures that are not off the table but simply have a higher degree of either technical or political headwinds to implement. At the high end for both technical and political constraints are all the forms of so-called “helicopter money” which we only contrive to expect after both further economic deterioration and exhaustion of all the more palatable options. Other more viable options include: resuming quantitative easing which would be only modestly challenging on both fronts, adjusting the capital key requirements to allow a higher proportion of stimulus to flow to peripheral Europe would be simple technically but remains a hard sell in some countries politically; following this might be new asset purchasing programmes in both equities and exchange traded funds but would raise challenges on both fronts; but perhaps this is still preferable to ECB purchases of unsecured bank debt.
Yet perhaps the most daring central bank action came out of the TCMB, Turkey’s central bank, with the largest ever rate cut of 425 basis points, bringing their benchmark borrowing rate down from 24% to 19.75%. It marks their first cut since 2016 yet still remains 2.5x the 8% level in early 2018 before the crisis of confidence forced a trebling of Turkey’s 1-week repo rate in just 5 months. Their corresponding press release well represents the broader picture, “Recently, weaker global economic activity and heightened downside risks to inflation have strengthened the possibility that advanced economy central banks will take expansionary monetary policy steps. While these developments support the demand for emerging market assets and the risk appetite, rising protectionism and uncertainty regarding global economic policies are closely monitored in terms of their impact on both capital flows and international trade.”
Turning to the economic calendar, the week ahead begins with Japan retail sales on Monday and unemployment figures and the Bank of Japan rate decision on Tuesday, along with Eurozone business confidence, German consumer confidence and CPI, and US consumer confidence, income and spending. On Wednesday focus will be on the FOMC rate decision where a 25 basis point cut is expected along with China PMIs, German unemployment and Eurozone Q2 GDP. Thursday sees further PMI data out of China, US, Germany and UK as well as the Bank of England rate decision. Lastly, this Friday is again US non-farm payrolls day, expected to slow from last month’s 224k figure; also on Friday are US trade balance data, Eurozone retail sales and the latest Bank of Japan minutes.