Fed Winds Down Quantitative Easing While European Inflation Stays Low
Last week saw another European Central Bank interest rate meeting in which the ECB chose to remain active in the face of inflation declining to its lowest level in 5 years. Only five years ago, the Eurozone was in the midst of a crisis over the currency's very existence.
Data out last week showed that inflation for the region missed an already low forecast of 0.6 percent and was in fact even lower at 0.5 percent for the year.
Meanwhile in the US, the non-farm payrolls (a measure of job creation) fell short of expectations at 192,000 – shy of their forecast 200,000. It isn’t the first bit of data from the US that has been soft and last week’s number certainly weakens claims that it’s all just been about a bit of bad weather.
Will tapering be seen through all the way through to zero? I remain sceptical and the declining yield on US Treasuries suggests that there will at least be a slowing of the pace at which the Fed weans the economy off Quantitative Easing at some point, or a clear indication that rates will remain low for a long time to come.
For the week ahead, we have a number of key announcements:
Tuesday 8th April, Japan Monetary Policy meeting:
The Bank of Japan is expected to maintain its target for expansion of the monetary base at 60-70 trillion Yen. The imposition of an 8 percent sales tax that is expected to lead to a 3.5 percent contraction this quarter compared to 4.4 percent growth in the last quarter, though, could well lead to a more ambitious use of the easing by the Bank of Japan.
The doubling of ETF purchases has been suggested as one such possible option. If the target is expanded, however, expect another devaluation of the Yen and a rally in the Nikkei 225, and although unlikely this time round the BoJ has said they will take further steps if the economy weakens - which forecasts suggest it could well do.
Wednesday 9th April, FOMC interest rate meeting minutes (19:00 GMT):
Will the Fed reduce its quantitative easing program to $55bn dollars a month on Wednesday? Likely. Will it completely pull the plug by December this year? Don't bank on it.
Wall St and the global financial markets will be listening to see when short term rates will rise, though the economy is still some way from being ready to endure higher rates. With structural reform having been shirked by the politicians in Washington, it’s hard to see how the US can grow in a more meaningful way than the sugar high of credit expansion and low interest rates fueling a rise in borrowing.
As such, it’s very possible we will see another slowdown in the economy as the Fed gets closer to winding QE down to zero. As such, expect remarks that suggest a long time lag between ending QE and hiking interest rates in attempt to cool fears about rates rising.
Thursday 10th April, US Initial Jobless Claims (13:30 GMT):
Previous jobless claims rose by more than expected to 326,000 (from 310,000) suggesting a slowdown in the creation of jobs and moving people away from unemployment benefits.
Although one blip isn’t sufficient to suggest a trend, the combination of a soft non-farm payrolls figure last week and another potential tapering announcement would mean another increase in the number of jobless claimants would be interpreted by the markets as an indication the US is heading for another slow down and can’t cope without large amounts of monetary easing by the Federal Reserve.
Friday 11th April, Consumer Price Index (inflation) for Germany (07:00 GMT):
Inflation for Germany is expected to be fairly sluggish at 1 percent year on year, and 0.3 percent for the month.
A decline in this figure would subject Draghi’s view that inflation will pick up in April to some scrutiny and put real pressure on the ECB to take action to avoid deflation engulfing the Eurozone and potentially subjecting the region to another crisis.