Last week, the ECB stunned markets by cutting interest rates.
Now the question is being asked: Are we about to see a big, new wave of central bank easing?
SocGen economist Klaus Baader identified this question as the #1 thing on clients’ minds right now.
In his note last night, he wrote:
…the ECB is not the only developed economy central bank that we suspect will move to an even more expansionary stance. Although the series of upside surprises in economic data releases in the US recently — such as PMI/ISMs, GDP, and crowned by Friday’s strong payrolls — has increased the risk of an earlier taper, we believe forward guidance could be used by the Fed to signal that policy will remain ultra-loose for considerably longer than currently indicated.
As regards tapering, although the recent data suggest that the US economy has been remarkably and surprisingly little affected by the government shutdown in the first half of October, we put the chances of tapering beginning in December at still less than 50%. But the chances of tapering beginning before March are clearly rising, and the 15bp surge in 10- year US government bond yields to the highest level since September, clearly reflect that this is the general perception. However, while the announcement of tapering and an eventual end to the Fed’s asset purchases will signal that the policy stance is at last stabilizing rather than being loosened continually, we suspect that the forward guidance could be shifted substantially.
Specifically, a recent research paper from the Fed opened the door to a possible change in the unemployment threshold which will trigger the start to normalization of the Fed funds rate, currently 6.5%. The implication would be that the rate hiking cycle in the US would start considerably later than currently anticipated — our current forecast is mid-2015. In other words, policy would be loose for longer.
We also believe that the Bank of Japan is likely to add to its current, highly-aggressive monetary policy easing sometime next year, mainly to support government efforts to minimize the contractionary effects of the consumption tax hike. In short, it looks as if developed economies’ central banks will unleash further monetary easing on their economies and hence the global economy.
Continuing on this theme, Josh Brown writes about the obvious implication of all this central bank activity:
In hindsight, buying stocks seems like the obvious reaction to all of this stimulus coming from everywhere at once, does it not? Three years ago I started thinking about the tsunami the Fed was sending toward the stock market. In october 2010, I talked about how “the more agile among us may want to start paddling their surfboards in front of the right wave now.” It took a year from there before the wave could be spotted offshore in the form of QE2, but ever since then…
The lesson here is one you’ve already heard before – don’t fight the Fed and especially don’t fight every Fed around the world when they begin to ease all at once.
If the entities in control of trillions of dollars all want asset prices to be higher at the same time, what the hell else should you be positioning for?
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