BloombergJoachim FelsCentral banks around the world continue to embrace easy monetary policy in its efforts to stimulate their local economies.
Morgan Stanley’s economics team has dubbed the moves since February as “the Great Monetary Easing, Part Three,” or GME3.
“I am surprised by the breadth of the move that we have seen recently,” said Joachim Fels, Morgan Stanley’s Global Head of Economics. “In the last 10 trading days we’ve seen the Fed tweak its language and we’ve had rate cuts from the ECB, Poland, India, Korea and Australia. So the breadth of the move has been surprising.”
“Now, what explains the moves? I think there are three global factors: 1) Japan had a big monetary easing announced in early April, so Japan is exporting deflation via its exchange rate. And I think other central banks wanted to buy insurance against that. 2) The global soft patch has been unfolding for the last month or two. 3) I think we’re seeing globally synchronised disinflation largely caused by lower commodity prices. So I think these reasons explain why central banks have now behaved as one.”
Morgan Stanley’s David Adelman sums up six points to keep in mind considering the backdrop of GME3.
- “Morgan Stanley believes first that global monetary easing is being driven by global disinflation and a synchronised economic soft patch.”
- “Secondly, monetary easing supports and increases our confidence that the global economy will move from twilight to daylight during the second half of the year.”
- “Third, our strategic asset allocation preference remains unchanged: for equities over credit and for credit over government bonds.”
- “Fourth, monetary easing contributes to our view that alpha will play a larger relative role versus beta in driving performance this year.”
- “Fifth, because liquidity going forward is likely to be less of a tailwind and because sentiment has become more positive, we don’t think that now is an opportune time to make large bullish bets on risky assets.”
- “And finally, with global monetary easing still underway, any correction in asset markets is likely to be to a pause that refreshes rather than the end of the cycle.”