While most of the attention this week has been paid to Greece’s debt restructuring, in reality headlines from the Federal Reserve, the European Central Bank, and other central banks–as well as brand new economic indicators–have ushered in a new era of cautious or minimal monetary easing, according to Morgan Stanley’s Currency Research team.In particular, a report about new quantitative easing from the Federal Reserve being sterilized–or not expanding the Fed’s balance sheet–as well as repeated concerns from the ECB’s Mario Draghi about short-term inflation risks may signal that central banks are less and less inclined to engage in potentially inflationary measures to spur on economic growth.
On one hand, Morgan Stanley analysts note that this is a result of the positive effects of previous easing measures:
Our economists believe that the success of the central bank measures taken so far could well reduce the need for further action, or at least reduce the extent of measures taken. For the ECB, the positive impact of the LTRO has reduced tail risks in Europe, reducing the need for a move towards full QE, and probably means that the ECB will only have to ease policy more modestly in the months ahead, our European Economic team believe.
On the other, it could also pave the way for a global correction:
Given that global central banks are no longer providing markets with the comfort of clear signals on whether another round of easing/liquidity measures will be forthcoming, the emphasis is being put back onto the economic data flow, and here the news appears to be far more mixed than was the case over the past couple of months.
There are signs that the global rebound in PMIs is running out of steam. Our calculation of the G10 Weighted Average PMI declined again in February. Also of concern is the evidence that global trade is slowing down. This was evident in the Australian GDP data for Q4, where growth was much weaker than expected, with softness in exports to China cited.
The German factory orders data was also extremely disappointing, showing a sharp decline for January. Once again exports lay behind the weakness, with the sharpest decline seen in non-EMU exports. We would suggest that not only does this particular data release suggest weakness at the core of Europe, but is also another warning signal regarding the sustainability of the global growth outlook.