Morgan Stanley’s Joachim Fels — writing in his Sunday Start note — makes a simple, compelling argument for staying bullish, which is that all of the world’s central banks will maintain easy policy for a long time, and that some of the major banks are actually going to be easing further in the near future.
Well, the key thing to watch in this respect is how fast slack in the economy and particularly in the labour market might erode. My colleagues Ellen Zentner and Melanie Baker hone in on this question in their notes published this past week for the US and the UK, respectively, with a particular focus on wage growth as a measure of slack. For the US (see here), Ellen finds that smaller companies’ wage practices are a leading indicator for broader measures of wage growth such as the Employment Cost Index (ECI), and that the continued climb in the smaller companies’ gauge points to an acceleration in broader wage metrics later this year. However, the extent of acceleration should remain historically muted, which will buy time for the Fed. Similarly, for the UK, Melanie looks for only a modest pick-up in average earnings growth and some offset from productivity gains, so that the MPC can take its time in raising rates until mid-2015 or so (see here). Bottom line: we stick to our ‘low for longer view’ for US and UK official interest rates, but if we’re wrong it will most likely be because wage growth accelerates faster than we expect.
Meanwhile, two other major central banks crept closer to easing policy further this past week: the ECB and the PBoC. In China, my colleague Helen Qiao notes here that with CPI inflation surprising on the downside in April (dropping to only 1.8%Y), the chances for monetary policy easing with a strong signalling effect, such as a RRR or an official interest rate cut, have increased significantly. And in the euro area, Mario Draghi (see Quote of the Week below) dropped a surprisingly clear hint that a cut in the refi rate, and potentially also the depo rate, in June is in the offing, in line with my colleague Elga Bartsch’s long-standing call (see ECB Watch: Arrivederci a Giugno!). Taken together, with all the major central banks on hold for longer or even easing further, the grab for yield looks set to continue. Let the good times roll!
So the Fed and the BoE still have plenty of time before they’re forced into action, and the ECB and the PBOC will probably make easing moves next. Hence his final line: Let the good times roll!
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