interest rates

German Bundesbank President Jens Weidmann presents the annual 2018 report in Frankfurt
German Bundesbank President Jens Weidmann presents the annual 2018 report in Frankfurt, Germany, February 27, 2019. REUTERS/Kai Pfaffenbach

May 26, 2019

FRANKFURT (Reuters) – European Central Bank policymaker and presidential hopeful Jens Weidmann said on Sunday he saw no need for the ECB to change its policy at present, despite a weaker euro zone economy.

The ECB’s Governing Council is due to meet on June 5-6 and decide on the terms of its third round of cheap loans to banks – one of several measures it has deployed to stimulate lending in the bloc.

“This isn’t a situation where prices are falling and we have to react now,” the head of Germany’s central bank told members of the public at the Bundesbank’s open days.

Weidmann added decreasing spare capacity in the economy, namely the extent to which labor, capital and other resources are used below their maximum level, would eventually push up prices.

These have been growing at a slower pace than the ECB’s target of “close, but below 2%” for years despite the central bank’s unprecedented stimulus measures.

Weidmann, a guardian of German economic orthodoxy who has often opposed the ECB’s easy policy, is one of the hot names in the race to replace Mario Draghi as President in November.

But he may face opposition from indebted countries in the bloc’s south, which favor lower interest rates.

“Surely it would be bad to give the impression that certain nationalities are fundamentally excluded from the ECB Presidency,” Weidmann said.

“That would be the opposite of what we want to achieve, which is acceptance.”

(Reporting By Frank Siebelt; Writing by Francesco Canepa; Editing by Raissa Kasolowsky)

Source: OANN

German Bundesbank President Jens Weidmann presents the annual 2018 report in Frankfurt
German Bundesbank President Jens Weidmann presents the annual 2018 report in Frankfurt, Germany, February 27, 2019. REUTERS/Kai Pfaffenbach

May 26, 2019

FRANKFURT (Reuters) – European Central Bank policymaker and presidential hopeful Jens Weidmann said on Sunday he saw no need for the ECB to change its policy at present, despite a weaker euro zone economy.

The ECB’s Governing Council is due to meet on June 5-6 and decide on the terms of its third round of cheap loans to banks – one of several measures it has deployed to stimulate lending in the bloc.

“This isn’t a situation where prices are falling and we have to react now,” the head of Germany’s central bank told members of the public at the Bundesbank’s open days.

Weidmann added decreasing spare capacity in the economy, namely the extent to which labor, capital and other resources are used below their maximum level, would eventually push up prices.

These have been growing at a slower pace than the ECB’s target of “close, but below 2%” for years despite the central bank’s unprecedented stimulus measures.

Weidmann, a guardian of German economic orthodoxy who has often opposed the ECB’s easy policy, is one of the hot names in the race to replace Mario Draghi as President in November.

But he may face opposition from indebted countries in the bloc’s south, which favor lower interest rates.

“Surely it would be bad to give the impression that certain nationalities are fundamentally excluded from the ECB Presidency,” Weidmann said.

“That would be the opposite of what we want to achieve, which is acceptance.”

(Reporting By Frank Siebelt; Writing by Francesco Canepa; Editing by Raissa Kasolowsky)

Source: OANN

FILE PHOTO: People pass by the NYSE in the financial district of New York
FILE PHOTO: People pass by the New York Stock Exchange (NYSE) in the financial district in the lower Manhattan borough of New York City, U.S. June 2, 2016. REUTERS/Brendan McDermid/File Photo

May 24, 2019

NEW YORK (Reuters) – J.P. Morgan on Friday more halved its previous estimate on U.S. economic growth in second quarter to 1.00% following data that showed a fall in durable goods orders in April.

The bank now sees it as basically a coin toss for the Federal Reserve to raise or cut interest rates, compared with its previous call for just a rate increase.

“We had previously expected the next move from the Fed would be a hike, albeit at the very end of our forecast horizon in late 2020,” J.P. Morgan economist Michael Feroli wrote in a research note. “We now see the risks of the next move as about evenly distributed between a hike and a cut.”

(Reporting by Richard Leong; Editing by Bill Trott)

Source: OANN

FILE PHOTO: People pass by the NYSE in the financial district of New York
FILE PHOTO: People pass by the New York Stock Exchange (NYSE) in the financial district in the lower Manhattan borough of New York City, U.S. June 2, 2016. REUTERS/Brendan McDermid/File Photo

May 24, 2019

NEW YORK (Reuters) – J.P. Morgan on Friday more halved its previous estimate on U.S. economic growth in second quarter to 1.00% following data that showed a fall in durable goods orders in April.

The bank now sees it as basically a coin toss for the Federal Reserve to raise or cut interest rates, compared with its previous call for just a rate increase.

“We had previously expected the next move from the Fed would be a hike, albeit at the very end of our forecast horizon in late 2020,” J.P. Morgan economist Michael Feroli wrote in a research note. “We now see the risks of the next move as about evenly distributed between a hike and a cut.”

(Reporting by Richard Leong; Editing by Bill Trott)

Source: OANN

FILE PHOTO: An investor looks at an electronic board showing stock information at a brokerage house in Shanghai
FILE PHOTO: An investor looks at an electronic board showing stock information at a brokerage house in Shanghai, China July 6, 2018. REUTERS/Aly Song/File Photo

May 24, 2019

(Reuters) – 1/THE MONTH OF MAY

Theresa May stepped into 10 Downing Street in July 2016 with the express aim of taking Britain out of the European Union. She will depart as prime minister this summer having failed in that ambition. No one can say she didn’t try — after three attempts to get her EU withdrawal bill through parliament, she finally had to admit it was dead in the water.

Speculation about her departure has been rife all month. Now it’s wait and see if her successor will fare any better with the withdrawal deal, or if he or she steers Britain towards a no-deal Brexit. What’s clear is that risks of crashing out of the EU without a transition period have risen, given the eurosceptic Boris Johnson is favorite to succeed May. The other risk is a new election, and possibly, a hung parliament. That means sterling could suffer more losses; it has fallen almost 3% this month against the dollar and euro.

May will remain in charge as the Conservatives elect a new leader. Her last task as prime minister — welcoming U.S. President Donald Trump to Britain — will hopefully be easier than trying to deliver Brexit.

Trade-weighted sterling interactive http://tmsnrt.rs/2hwV9Hv

Graphic on Brexit and sterling: https://tmsnrt.rs/2WW8QBb

2/GAME OF PHONES

The Sino-U.S. trade war has morphed from a tariff spat into a battle over who controls global tech. Washington has banned U.S. firms from doing business with Chinese telecommunications giant Huawei. Essentially that cripples the company’s ability to make new chips for its future smartphones.

As chipmakers and companies including Panasonic and ARM fell into line behind the U.S. ban and others like Toshiba scrambled to check their exposure, the widespread impact of the move on complex global supply chains is becoming clear.

Accordingly, shares have tumbled worldwide. Among others, the potential loss of business from the Chinese smartphone giant has hit Europe’s AMS and STMicroelectronics. Taiwan Semiconductor, which Bernstein analysts calculate makes around 11% of revenues from Huawei, sank too.

The Philadelphia semiconductor index, widely seen as a bellwether for world chipmakers, has lost around 18% in just a month since hitting a record high on April 24.

However, some telecoms equipment firms such as Nokia and Ericsson could benefit if the Huawei clampdown diverts business to them.

Trump’s latest claim that Huawei could be part of a trade deal has injected some hope into markets, but unless further talks are announced investors will remain unconvinced.

(For a graphic on ‘Chips tank worldwide as trade tensions return’ click https://tmsnrt.rs/2X6l0Yq)

3/EM TANTRUM WITHOUT THE TAPER?

Markets have a funny way of repeating themselves and exactly six years on from the ‘taper tantrum’, when investors freaked at the sudden realization the U.S. Fed wanted to end money printing, some are wondering whether something similar is brewing again.

A conviction the U.S.-China trade war will force the Fed to cut interest rates have pushed benchmark government bond yields that drive global borrowing costs to the lowest in years. But just like in 2013, the Fed is flagging something different.

It has signaled it may sit on its hands “for some time”. So if yields do start to spring back up, things could get scary.

Emerging markets in particular have painful memories of the taper tantrum. Economic surprises in the developing world are the most negative now in six years, according to an index compiled by Citi. And nearly $4 billion fled EM equities last week, EM equities have dropped around 10% so far this month and the premiums investors demand to hold EM bonds have spiked.

Clearly, many investors are not hanging around to find out what happens next.

(For a graphic on ‘EM stocks having a tantrum without the taper’ click https://tmsnrt.rs/2EtdQG4)

(For a graphic on ‘EM economic surprises most negative in six years’ click https://tmsnrt.rs/2YEM2q6)

4/MODI-NOMICS TO THE TEST After a stunning win in the world’s biggest election, Indian Prime Minister Narendra Modi begins to put together a new cabinet and a 100-day action plan. Focus is on who becomes finance minister — Arun Jaitley, a key troubleshooter for years — is said to be out of the race due to ill-health.

Modi’s re-election reinforces a global trend of right-wing populists sweeping to victory, from the United States to Brazil and Italy. Energised by his brand of Hindu nationalism, voters gave less weight to his failure to create jobs — a key campaign promise at the last election. In fact, a complex tax reform and a flash demonetization pushed millions out of work.

Credibility issues aside, upcoming growth data will be a reminder that while investors gave Modi a big thumbs up and pushed Indian stocks to record highs, the economy is less cheerful. Corporate earnings have in fact disappointed in the years Modi has been in office. And small businesses, low-income farmers, jobseekers and liquidity-starved banks will demand more of him in his second mandate.

(For a graphic on ‘Corporate India Earnings’ click https://tmsnrt.rs/2D7eato)

5/ON THE ROAD AGAIN

The U.S. summer vacation season begins, unofficially, with the Memorial Day weekend, and travel volumes across the United States should be the second-highest on record this year, according to the American Automobile Association (AAA). Despite high fuel prices, nearly 43 million Americans will be traveling over the long weekend, and 37.6 million will be driving, making this holiday travel season the busiest since 2005, the AAA predicts.

But gasoline supplies are tight on the U.S. East and West Coasts, leaving both regions vulnerable to potential price spikes at the pump, just as the peak summer driving season kicks off. High fuel prices cut into people’s discretionary spending though, so the question is what impact there will be on the U.S. consumer.

Consumer spending — which includes spending on services such as travel — jumped in March by the most in nearly a decade, following small increases in the previous two months. But even though first-quarter U.S. growth was a healthy 3.2% on an annual basis, consumer spending grew less. In coming months, the economy is widely seen decelerating; the question is what role consumer and travel spending will play.

(For a graphic on ‘Summer Gas Season’ click https://tmsnrt.rs/2EuvqcP https://tmsnrt.rs/2EuvqcP)

(Reporting by Sujata Rao, Helen Reid and Marc Jones in London; Marius Zaharia in Hong Kong and Jennifer Ablan in New York)

Source: OANN

FILE PHOTO: Illustration photo of a China yuan note
FILE PHOTO: A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration/File Photo

May 24, 2019

By Winni Zhou and John Ruwitch

SHANGHAI (Reuters) – As China’s yuan slips to historically weak levels against the dollar, the central bank’s atypical light touch is spurring speculation that policymakers want to be more judicious in their intervention and have no specific target for the currency.

The yuan has lost more than 2.5% against the dollar since the festering China-U.S. trade dispute took a turn for the worse with tariff increases early this month. It is now less than 0.1 yuan away from the 7-per-dollar level authorities have in the past indicated as a floor.

A weakening yuan risks sparking outflows, a major concern for policymakers keen to retain investor confidence in a slowing economy and acrimonious trade war with the United States.

But the People’s Bank of China (PBOC) has done little to keep the yuan in check, beyond issuing yuan-denominated bills in Hong Kong and setting the managed currency’s daily mid-point consistently stronger than market expectations.

“My sense is that 7 is no longer so critical as in 2016. Policymakers are more confident,” said Tommy Xie, head of Greater China research at OCBC Bank in Singapore. “It also depends on the cost of defending 7.”

In 2015, a one-off 2% yuan devaluation fueled depreciation expectations, and Beijing burned through about $1 trillion of foreign exchange reserves to fight back.

In 2018, to hold the currency steady, the PBOC raised the cost of shorting the yuan by hiking reserve requirements on forwards. State-owned banks also used swaps and sold dollars to prop up the local unit.

Despite the trade war, it was not until this week that senior central bank officials launched a verbal campaign to remind the market that China can keep the yuan “basically stable” and draw on a toolbox of policies to manage fluctuations.

“Nothing has gone wrong, and (we) will not allow anything to go wrong,” Liu Guoqiang, PBOC vice governor, told the Financial News, a newspaper run by the central bank.

The PBOC did not respond immediately to faxed questions from Reuters about its policy and tactics relating to yuan levels.

(GRAPHIC: China’s falling yuan approaches 7/dollar – https://tmsnrt.rs/2W6Aoqb)

SUBTLE MESSAGE

To yuan watchers, the central bank’s perfunctory actions and messaging suggest a higher degree of comfort with a weaker yuan, while the currency’s stability against a basket of trade-weighted currencies is evidence it is not encouraging excess depreciation.

“The authorities are providing only the support needed to cap yuan weakness, rather than trying to strengthen the currency significantly,” Lemon Zhang, a strategist at Standard Chartered Bank wrote in a note.

A weaker yuan would theoretically help exporters, many of whom are feeling the pinch of U.S. tariffs on billions of dollars worth of made-in-China goods.

BofAML analysts Claudio Piron and Ronald Man reckon China will limit the yuan’s weakness in the run-up to a G20 summit at the end of June, when U.S. President Donald Trump and his Chinese counterpart Xi Jinping might meet.

If that meeting fails to produce a breakthrough easing trade tensions, “it is clear that China has the capacity and need for yuan depreciation to dollar/yuan 7.13. Fiscal stimulus and monetary easing would be required to support China’s economy,” they said.

But analysts suspect the PBOC’s strategy is not just about targeting yuan levels but also involves managing its currency reserves and a growing international role for the yuan. Those explain the central bank’s reluctance to reduce its dollar reserves too quickly or drive up interest rates in the offshore yuan market in order to make it expensive to short-sell the currency.

“If the central bank chooses to intervene directly in the market, a decline in the reserves to $2.9 trillion from $3 trillion would trigger greater shock to market confidence,” said Raymond Yeung, ANZ’S chief Greater China economist in Hong Kong.

Yeung says the PBOC “is unwilling to see a huge gap between onshore and offshore yuan as that would affect international institutions’ judgment of whether the yuan is capable as a reserve currency”.

The offshore yuan this week has been relatively weaker than the onshore one, but the PBOC’s sale of its debt in Hong Kong, intended to drain offshore yuan supplies, has been small scale.

As the central bank juggles multiple objectives, its injections of cash onshore, aimed at spurring lending in a slowing economy, have also been modest, in part to guard the exchange rate.

(Editing by Vidya Ranganathan and Richard Borsuk)

Source: OANN

FILE PHOTO: An employee of a bank counts US dollar notes at a branch in Hanoi
FILE PHOTO: An employee of a bank counts US dollar notes at a branch in Hanoi, Vietnam May 16, 2016. REUTERS/Kham/File Photo

May 24, 2019

By Daniel Leussink

TOKYO (Reuters) – The dollar held steady on Friday, having come off two-year highs on lower U.S. yields in the previous session amid fears that a trade war with China will hurt the U.S. economy more than previously thought.

The greenback was not helped by rising expectations for an interest rate cut by the U.S. Federal Reserve later this year to help boost the world’s biggest economy.

Against a basket of key rival currencies, the dollar was largely unchanged at 97.906, having fallen from a two-year high of 98.371 overnight. The index is still up 1.8% for the year.

“Global risk aversion stemming from the intensifying U.S.-China trade tension is causing the stronger yen,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.

“Markets are pricing in the potential negative impact on the U.S. economy and the U.S. equity markets,” he said, referring to U.S.-China trade tensions.

On Thursday, President Donald Trump said U.S. complaints against Huawei Technologies Co Ltd might be resolved within the framework of a U.S.-China trade deal, while at the same time calling the Chinese telecommunications giant “very dangerous.”

The benchmark 10-year U.S. Treasury note yield was last up slightly at 2.3309%.

Overnight, it fell to its lowest since October 2017 after an early read on U.S. manufacturing activity for May posted its weakest pace of growth in almost a decade, suggesting a sharp slowdown in economic growth was underway.

There was only a 38.2% expectation on Thursday that U.S. interest rates will be at current levels in October of this year, compared to 58.3% a month ago, according to the CME Group’s FedWatch tool.

Against the yen, the dollar edged up to 109.695 yen, having giving up two-thirds of a percent overnight to record its steepest drop in a single session in two months.

The greenback is still 0.6% above a three-month trough of 109.02 yen touched on May 13.

The Australian dollar held steady at $0.6904, putting it on track to finish the week with a 0.5% gain, its first positive weekly performance in six weeks.

Elsewhere in the foreign exchange market, the euro was flat at $1.1183, having bounced from a two-year low of $1.11055 during the previous session.

The single currency came under pressure after a private survey showed activity in Germany’s services and manufacturing sectors fell in May, aggravating fears about the effect of unresolved trade disputes on Europe’s largest economy.

Compounding these worries, European parliamentary elections began on Thursday with eurosceptic parties expected to do well, raising concerns about the single currency’s stability.

(Graphic: World FX rates in 2019 – http://tmsnrt.rs/2egbfVh)

(Reporting by Daniel Leussink; editing by Darren Schuettler)

Source: OANN

FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa
FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File Photo

May 24, 2019

By Mumal Rathore

BENGALURU (Reuters) – The Bank of Canada is done raising interest rates until at least the end of next year, with a serious risk of a cut by then as policymakers become more wary of slowing growth and global trade tensions, a Reuters poll showed on Friday.

The central bank, which last raised its overnight rate in October, abandoned its tightening bias last month, putting it more in line with peers like the U.S. Federal Reserve and the European Central Bank.

All 40 economists in the latest poll taken May 21-23 said Governor Stephen Poloz and fellow policymakers would hold rates at 1.75% at the May 29 meeting.

While median forecasts show rates unchanged from here on, forecasters were split in three directions starting from the fourth quarter of this year. By end-2020, about two-thirds who provided a view said rates would be either unchanged or lower.

While the BoC cut its near-term growth outlook in last month’s quarterly monetary policy review, it expects the economy to rebound in the second half of this year.

But not everyone is convinced that is about to happen.

“We see little impetus for policymakers to resume rate hikes over our forecast horizon, as sluggish growth and lingering slack in the economy will continue to warrant leaving some policy accommodation in place,” wrote Morgan Stanley economists in a note.

“If growth fails to show any convincing signs of a rebound in 2H19, we think the risks of rate cuts will increase, and given our sluggish outlook, we place a subjective 40% probability that the BoC will deliver at least one 25 basis point rate cut over the next 12 months.”

Asked about the probability of a cut by the end of this year, the median from a smaller sample of economists in the Reuters poll put it at 23%. But that rose to 40% by the end of 2020, with nearly a third predicting more than 50% chance of a cut by then.

Chances of a rate cut this year are a little less than 20 percent, according to market speculators.

One major concern is the U.S.-China trade war, which has heated up over the past month. A Reuters poll taken earlier in May found the risk of recession in the U.S., Canada’s largest trading partner, had risen this month. [ECILT/US]

“If they (the BoC) cut, it is more likely to be on global weakness – generated by U.S.-China tensions most likely – than weakness specifically in Canada,” said David Sloan, senior economist at Continuum Economics, a consultancy.

But there are still some forecasters who expect the BoC to raise rates again. Out of the 30 contributors who provided an end-2020 view, 11 forecast a hike by the end of next year, including four respondents who expect two.

“The Canadian economy faces tail risks, but its labor market is historically tight and the Bank of Canada’s policy rate sits below trend real GDP growth,” said William Adams, senior economist at PNC Financial Services.

“The Bank of Canada’s next move will be a hike unless the U.S. or Canada fall into recession in the next 12 months.”

Chances of a recession in Canada in 12 months were 20%, rising to 27.5% in the next two years, a Reuters poll taken in April found. [ECILT/CA]

Separately, a Reuters survey of property market experts published earlier this week showed Canada’s housing market will stay stuck in the doldrums, with average prices stagnating this year and then rising 1.7% next year. [CA/HOMES]

(Polling by Sujith Pai and Indradip Ghosh; Editing by Ross Finley)

Source: OANN

FILE PHOTO: A worker cycles past containers outside a logistics center near Tianjin Port
FILE PHOTO: A worker cycles past containers outside a logistics center near Tianjin Port, in northern China, May 16, 2019. REUTERS/Jason Lee/File Photo

May 23, 2019

(Reuters) – The recent ratcheting up of U.S.-China trade tensions is creating uncertainties for businesses and could threaten economic growth, four Federal Reserve policymakers said on Thursday.

The remarks suggest the outcome of the 10-month trade war between the world’s two largest economies will be an important factor as Fed policymakers weigh how long to stay “patient” on interest rates.

“I feel like the data is good, but the mood is teetering, so if we get a relaxation or a reduction in the uncertainty…then I expect the economy’s momentum to be an upside risk to growth,” San Francisco Federal Reserve President Mary Daly said at a Dallas Fed conference. “If the uncertainties persist…then I think that’s a downside to the economy, because the uncertainty has real effects, but it also has effects on confidence, and that confidence feeds back into investment.”

Richmond Fed President Thomas Barkin and Atlanta Fed President Raphael Bostic, who spoke on the same panel, also said that uncertainties around trade could hurt growth, while their resolution could boost it.

“I’m watching very carefully how these trade tensions unfold because I have a concern.. whether that could cause some deceleration in the rate of growth,” Dallas Fed President Robert Kaplan told reporters after the panel. “It’s too soon to say.”

The comments came as researchers at the New York Fed published research showing the newest round of U.S. tariffs on Chinese imports will cost the typical American household $831 annually.

The Trump administration this month increased existing tariffs on $200 billion in Chinese goods to 25% from 10%, prompting Beijing to retaliate with its own levies on U.S. imports, as talks to end a 10-month trade war between the world’s two largest economies stalled.

“Our rate setting for the moment — key words being ‘for the moment’ — is in the right area,” Kaplan said. “I think the new development over the last month has been increased trade tensions and more business uncertainty, and it’s going to take a little while to sort out how that might unfold, or how long that might last.”

The policymakers made the comments at a Dallas Fed conference on technology, where academics, educators, and policymakers gathered to discuss the effect of technological advances like artificial intelligence on inflation, labor markets and the economy.

Research presented suggested that the adoption of new technologies may be pushing down on inflation and changing the nature of work in a way that could exacerbate what are already big income inequalities.

(Reporting by Ann Saphir; Editing by Chizu Nomiyama)

Source: OANN

FILE PHOTO: Sign of the European central Bank (ECB) is seen outside the ECB headquarters in Frankfurt
FILE PHOTO: Sign of the European central Bank (ECB) is seen outside the ECB headquarters in Frankfurt, Germany, March 7, 2019. REUTERS/Kai Pfaffenbach

May 23, 2019

By Dhara Ranasinghe and Ritvik Carvalho

LONDON (Reuters) – With euro zone growth faltering again, markets are debating what else the European Central Bank can do to shore up the economy.

After pushing borrowing costs to record lows and taking 2.6 trillion euros ($2.9 trillion) worth of bonds out of the market to revive inflation, its toolkit is limited.

But as outlined below, options do exist.

1/CHANGE GUIDANCE, OFFER TLTROs

Changing guidance on its plans for interest rates is widely seen as an easy first step.

In March, the ECB pushed out the timing of its first post-crisis rate hike to 2020 at the earliest.

This is expected to be delayed further, but doing so could have a limited impact as markets no longer expect a rate hike over the next two years. In fact, rate cut bets have been building.

So, a change in guidance would likely be combined with a very generous package of cheap multi-year loans – or targeted longer-term refinancing operations (TLTRO) – aimed at banks.

The ECB is set to launch a fresh TLTRO in September, but as details are not yet finalised it has time to assess whether more generous terms are needed.

(For a graphic on ‘Will the ECB’s next move be a rate cut?’ click https://tmsnrt.rs/2ElFVza)

2/ CUT RATES, TIER RATES

The ECB is studying whether to grant relief to banks from some of the burden of its -0.4% deposit rate, worried that weak bank profitability could impair transmission of monetary policy.

For markets, tiered rates are only likely as part of a bigger easing that involves rate cuts.

Economists say a cut would require significantly weaker economic conditions, while one source told Reuters this was nowhere near to being discussed by the ECB.

But don’t rule it out: New Zealand and Iceland cut rates in May, Australia may follow in June and markets anticipate a U.S. rate cut this year.

(For an interactive version of this chart: https://tmsnrt.rs/2EdOcoU)

3/BRING BACK QE!

The ECB says it is will use all tools available to boost growth and inflation, including resuming the asset-purchase scheme it ended just five months ago.

Capital Economics expects QE to return next year and ABN AMRO believes any new stimulus is likely to take this form.

But first, the ECB would need to raise the limit on how much sovereign debt it can hold from a single issuer, given it was already approaching the current 33% limit when QE ended.

That ceiling was introduced to ensure the ECB did not have a deciding vote in case of a debt restructuring, and changing it could expose the ECB to legal challenges.

(For an interactive version of the chart below: https://tmsnrt.rs/2EgAulf)

“Although raising the limit would likely be an uncomfortable situation for the ECB, it would be willing to do this in our view given the lack of other alternatives,” said ABN AMRO’s head of financial market research Nick Kounis.

4/BUY STOCKS, BONDS, SOURED LOANS

With government bonds getting scarce, the ECB added corporate debt to QE asset purchases in 2016. A new QE round could include shares.

Switzerland’s central bank buys stocks to diversify its currency reserves and the Bank of Japan buys equity exchange traded funds (ETFs) as part of its QE.

ECB Vice President Luis de Guindos said in April the ECB had not discussed buying stocks, and many question the effectiveness of equity purchases.

“It’s doable and sensible but it would be complicated,” said Marchel Alexandrovich, European financial economist at Jefferies. The European stock market is relatively small and buying stocks could leave the ECB open to criticism that it is picking companies that don’t apply best business practices, he said.

Buying bank bonds would be a game changer, said TS Lombard senior economist Shweta Singh. “This would release a lot of assets for the ECB to buy but it is next to impossible, as it would complicate the ECB’s role as bank supervisor,” she said.

Buying banks’ non-performing loans would also have a more powerful impact than buying equities but conflicts with the ECB’s supervisory role.

(For a graphic on ‘Size of major world equity markets’ click https://tmsnrt.rs/2WlhJHn)

5/YIELD CURVE CONTROL

One way to add more economic stimulus could be to target explicit levels for long-term interest rates.

The BOJ has targeted long-term yields around zero since 2016, and the idea is gaining traction. Federal Reserve official Lael Brainard has said she wanted to explore whether the Fed, in a future downturn, should consider this step.

It would be more complicated for the ECB, said Mohammed Kazmi, portfolio manager for UBP in Geneva. “The natural answer is to target Germany because the other countries’ bonds are priced against Germany,” he said.

But German bonds are in short supply. The ECB could change its capital key rule, where it buys bonds relative to a member state’s contribution to the ECB working capital. That would allow it to target another bond market though this in turn would leave it open to charges of financing spending by weaker states.

(For a graphic on ‘Yield curve control: a leaf out of the BoJ’s book?’ click https://tmsnrt.rs/2Wljl3V)

(Reporting by Dhara Ranasinghe; Graphics by Ritvik Carvalho; Additional reporting by Balazs Koranyi in Frankfurt; editing by John Stonestreet)

Source: OANN


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