It has been a relatively quiet week on the data front which gives us an opportunity to catch up on the events that have unfolded the past two weeks. We have seen key events from each of the major central banks over the past fortnight. Starting with the Eurozone, where the ECB refused to call an end to its QE program, instead opting to halve their monthly bond purchasing to €30bn until September next year. Draghi and Co. appeared to have learned lessons from the Fed who back in 2013 saw a surge in US Treasury’s when Fed Chairman Ben Bernanke, announced a halt to their own bond purchasing program, and triggered a ‘taper tantrum’ which saw investors racing to withdraw from bonds.
The ECB however, have shrewdly led markets to believe that they delivered on markets expectation by cutting the underlying figure to €30bn. However, the central bank since announced that they expect to reinvest a further €130bn in bonds that are set to mature in the coming year. This additional €11bn a month brings the underlying monthly figure to around €41bn. This move has seen government yields across the EU continue to remain low, with the German 10 year holding near two month lows, down around 16bps from the peak it hit a day before the ECB meeting on Oct.26. Equity markets also took the news in their stride, with both the DAX and CAC 40 hitting record highs last week. This sentiment was carried through into a risk-on sentiment with the VIX hitting a new all-time low.
However, as before we remain skeptical of this environment given the geo-political risks which continue to remain prevalent. Only this week we saw Saudi Arabia accuse Lebanon of declaring war on it, while tension remain high between Bahrain and Qatar. While away from the Middle East, the relationship between North Korea and Trump remains sore, with the former accusing Trump of looking to start a nuclear war.
Over in the UK, we saw the BOE raise rates for the first time in a decade last week. Mark Carney has faced a lot of scrutiny in the past and a failure to raise rates here would have seriously undermined the Bank’s communication policy. Fundamentally, we believe the UK can cope with this rate increase, particularly with inflation now at 3%. If we roll back 10 years to when the last rate hike happened, inflation sat at 2.4%, unemployment was 5.4% while annual growth was 2.6%. While the only laggard here on these figures is growth, we have seen no real consistent let up in any of economic indicators which would suggest to us the economy is not in a position to withstand this increase. While on a debt front, Public Net Debt is at all-time highs in terms of volume, but when you look at it as a percent of GDP its low in terms of historically standards here.
Finally, in the US where we saw Trump hand Jerome Powell the daunting task of guiding the US back to a ‘normal’ financial environment. Powell, who is seen as broadly centrist on monetary policy will be tasked with attempting to align the market yield curve and Fed dot plot which differ by 0.75%, or three rate hikes over the next two years. Powell however will be cautious of pushing rates up to quickly. Some readers may recall when Paul Volcker served as Fed Chairman back in 1979, his battle against high inflation saw him raise rates dramatically in the space of 2 years and resulted in the US falling into a recession by 1981.
Today’s calendar again light on the ground with weekly initial jobless claims out this afternoon, while this morning we have EU economic forecasts.