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R&R Weekly Column

G10 Central Banks Are Trying To “Manage The Pause”

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By Brunello Rosa


9 December 2019  


After a few weeks during which G10 central banks did not make any major decisions, in December nearly all ten of them will hold their policy meetings. Last week, the boards of both the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) met to decide the course of their respective monetary policies for the coming months. The BoC left its policy rate unchanged at 1.75%, as had been expected it would. It is the highest such rate among the G10 countries. The BoC’s position is, broadly speaking, “neutral”: the Bank’s statement did not express any particular bias towards either raising rates further or cutting them in the near term. The Bank can enjoy Canada’s inflation being on target and growth being not too distant from its potential level, and so can afford to wait longer before deciding what to do. Clearly, the most relevant factor will be the outcome of the trade negotiations between China and US, given that the Canadian economy is highly dependent on both those economies. It will also depend on oil prices, which tend to move in tandem with global growth. 

If the US and China manage to agree to at least the Phase-1 deal (as we expect they will), the Bank of Canada will be able to stay on hold for longer, hoping that a pickup in global growth does not  eventually lead to cutting its policy rates. 


On the other side of the world, in Australia, the RBA also kept its rate unchanged at 0.75%, but in this case after having already cut rates three times this year, for a cumulative amount of 75bps. Like Canada, the Australian economy is highly dependent on the US, China, global growth and the commodity cycle, which is why the RBA has already also started to explore which unconventional measures it might use if and when its policy rate reaches the effective lower bound of 0.25%. Governor Lowe said that the RBA would be ready to start a QE program of purchases of sovereign bonds in case extra easing is needed, also thanks the additional supply of bonds deriving from the expected fiscal stimulus. So, while the BoC’s position was effectively neutral, in the case of the RBA we can see there exists a clear easing bias. 

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In the week ahead, the two largest central banks will meet: the Fed and the ECB. As we will discuss in our forthcoming preview, the Fed, which has officially declared itself to be “on pause”, will have to calibrate this message in order not to be pushed around further by President Trump during the coming election year, Trump wanting rates to be cut even more. The ECB’s job is equally challenging. Its policy stance is currently on some sort of auto pilot: open-ended QE, full reinvestment of proceeds, easing bias on rates, and reserve tiering for core-EZ banks and TLTROIII for periphery-EZ banks. But the arrival of a new president at the helm of the institution – namely, Lagarde replacing Draghi – marks the beginning of a transition period that could last a few months. The announced review of policy strategy is a double-edged sword. On the one hand, Lagarde my end up taking ownership of the current policy stance; on the other hand, the review could be the beginning of a reversal of some policy tools. Also this week, the central bank of Switzerland (the SNB) will meet, but as we will discuss in our forthcoming preview we do not expect major changes in its policy stance to be made. 


The following week, on Thursday, there will be a number of important central bank meetings: the BoJ, the BoE, Norway’s Norges Bank and Sweden’s Riksbank. The BoE will do nothing on the day of the general election: it remains to be seen whether the dissenters within the Monetary Policy Commitee will keep or change their vote to “no change”. Norges Bank has already reached “pause” levels, and we do not expect them to do anything at this meeting. More interesting will be to see what the BoJ will do, since the government has finally launched a supplementary budget  (which includes a larger-than-expected USD 121bn stimulus package), as the Bank had been clearly demanding it do. Finally, and perhaps surprisingly, the Riksbank is likely to increase its policy rate, as we mentioned in our latest review. It may take its repo rate from -0.25 percent to zero, before entering what will likely be a long period of pause.     

LATEST RESEARCH

SNB Likely To Hold Off, For Now

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by  Brunello Rosa, Farah Aladsani and Fawaz Al Mughrabi

10 December 2019

The US-China Phase-1 Trade Deal Is Likely To Be Completed Soon, But the Strategic Rivalry Is Also Likely To Increase Over Time

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by Nouriel Roubini

6 December 2019 

POLICY COMPASS: EU Update Winter Is Coming For Europe’s Wobbly Coalitions

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by Grégoire Roos and Brunello Rosa

5 December 2019

MONETARY AFFAIRS - Fed Preview: Managing The Pause

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 by Nouriel Roubini and Brunello Rosa

9 December 2019

ECB PREVIEW - All Attention Will Be On Lagarde’s First Press Conference

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by Brunello Rosa and Nouriel Roubini

6 December 2019

MARKET VIEWS - Six ‘Grey Swan’ Events Could Hit The Global Economy And Markets In 2020

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  by Alessandro Magnoli, Fawaz Al Mughrabi, Farah Aladsani 

28 November 2019

The Geopolitical Corner by John Hulsman

Amidst Economic Chaos, The Red Tide Recedes In South America

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3 December 2019

  

Introduction: The Left’s Luck Runs Out 


Little noticed at the time by the rest of a busy world, between 2000-2015 a red (or at the very least, pink) tide swept South America, as leftist populists from Brazil, Argentina, Bolivia, and Venezuela politically dominated the continent. At first, their power was sustained by easy economic prosperity the commodities boom brought on with the rise of China. At the same time, China also started to heavily invest in the region, to gain economic and geopolitical influence. 


However, South America’s populist left, both by ideological inclination and the lure of easy popularity, declined to ‘fix the roof while the sun shined,’ eschewing the tough economic medicine that might have transformed the continent’s boomlet into more lasting economic gains. As the commodities boom wore down, the victim of trade wars and the slowing growth of Beijing, the party was well and truly over. 


Shorn of their local political legitimacy, and in many cases mired in corruption scandals (as was the case with Lula da Silva’s government in Brazil), several of the region’s leftist leaders (particularly Evo Morales in Bolivia and Nicolas Maduro in Venezuela) turned to repression to keep their formerly popular regimes in power. The result has been a disaster for the left, shorn now of its populist credentials.

 

Worse for South America’s leftist populists, their perennial imperialist nemesis, the United States, evinced a new interest in the region, as the ‘America First’ administration of Donald Trump has looked closer to home, turning away from the Middle East, to secure traditional American hegemony in the Western Hemisphere. While far from wiped out—as the Peronists find themselves back in power in Argentina and Maduro’s thuggish Bolivarian Revolution limps on—it is also surely true that the generation’s rise of the left across South America has definitively come to an end.


The Days Of Wine And Roses


How different things looked in the first decade of the 2000s. Carefully shepherding Brazil’s economic largesse into programs for social justice, President Lula (as he is universally known in his country) initiated the remarkable Bolsa Familia programme, which it is estimated lifted as many as 30 million Brazilians out of extreme poverty. To this day (perhaps unsurprisingly), Lula remains the most popular politician in the country. 


Likewise, while an economic basket case now, the Bolivarian Revolution of Hugo Chavez has not always been viewed as an unmitigated disaster. Using the proceeds that come from possessing the largest oil fields in the world, Chavez poured money into subsidies for the poor, winning himself enduring and real local affection from Venezuela’s have not’s. 


The husband/wife team of Nestor Kirchner (until his sudden death in 2010) and Cristina Fernandez de Kirchner revitalised the old corporatist Peronist model in Argentina, giving it a decidedly populist, leftist tinge that was electorally dominant for well over a decade.  

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In turn, Evo Morales socially remade his country as its first indigenous leader, taking power away from the often-repressive, European-styled elite. Morales was to stay in power longer than his leftist compatriots in Brazil, Argentina, and Venezuela (Lula left power voluntarily, while grooming his successor Dilma Rousseff, while Chavez and Kirchner died), hanging on for 14 years. 


But these early political and social successes were in each case not followed up by anything approaching serious economic reform. Instead, lulled into a false sense of security that the boom (and its easy political benefits) would last forever, in each case South America’s populist leaders dithered, missing the chance to enshrine a sustainable upwards trajectory for their people. Shorn of structural economic success that had not been of their own making in the first place, South America’s populist left were now to pay the price for avoiding anything approaching genuine economic reforms. 


And Then Comes The Rain 


Beyond the economic downturn, in each case South America’s leftist populists had a succession problem. Due to his early death, Kirchner resorted to nepotism, handing power over to his charismatic (but also wildly corrupt; she is presently under indictment in no fewer than 11 cases of malfeasance) wife Cristina, a woman fond of leftist battle cries but less well-versed in macroeconomics. 


Chavez, in many ways the charismatic prototype of the South American leftist, populist leader, left power to the decidedly unglamorous Nicolas Maduro; ‘Chavism without the charisma’ has not worked very well. 


Lula democratically handed power over to his hand-picked successor, Dilma Rousseff, but she had neither his economic luck, nor his way with the people. 


Morales’ problem was in many ways the opposite of the three others; to avoid appointing a weaker successor he instead declared himself irreplaceable, going on to serve an untraditional third term, and—in defiance of a lost plebiscite he had promised to adhere to—even attempted a fourth one. This proved to much for the people of Bolivia, particularly in the police and the army who sealed his political doom.

In each case, a personal law of diminishing returns set in for South America’s left; the new leaders were commonly acknowledged to be merely political shadows of what had gone before. And in a part of the world with traditionally weak political institutions, these personal failings play a disproportionate role in any political risk analysis.


[...]


(This is an excerpt of Dr. Hulsman's latest article, which you can read here).


Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com. 

Looking Ahead

The Week Ahead

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Week 9 - 15 December 2019

  

Fed and ECB To Leave Policy Stance Unchanged, Tory Party Ahead In UK Polls 


In the US, the Fed is expected to leave its policy target range unchanged at 1.50 - 1.75%, while it keeps monitoring economic developments, particularly on the inflation front. CPI inflation is expected to rise to 2.0% y-o-y in November (p: 1.8%). 


In the EZ, the ECB is expected to keep the ‘main refinancing rate’ and the ‘deposit rate’ unchanged at 0.0% and -0.50%, respectively. October IP is expected to contract (c: -2.3% y-o-y; p: -1.7%), as business sentiment deteriorates.


In the UK, polls for the December 12 general election show the Conservative party at 43%, and the Labour party at 33%. A Conservative party majority win will provide PM Johnson enough backing to break the Parliament deadlock and get the ‘Brexit agreement’ passed by the January 31, 2020 deadline. 


In Switzerland, the SNB is expected to keep its policy rate unchanged, in-line with the ECB (-0.75%).


In Japan, Q3 GDP growth is expected to remain unchanged at 0.2% y-o-y (p: 0.2%).   

The Quarter Ahead

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Global Economic Activity Remains Stagnant, But With No Signs Of Credit Crunch


At global level, Leading indicators (global shipping, consumer and business confidence, PMIs, financial conditions and credit spreads) show resilience.


According to US President Trump, US and China’s ‘Phase-1’ deal could be delayed until after the US presidential election of November 2020. Policy uncertainty is undermining investment and risks remain high, e.g.: an escalation of trade conflicts, geopolitical tensions, China’s slowdown and climate change. Trade tensions are likely to continue until late next year. After President Trump stated that “US-China trade tensions could persist until the end of next year”, the market expectations of a Fed rate cut in 2020 rose to 69% (p: 63%). The NY Fed added USD 70.1bn in temporary liquidity to the financial markets, via: i) overnight repurchase agreements worth of USD 54.9 bn; and ii) mortgage securities worth USD 15.2bn.


In the US, a Democratic-controlled House committee approved a report accusing President Trump of: 1) “soliciting foreign interference”; and 2) placing “his own political interests above the national interest” by pressuring Ukraine to investigate Trump’s 2020 political rival, Mr. Joe Biden. The proceedings are unlikely to pass in the Republican-controlled Senate. At the 70th-anniversary NATO summit, President Trump spurred diplomatic feuds within the alliance (i.e.: French President Macron and Canadian PM Trudeau) over: i) defence budgets; and ii) unfair treatment of US companies via the proposed digital tax. 


In the EZ, as the banking sector outlook turned negative, banks cut 60,000 jobs. Going forward, the upcoming digitisation and industry consolidation are likely to lead to more “rightsizing”.     

Last week's Summary (2 - 8 November 2019)

Real Economy: Geopolitical Tensions Still Remain High, Hampering Economic Activity


In the US, November’s labor market data remained robust (Nonfarm Payrolls Nov., a: 266K; c: 180K; p: 128K; Avg. Hourly Earnings, a: 3.1% y-o-y; c: 3.0%; p: 3.2; Unemployment rate; a: 3.5%; c: 3.6%, p: 3.6). 


In the EZ: 1) Q3 GDP stalled at 1.2% y-o-y, in-line with expectations (c: 1.2%; p: 1.2%); 2) October retail sales fell below-consensus, to 1.4% y-o-y (c: 2.2%; p: 2.7%); while 3) November manufacturing PMI rose to 46.9 (c: 46.6; p: 46.6), still in contractionary territory. 


In Japan, the government launched a stimulus worth USD 121bn (1.9% of GDP), the first DM country to embark in fiscal expansion. 


In Turkey, after 3 consecutive quarters of contraction due to the 2018 crisis, in Q3 the economy returned to growth (Q3 GDP, a: 0.9% y-o-y; c: 1%; p: -1.5).


In Australia and Canada, CBs left their key policy rates unchanged at 0.75% and 1.75%, respectively.   

Financial Markets: Strong US Job Growth Offset Trade-Related Uncertainties, Lifting Sentiment


Market drivers: after an above-consensus jobs report signaled strength in the US economy, US stocks and government-bond yields rose, offsetting trade-related jitters. 


Stocks: w-o-w, global equity indices rose (MSCI ACWI, +0.3% to 548), led by DMs (MSCI World, +0.2% to 2,296; S&P 500, +0.2% to 3,146); EM stocks also rose (MSCI EMs, +0.9% to 1,049). 


Bonds: Returns fell w-o-w (BAML Global, -0.4% to 284.6). 


FX: w-o-w, the USD weakened against other currencies (DXY, -0.6% to 97.700), while the EUR and GBP appreciated (EUR/USD, +0.4% to 1.106; GBP/USD, +1.6% to 1.314). EM currencies recovered w-o-w, on the back a weak USD (MSCI EM, +0.2% to 1,635); despite US tariffs on Brazilian steel, the BRL rose (USD/BRL, +2.3% to 4.141). 


Commodities: Oil prices rose, driven by deeper-than-expected output-cuts, agreed during the OPEC+ meeting (Brent, +3.1% to 64.4 USD/b).  

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