Thursday March 28, 2013 - 16:24:00 GMT
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ECONOMIC DATA ANALYSIS - RENEWED MONETARY POLICY ACTIVISM?
ECONOMIC DATA ANALYSIS THURSDAY 28 MARCH 2013
RENEWED MONETARY POLICY ACTIVISM?
- ECB reaction to renewed euro area concerns watched for signs of further stimulus
- MPC likely to remain divided with policy on hold despite growing economic uncertainty
- BoJ to pursue more activist policy, but incumbents to question how quickly
Cyprus impact lingers ...Cypriot banks reopened today, but any suggestion that things have returned to normal neglects the accompanying capital controls. These are scheduled to be reviewed weekly. European officials have been keen to stress that Cyprus is a “very special case”. Yet, combined with the political uncertainty in Italy, financial markets are increasingly recognising the possibility of a major juncture in the euro area’s crisis. Core yields have dropped sharply, as has the euro. Peripheral yields have not moved as much as in previous episodes, reflecting the separation of sovereign and bank balance sheets in this latest bailout. But financial credit spreads have risen, risking further fragmentation of the euro area’s capital markets.
ECB response ? ... Rising fragmentation risks undoing the progress made since President Draghi promised to do “whatever it takes” last July. The ECB announces its latest policy decision on Thursday. We expect no change, but markets will watch Draghi’s press conference for a reaction to recent events. As well as recent developments, the economic news has worsened, while inflation is now further below the ECB’s target and expected to remain there over the it’s forecast horizon. Arguments for further stimulus are growing. But concerns surround the ECB’s toolkit. Implementing OMT - the ECB’s seemingly preferred stimulus - is outside of the Governing Council ’s control. Further LTROs could meet limited demand given ongoing 3-year repayments and the possibility of ‘stigma’ for fresh users. Markets will thus watch for clues of a refi rate reduction (narrowing the corridor, rather than introducing negative deposit rates) or a further easing in collateral standards. Importantly markets hope to see some reaction from the ECB.
MPC stands on divided ground for now ... The MPC also announces its latest decision on Thursday. March’s Committee was split between those advocating more QE to prevent weak short-term growth becoming permanent and those with concerns over inflation expectations and the efficacy of QE. We do not expect an extension of QE this time. However, renewed deterioration in the euro area and a persistent softening in domestic activity indicators would make the following meeting, with updated Inflation Report projections, a closer call even ahead of the greater activism expected under Governor Carney in H2.
Bank of Japan to pull policy levers ... Thursday also sees the BoJ’s latest policy meeting- new Governor Kuroda’s first. Anything other than a significant loosening in policy will be a disappointment to markets. Sources suggest the BoJ will bring forward open-ended QE to start immediately and will extend the maturity of its purchases. The key question is how much QE will it undertake? In the US, the Fed’s open-ended $85bn/month is an annualised 6½% of GDP. An equivalent in Japan would be ¥2.4trn/month. Yet Kuroda is just one of a nine-strong Committee and backing from other members cannot be taken for granted. Given government support, other members are likely to be broadly compliant, but they may constrain how quickly the Governor can pursue a more activist policy.
US expansion continues ... The coming week also sees important indicators from the US including March’s ISM indices and the latest payrolls release. Our global team sees both suggesting that the sequester has not yet had a material impact on activity. In particular, forecasts of rising ISM’s point to encouraging underlying expansion. This does not make the economy impervious to fiscal tightening, which should have a more visible impact over coming quarters. Nor would it suggest US expansion could offset the impact of a renewed slump in euro area activity
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