It's not just the Fed....



ref :- "Investors await signals on ECB asset purchase easing", Market questions -- Week ahead, The Financial Times


For obvious reasons, Mondays can be a bit bare when it comes to breaking market action news. But most financial news outlets will offer some form of heads-up regarding what we should be looking out for during the upcoming week, and some will give us a potted summary of the factors likely to shape events/decisions/data. The FT's version ("Market questions") takes the form of posing three (usually) questions, each relating to a different event coming up in the week ahead and identifying the points for consideration that might go towards defining their outcomes.

Today the column leads with the ECB's policy meeting on Thursday , and whether they are likely to announce a "tapering" of it's emergency €80bn per month bond purchasing programme (PEPP). Sounds familiar? The ECB does indeed face many of the same issues as the Fed (and other major central banks) when it comes to making that decision: rising growth and inflation predictions on the one hand (last week saw the strongest inflation data for a decade), and the Delta variant surge that argues against making any premature decisions that may undermine the data on the other.


It still sounds familiar, with both hawks and doves on the governing body arguing their cases. Where the ECB and the Fed may differ though lies in the ECB's record of tightening too quickly in the past. It's true that the Taper Tantrum of 2013 was a great MARKET reaction to ill-considered communication of Fed thinking, but premature action by the ECB in 2011 just as the Eurozone was slipping into a sovereign-debt crisis pushed the real economy back into recession, and arguably it's not the only time that hawks have pressed the ECB into tapping on the brakes too quickly. It's something that the ECB are well aware of, and wary of repeating.


Some pundits expect monthly purchases under PEPP to be trimmed back to say €60 - 70bn as they announce raised forecasts for growth and inflation. It's not impossible, but even if the ECB do take such action one has to expect them to SOUND dovish as they do it. One way they might do that is to make it absolutely clear that a modest tapering of purchases does not signal the start of a path towards a total cessation of asset purchases. When the Fed eventually begins to wind down it asset purchases Stateside, it will in time be a commitment to stopping asset purchases altogether, but if it wants to avoid a repeat of history many are arguing that the ECB must make plain their intention to continue with its pre-pandemic purchases even after the measures are wound down.


The second issue that the FT examines is Wednesday's publication of the Fed's "Beige Book". Newcomers may wonder exactly what that is. Essentially, it's a survey of interviews conducted by the 12 local Fed banks of the businesses in their region. The importance of the Beige Book to investors has gone up and down over the years, but it would be fair to say that it's not been one of the most closely followed reports of late. Investors have generally preferred hard, "quantitative" data to the more anecdotal, "qualitative" Beige Book report.


But there's an argument that says we might all do well to pay the Book a little more attention. These are highly unusual times, and even hard data fans such as Tom Graff of Brown Advisory are suggesting that right now anecdotal evidence provided by talking to the people at the sharp end may be more helpful than hard data numbers. He says: "The hard data need context at least and at times can even be deceptive under these circumstances of unprecedented supply pressures, labour shortages and a rapidly changing pandemic".


Of course, you can't get away from the issue of the moment and the reason why the Beige Book might carry greater weight than in the recent past is for the input it might have on the Fed's decision on when to start reining back the stimulus. Heaven knows investors could do with the help.... Friday's employment report saw non-farm payrolls come in at +235,000, much lower than the lowest expectation but at the same time wage costs continue upward, which is likely to contribute further to inflation readings already way above target. We'll wait to see whether the Beige Book gives the Fed (and investors) any clue to future action , but on balance it would seem that an announcement at the Fed's September meeting is a little more unlikely than it was before Friday.


And lastly, Australia.... where a "no-change" decision on rates by the Reserve Bank of Australia (RBA) is widely expected this week. Yes, we know.... that wouldn't seem to be the most startling piece of news to settle on, especially as near-neighbours New Zealand, who were expected to raise rates in August, in fact declined to do so in response to the pandemic upsurge. But Australia's position in global trade makes it always of interest, and not just to Aussie $ traders.

Some analysts had also been expecting Australia to raise rates as a measure to address rocketing house prices but the pandemic has almost certainly put paid to that too. We all know that both nations have a pretty whole-hearted approach to anti-Covid measures and the lockdowns provoked by the Delta surge are bound to adversely affect economic recovery and thus postpone the first rate rise in 11 years (in Australia's case).


Shane Oliver of AMP Capital tells the FT that a deteriorating economic outlook only reinforces the fact that a rate rise is a long way off. The RBA has stated that rates won't rise until inflation is sustainably with the 2 - 3% target range, which it doesn't expect until 2024. In other words, in common with many other central banks the RBA believes the current spike in inflation (3.8%) is "transient".


Any thought of rate rises seems well out of kilter with the increasing bearish view on the Australian economy being taken by many analysts. You've got to remember that Australia is one of the foremost examples of a commodity-producing economy dependent on demand for its exports from client nations. In Australia's case, that mostly means China.... and if you're bearish on Australia's economy you're almost certainly less-than-bullish on the prospects for Chinese growth. That wouldn't bode too well for the world economy, never mind just Australia's. This Delta variant's got a lot to answer for.....

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