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26 Feb 2016
Central banks alone cannot fix sentiment – SocGen
Michala Marcussen, Global Head of Economics at Societe Generale, suggests that the unorthodox monetary policy accommodation has resulted in financial markets to take considerable comfort from the liquidity channels of these policies; that is until recently as the dark side of low and negative yields has come to dominate the debate.
Key Quotes
Fed: We now expect only one hike at the end of this year. The Fed may try to hike earlier if market volatility subsides, however as the taper and lift-off have taught us, repricing of market expectations is likely to be challenging and it will probably take longer than the Fed would like. Importantly, we do NOT expect the dots to converge to our new scenario in one go. The Fed’s bias is still for hikes and removing them from the FOMC’s scenario will probably be done incrementally. This is very important for market sentiment. We assume four hikes next year, with the rate peaking at 1.875% (i.e. the ‘lost’ hikes are not made up).
PBoC: The PBOC is caught in the impossible triangle and we have recently scaled back expectations for RRR cuts.
ECB: Our baseline call includes a 20bp cut in the deposit rate in March, likely with the introduction of a two-tier charge on excess reserves, along with an extension of the TLTRO with a 3y maturity. In light of the present growth and inflation outlook, we see the case for more aggressive easing as limited, but options to boost market confidence (activate a corporate bond purchase programme and expand collateral eligibility) could be considered in case stress remains in credit and ABS markets. We expect the APP programme to be tapered as of March 2017, ending in late 2017, as the euro area recovery increasingly becomes supported by investment.
BoJ: We consider that the possibility of the BoJ expanding its QQE policy (by lowering the negative interest rate further) in 2016 has increased from 10% to 30%. We also think the possibility of another delay in the next consumption tax hike (scheduled for April 2017) has risen from 10% to 30%.
BoE: We already have a bold out-of-consensus call of no rate increases in this business cycle. The tightening of financial conditions in the new scenario would not be sufficient to warrant rate cuts, even though the OIS curve is building in a non-negligible risk of that happening within the next year. So our rate forecast path remains one of unchanged rates out to 2020.We interpret the OIS market pricing as building in some risk of Brexit which would elicit a policy response of lower interest rates, a risk we have been stressing for some time. Once the referendum is out of the way, that risk should be removed.”
Key Quotes
Fed: We now expect only one hike at the end of this year. The Fed may try to hike earlier if market volatility subsides, however as the taper and lift-off have taught us, repricing of market expectations is likely to be challenging and it will probably take longer than the Fed would like. Importantly, we do NOT expect the dots to converge to our new scenario in one go. The Fed’s bias is still for hikes and removing them from the FOMC’s scenario will probably be done incrementally. This is very important for market sentiment. We assume four hikes next year, with the rate peaking at 1.875% (i.e. the ‘lost’ hikes are not made up).
PBoC: The PBOC is caught in the impossible triangle and we have recently scaled back expectations for RRR cuts.
ECB: Our baseline call includes a 20bp cut in the deposit rate in March, likely with the introduction of a two-tier charge on excess reserves, along with an extension of the TLTRO with a 3y maturity. In light of the present growth and inflation outlook, we see the case for more aggressive easing as limited, but options to boost market confidence (activate a corporate bond purchase programme and expand collateral eligibility) could be considered in case stress remains in credit and ABS markets. We expect the APP programme to be tapered as of March 2017, ending in late 2017, as the euro area recovery increasingly becomes supported by investment.
BoJ: We consider that the possibility of the BoJ expanding its QQE policy (by lowering the negative interest rate further) in 2016 has increased from 10% to 30%. We also think the possibility of another delay in the next consumption tax hike (scheduled for April 2017) has risen from 10% to 30%.
BoE: We already have a bold out-of-consensus call of no rate increases in this business cycle. The tightening of financial conditions in the new scenario would not be sufficient to warrant rate cuts, even though the OIS curve is building in a non-negligible risk of that happening within the next year. So our rate forecast path remains one of unchanged rates out to 2020.We interpret the OIS market pricing as building in some risk of Brexit which would elicit a policy response of lower interest rates, a risk we have been stressing for some time. Once the referendum is out of the way, that risk should be removed.”