A key theme for us this year was that despite the improved global growth outlook, monetary conditions in the key developed economies would remain highly stimulatory and in two cases – the Euro area and Japan – possibly become easier. Recent statements from the G3 central banks have not altered that view.
the March Federal Open Market Committee (FOMC) meeting increases in interest
rate projections (the dots in the central tendency projections) along with Chair
Janet Yellen’s apparent definition of "considerable time" as
six-months in the post-meeting press conference left markets concerned, overly
in our view, that interest rate increases were closer than appeared likely
before the meeting.
release this week of the minutes from the March meeting should have left markets
in no doubt as to the continued dovish bias of the Committee. That followed an equally dovish speech from Yellen
last week that, along with the minutes, consigns “dot-gate” and “six-months” to
history as communication wobbles.
the weather cops most (though not all) of the flak for the recent weakness in
activity data, there was an interesting and important discussion about the
degree of slack in the labour market. "Several" members of the
committee thought there might be more slack in the labour market than suggested
by the unemployment rate alone while “a couple” saw slack as more limited.
weight of opinion in that discussion is consistent with Yellen’s speech last
week in which she observed that the economy and the job market are not back to
normal health and that the US economy needs extraordinary support for some
time. The discussion is not suggestive
of a committee that is going to be in a rush to remove monetary accommodation. That said the focus on the labour market reinforces
for me that wages, more precisely unit labour costs, holds the key to the Fed’s
Euro zone economy is at a fascinating stage.
Growth is clearly better, but remains insufficiently robust to make any
significant dent in spare capacity. The
complicating factor for the ECB is that the amount of spare capacity differs
across the region, most notably between Germany where the output gap is small
and closing and in the likes of Spain Italy and France where output gaps remain
large. On balance, risks to inflation
remain to the downside.
ECB left conditions unchanged at their meeting last week but clearly maintained
an easing bias which was, if anything, reinforced by the comment that the
Governing Council is "unanimous in
its commitment to also use the unconventional methods within its mandate in
order to cope effectively with risks of a too prolonged period of low
options remain on the table for the ECB including quantitative easing (QE). Bank President Mario Draghi said the
discussion was continuing around QE including determining which of private and
public purchases would be most effective.
as there is a high hurdle for altering tapering in the US, there is a high hurdle
to its introduction in the Euro zone and I'm not convinced the ECB is fully there
yet. But it can’t be ruled out either with
high unemployment, continued corporate deleveraging and the risk of lower
Japanese economy is also at a critical stage.
The Bank of Japan (BoJ) also left conditions unchanged this week but at
the post meeting press conference Governor Haruhiko Kuroda acknowledged there
was room for further easing, although he also said there is room to adjust conditions
in the opposite direction i.e tighten.
the BoJ was somewhat more cautious about the economic outlook this month,
perhaps in response to the weaker than expected Tankan survey, I think they are
being a tad optimistic about how well the economy will come through the April
1st consumption tax increase.
discussed in the post below I think Japan is in for a period of low growth
which along with the waning impact of the recent currency depreciation will see
inflation turn down again in the months ahead.
That will force the BoJ’s hand if they remain committed to their 2%