Global Economic Headlines (12/3/18)

• BIS tells central banks to keep calm and carry on with policy normalisation
• ECB – debate shifts to QE taper/end beyond September
• Germany, China warn Trump tariff moves threaten global trade
• UK Chancellor of the Exchequer Hammond sees light at the end of austerity tunnel, but debt must fall
• Visa says UK consumer spending suffers weakest start to a year since 2012

Top Two Stories

BIS tells central banks to keep calm and carry on with policy normalisation
The recent volatility in global financial markets should not deter top central banks from lifting interest rates or ending years of unprecedented stimulus, the Bank for International Settlements (BIS) said on Sunday. The latest report from the Switzerland-based group said that after such a long period of calm there were bound to be more market wobbles and that trade war worries were making the “delicate task” of trying to normalise policy more complicated. Nevertheless, the move toward higher interest rates, which started in the United States and is gradually gaining traction elsewhere, should continue.
The BIS is an umbrella group for the world’s central banks, so its reports are seen as an indicator of the thinking that goes on behind the closed doors of its quarterly meetings.

ECB – debate shifts to QE taper/end beyond September
The ECB dropped the QE easing bias at its policy meeting last week, a decision which received unanimous support and paves the way for an eventual tapering and end to the programme, that is likely to be announced at the June 14 meeting. The April 26 meeting is where the big debate will likely happen over the fate of QE, and the press conference that follows should hint at the likely shape of QE beyond September. The ECB took a small but significant step on March 8 as it lays the foundations for an eventual end to the programme and the rotation of forward-guidance language to focus on interest rates. The removal of the easing bias now means the ECB sees it less likely it will need to increase the “size and/or duration” of QE should the outlook become less favourable.
The next step is to provide colour on what will happen to QE assuming the current programme expires at end-September.

Bond Market

US Treasuries
US Treasury yields hit session peaks on Friday after data showed the world’s largest economy created far more jobs than expected in February, although the rise in yields was limited by slowing wage inflation. The employment report suggested the Federal Reserve is still on track to raise interest rates at least three times this year. US non-farm payrolls expanded by 313,000 jobs last month, boosted by the largest gain in construction jobs since 2007. The jump in payrolls last month was the biggest since July 2016. But the average hourly earnings, a closely watched inflation metric, edged up four cents, or just 0.1%, to $26.75 in February, a slowdown from the 0.3% rise in January. That lowered the year-on-year increase in average hourly earnings to 2.6% from 2.8% in January. US benchmark 10-year yields hit session highs of 2.903%, up from Thursday’s 2.866%, and are now marginally higher at 2.905%.

Eurozone Bonds
Borrowing costs in Spain and Portugal had their biggest weekly fall in at least four months last week, as the ECB gave up a pledge to increase bond-buys if needed but signalled a slow route out of its massive stimulus. Having revived Eurozone growth, the ECB has been dialling back its support in tiny increments, fearing that any big change could unravel its work and force an embarrassing and economically damaging policy reversal. It’s that cautious stance that brought comfort to bond investors, especially in southern Europe, a big beneficiary of the €2.55 trillion stimulus scheme. Meanwhile, reports that Italy’s centre-right alliance was reaching out to lawmakers from the Democratic Party to seek support for a broad governing alliance after the inconclusive General Election on March 4 helped supported Italian debt at the end of last week.

UK interest rates are still expected to rise in May following a barrage of hawkish signals from Bank of England policymakers, but most economists in a new Reuters poll don’t see a follow-up move for another year. Part of the hesitation stems from the fact that Britain’s economy has moved from leading to lagging all of its industrialised peers, and is facing its most far-reaching change since the Second World War: leaving the European Union. Indeed, the latest poll found no upgrades to economists’ already modest inflation and growth forecasts. The consensus view also showed the likelihood of a disorderly exit from the EU has held at 20%, where it has been all year, but with several saying that it had increased in the past week. The range was 5-60%. The highest median probability was 30% reached in July 2017, and again last October. All but one of the respondents in the poll, taken March 5-7, expected a transition deal will be struck. Nearly every respondent said the most likely eventual outcome from talks between London and Brussels would be a free trade agreement.

Other Bonds
China has moved away from its old growth model which was heavily reliant on investment and will rely less on stimulus to boost the economy in future, according to People’s Bank of China Governor Zhou Xiaochuan. Zhou’s comments echoed those of other top officials at China’s parliament last week which suggested that Beijing will be more cautious about spending this year while it focuses on reducing the risks from a rapid build-up in debt. After years of heavy pump-priming, markets worry less generous stimulus could retard the pace of growth not only in China but globally. But local analysts believe Beijing will continue to keep the system well supplied with cash to avoid the risk of a sharp slowdown in economic growth, even as they continue to tighten the screws on financial regulations.

Key Economic Indicators of the Day
Time (GMT) Country Release Period Merrion Market Last
18.00 US Monthly Budget Statement February -$225.0bn -$223.0bn -$192.0bn

Key Economic Speeches/Events of the Day
Time (GMT) Country Event
10.00 Italy Bank of Italy publishes “2017 Households Income and Wealth” report
14.00 Eurozone Eurogroup meeting in Brussels

Today’s Debt Auctions/Buybacks/Announcements
Time (GMT) Country Auction
10.00 Italy Italy sells €6.5bn of 365-day T-bills
10.30 Germany Germany sells €2bn of 154-day T-bills
13.50 France France sells BTFs
15.30 US Treasury sells $45bn of 6-month T-bills and $28bn of 3-year notes
17.00 US Treasury sells $51bn of 3-month T-bills and $21bn of re-opened 10-year notes

Alan McQuaid (12/3/18)