Market expectations for US inflation have dropped to their lowest level in a year and are now below the Federal Reserve’s unofficial target, as investors respond to the central bank’s latest attempt to stimulate the economy, the FT reports. The expected rate of inflation over the next 30 years, as measured by the difference between Treasury Inflation Protected Securities, Tips, and cash government bonds, dropped as low as 1.85 per cent in recent days from 2.73 per cent since last month. The rate was just under 2 per cent on Tuesday. The drop in long-term inflation expectations came after the Fed announced Operation Twistlast week, a policy aimed at driving down long-term interest rates. So far it has not approached the lows of summer 2010, when investors feared the economy was in danger of tipping into deflation.
Financial markets are forecasting interest rate cuts in the eurozone as early as November, says the FT, in a sharp reversal of monetary policy expectations due to a deterioration in confidence surveys and growing worries about Europe’s debt crisis. Although many economists do not think the European Central Bank will signal rate cuts at Thursday’s press conference following the monthly rate-setting meeting, the market is predicting a 92 per cent chance of a quarter point rate cut in November. Only a few weeks ago, the markets were predicting a slim chance of more rate hikes before the end of the year following two quarter point increases in April and July.
Brazil’s central bank has taken the unexpected decision to cut interest rates, bringing its seven-month tightening cycle to an end as the country prepares for slower growth and a sharp deterioration in global markets, the FT says. Brazil’s central bank slashed its key interest rate to 12 percent from 12.5 percent on Wednesday in a shock decision, Reuters reports. All 20 analysts in a Reuters survey had expected the central bank to keep the Selic rate unchanged. “The government and the central bank are reacting in a coordinated manner to the global slowdown through a preemptive tight fiscal/loose monetary stance,” Barclays Capital analysts wrote in a note, adding that the decision is “unexpected and unprecedented.”.
On the bright side, at least the ECB left more room to cut rates?
Sometimes, you have to turn to US history to realise how very confused the eurozone is at the moment…
Merkel and Sarkozy want balanced member-state budgets in 2012, but no eurobonds for the foreseeable future. Interestingly, in the 1840s, US states almost all added balanced budgets to their constitutions after a huge debt crisis. In fact after some states defaulted. But then again “eurobonds” already existed in this case. Read more
So much focus on government debt lately — won’t somebody please think of the household leverage?
Morgan Stanley’s Global Monetary Analyst team has: Read more
The minutes of the last MPC meeting are out and here’s the price action in the Great British Krona.
The Bank of Japan raised its economic assessment for a second consecutive month after companies ramped up production, Bloomberg reports. Governor Masaaki Shirakawa and his policy board left the benchmark lending rate between zero and 0.1 percent at a meeting in Tokyo on Monday. They also kept unchanged a 10,000bn yen ($125bn) fund to buy assets such as corporate bonds and exchange-traded funds.
Ever pondered the big questions? The meaning of life? Are we alone in the universe? What will happen to European RMBS once interest rates start rising? We have.
And we have an answer — to the last one anyway. Read more
Bank analysts have swung behind the view that China will limit or even suspend interest rate increases for the rest of the year, says Bloomberg. JPMorgan, HSBC, and Goldman analysts all said that Wednesday’s 25bps hike was likely to be 2011′s last, as Chinese inflation becomes “controllable”. But a Chinese central bank adviser also called for further tightening of deposit rates, saying they were still below inflation, according to the WSJ. Inflation is likely to have reached 6 per cent in June, but the central bank will be cautious of raising rates too far unless they damage borrowing costs for local government debt over the edge, the FT says.
Several Chinese government scholars told local media on Thursday that China may be preparing for more tightening after Wednesday’s interest rate increase. MarketWatch says Xia Bin, an academic adviser to the People’s Bank of China, was the most vocal in calling for more interest rate increases in comments to the state-run China Securities Journal, saying the increase “still not enough” as deposit rates remain well below the level of inflation. Both deposit and lending rates were raised 25 basis points on Wednesday.
With China hiking interest rates by 25 basis points on Wednesday, reportedly to counter faster inflation, now is probably a very good time to bring up the issue of the country’s GDP deflator calculation.
Simon Hunt of Simon Hunt Strategic Services, a veteran copper market analyst with great connections in China, believes the deflator may be a much bigger concern for Chinese authorities than the CPI inflation figure. Read more
So here it is — the fifth Chinese rate hike since October last year.
As Reuters reported on Wednesday: Read more
German financial consultant Achim Dübel doesn’t mince his words.
Last week he spoke to a group of European politicians, including representatives from the UK, Spain and Germany, to talk mortgage reform. In particular, he was presenting a new paper, written together with Marc Rothemund, and published by the Centre for European Policy Studies (CEPS). It’s a big deal given the current consumer protection debate on European mortgages, and the European Commission’s recent interest in the cost and benefits of various mortgage credit policies. Read more
Price action in the Norwegian krone on Tuesday:
Hot on the heels of the BIS’s annual report – criticising how prolonged low interest rates can create ‘distortions’ and threaten ‘price stability’ — comes this presentation from Citigroup’s credit team.
The bank’s credit strategists Hanz Lorenzen and Matt King have some simple advice for investors seeking to deal with modern (QEased) markets; “what feels wrong is probably right.” Read more
Those low interest rate u-Zirpers at the BIS are back.
The Bank for International Settlements, often known as the central banker’s bank, seems to share little in common with its low interest rate-advocating cousins in places like the UK and the US. In fact, the latest annual report from the BIS is fairly scathing when it comes to prolonged easy monetary policy. Read more
Up until April this year, US banks had a nice little earner.
As Freakonomics explained, big banks were able to borrow cash from the Fed funds or repo market for say, 15 basis points, posting US Treasuries as collateral, and then deposit the cash received with the Federal Reserve overnight at 25bps, earning some 10bps. The FT has estimated that since late 2008, this risk-free arbitrage may have netted America’s banks as much as $200m in profits. Read more
Notice anything in the below chart, of five-year CDS for Spain, Japan and Australia?
Your extend and pretend datapoint du jour, right here folks.
On Monday, Moody’s released a report advocating more disclosure of loan modifications within British Residential Mortgage-Backed Securities (RMBS). The UK’s Financial Services Authority already said something similar last month, when it issued its first Prudential Risk Outlook. Read more
Here’s something to throw the Bank of England’s will to withstand high UK inflation (and low interest rates) in surprising, sharp relief.
It’s a new finding by the Institute for Fiscal Studies, connected to a study of inflationary effects on low-income households over the long term: Read more
During the Spanish boom of 2004-2008 the country started construction of about 3.26m new houses, according to Nomura’s figures, and sold about 2.86m in the Costa Brava beach house craze.
By the end of 2009, however, the financial crisis had erupted and left Spain with a stock of unsold houses of almost 700,000. By 2010, the number of new houses being sold had dropped to 200,000. Read more
Some graphics from Danske Bank to ponder ahead of the ECB’s Thursday meeting:
There’s the effect of rising European Central Bank rates on households in the periphery, and there’s the effect of two-tiered rate markets on periphery banks:
US money market funds are struggling to make returns after short-term interest rates fell to record lows in the wake of regulatory changes and a big decline in Treasury bill issuance, the FT reports. The recent drop in rates has compounded the already low level of returns money market funds have made since the Federal Reserve set overnight rates in a band of zero to 0.25 per cent in December 2008. The low interest rate environment means a growing number of funds are losing business and coming under mounting pressure to consolidate. The Investment Companies Institute calculates that last year the industry waived $4.5bn of fees to maintain the fixed $1 per share net asset value of funds. See also FT Alphaville posts.
It’s a moonless night in October, 2008.
A hooded figure turns the corner of Threadneedle Street. It’s Fred Goodwin, head man of the languishing British bank, RBS. He glances behind him. No one’s there. With a sigh of relief he pulls open the heavy door and disappears into the warm welcoming light of the Bank of England. Read more
China’s consumer price index rose 5.3 per cent in April, lower than March’s 5.4 per cent increase but still higher than expected, the FT reports. Food prices also rose faster than during the first quarter at 11.5 per cent, compounding political sensitivities. Industrial output nevertheless fell in tandem with producer prices, indicating that the four interest rate hikes since October are cooling growth. However, fixed-asset investment has ballooned 25.4 per cent so far this year, indicating that domestic demand cannot support growth, Bloomberg reports. If fixed-asset investment falls, the central bank may even begin cutting rates by the end of the year, Reuters says.
Code word time again. Trichet at Thursday’s ECB rates decision (held, at 1.25 per cent) presser:
With interest rates across the entire maturity spectrum remaining low and the monetary policy stance still accommodative, we will continue to monitor very closely all developments with respect to upside risks to price stability. Read more
Here’s a convenient continuation of the rising-European-rates-meets-real-estate theme.
Standard & Poor’s reckon “fresh headwinds are gaining force in Europe’s real estate markets” due to rising interest rates (or at least, expectations of them) in a report out on Wednesday. Read more