Watching and waiting

Watching and waiting

There’s a title of a song in there somewhere, but we watch and wait upon the ECB and the Fed, which is of course a song and a dance routine. It is widely accepted that everyone knows that everyone else knows that the central banks are not going to let anything untoward happen to the markets. This “belief” started with the Greenspan “put”, morphed seamlessly into the Bernanke “put” and until recently to the Yellen “put”. The present Chairwoman has had her work cut out to maintain the Fed’s credibility as Masters of the Universe, but it does seem that at long last she is about to lay an egg and accede to the clamour to raise rates.

The recent data on employment – there are nearly 2000 indices on the FRED (Federal Reserve Economic Data) website covering employment so there should be something there for all tastes – has been “strong”, but, despite Rosy Scenario’s appearance, the most recent GDPNow number from the Atlanta Fed shows a decline in the growth rate for Q4. The Q1 GDP has been consistently low in recent years, as seasonal factors drag the number down, so we face the prospect of the Fed having to reduce rates again in the New Year. How embarrassing would that be? At least they’ll have something to cut… Maybe that’s the only reason to raise now, but the belief in central bank omnipotence will be wearing pretty thin by then if that’s the case.

Over in Europe, Dr. Aghi is leaning in the opposite direction. His jaw boning is legendary; in July 2012 he uttered the “whatever it takes” phrase, which galvanised the bond markets into believing that he had their backs, and the belief is still in evidence. The Italian 10 year yield, which before that statement was standing at 6.5%, is now 1.4%. To put that into perspective US Treasuries yield 2.2% and Gilts 1.8%. He has further suggested that at the next meeting on December 3rd there is the prospect of more monetary easing. One might wonder why this is necessary having already put aside in excess of €1 trillion to buy up European debt. Quite simply…QE doesn’t work! Certainly not in the way intended, which was to get the money supply moving again by getting the banks to lend to businesses to kick start the economic growth engine. There has been some tepid growth in issuance but demand has been luke warm too mainly as a result of euro austerity as preached by Germany and enforced on the unwilling by the ECB and the EU commission.

It would seem unwise to continue with more QE, so we expect that the introduction of negative interest rates – the short term bond markets have been there for some time – that will give further impetus to the banks to lend and to consumers to spend. What is really needed is an end to austerity. Lower tax rates could very conceivably bring about higher growth rates and in turn a higher overall tax take.

The European economy desperately needs a kick with unemployment across the euro area averaging 10.8%. It’s less than half that in Germany 4.5% and nearly twice that in Spain 21.2%. In Germany wage growth has continued unabated for the last 10 years whereas in Spain it has been flat at best. Any improvement in the Spanish economy has come as a result of “labour” taking a hit. European markets aren’t expensive, but Europe isn’t “fixed” either so we watch and wait to see what magic the good Doctor comes up with on the 3rd. Here’s hoping!

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