Central banks are delivering on their easing promises, with the ECB having announced open-ended QE. But, monetary policy is not the only game in town.
After delivering open-ended QE at the ECB’s September meeting, Mario Draghi’s firm message was that it is now the turn of fiscal policymakers to deliver the next dose of stimulus. And, indeed, while the Fed and PBoC have some scope to cut rates, albeit being reluctant to take meaningful steps, the ECB and BoJ simply do not have much room left for further rate reductions.
‘Reluctant cutter’ used to be a popular nickname for the Reserve Bank of Australia, when it was easing monetary policy at a snail’s pace in 2015 and 2016. We expect this moniker to gain popularity again, but this time to characterize the Federal Reserve Bank in its current easing cycle. Yes, the first cut was announced in July and there most likely will be another cut in September, but recent Fed comments suggest that the policymaker will administer its doses of easing with continued reluctance.
We expect the Fed to cut rates by another 75 bps, including 25 bps in September. Some further easing should probably be priced in, as risks to that central view are to the downside. Currently, 50 bps in Fed cuts are priced in for the September to December period, and an additional 34 bps for end 2020. For the September meeting we do not expect the Fed to ‘out-ease’ market expectations, or signal such intentions via its Summary of Economic Projections. Hence we see some risk of disappointment in front-end rates around this meeting, but beyond the next meeting we think that risks are tilted towards more easing than is currently being priced in.
It was no surprise to see ECB President Draghi live up to his reputation at the September ECB meeting by laying out a broad monetary stimulus package that ensures his presidency ends with a bang and not a whimper. Besides a 10 bps cut in the deposit facility rate to -0.50%, the ECB strengthened its forward guidance on policy rates by dropping the previous “mid-2020” calendar guidance and enhancing the state-based link to inflation. It now expects to keep rates at “present or lower levels” until it sees the inflation outlook robustly converge to the target, to the extent that such convergence is reflected consistently in core inflation dynamics.
The ECB also introduced a two-tier system for reserve remuneration and sweetened the terms on the upcoming TLTRO 3 operations. However, it was the “open-ended” nature of the announced restart of net asset purchases that led to a strong risk-on rally in Eurozone bond markets. Net purchases are expected to continue until “shortly before” the ECB starts raising rates which, in turn, is state-dependent on inflation dynamics: markets currently do not envisage rate hikes happening before 2022. This would imply cumulative net purchases of more than EUR 500bn.
As we predicted in our previous Central Bank Watcher, from July, the PBoC has used the reform of its interest rate framework to lower borrowing costs for the real economy: the loan prime rate (LPR) – from which new loans are priced – is now explicitly linked to medium-term lending facility (MLF) rates. The latter are much lower than the benchmark lending rates with which most existing loans have been priced.
Looking ahead, with growth data remaining unconvincing, with lingering downside risks related to the US-China trade dispute, and with PPI inflation tending to lead the closely watched credit impulse metric, we are fairly convinced that additional monetary stimulus will be forthcoming.
The BoJ is expected to maintain the status quo at its next meeting, on 19 September. This applies to all available policy tools, including policy rates, yield targets and asset purchases of ETFs and government bonds. While the ECB has moved towards a new round of monetary easing, with the Fed expected to follow, the trade-weighted yen is holding up very well. We believe this will allow Japanese policymakers to keep their additional easing options in reserve while sticking to their strategy of extended forward guidance, with perhaps a small rate cut somewhere during the next year.
The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any US Person.
This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)) who are professional investors. By clicking “I Agree” below and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States (within the meaning of Regulation S under the Securities Act) and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States (within the meaning of Regulation S under the Securities Act) and (v) you are a professional non-retail investor.
Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States.
Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction.
We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.This website has been carefully prepared by Robeco Institutional Asset Management B.V. (Robeco). The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use with the general public.