To QE or not to QE

Anders Svendsen

Big central banks have become less inclined to QE…

Recently, the minutes of the March MPC meeting at the Bank of England showed that only one member now favours more QE and he even said that the call was finely balanced. That was a surprise for us as well as for most other market observers, and an increase in the asset purchase programme is no longer on the agenda, at least for the May meeting. Maybe it should not have been a surprise given that also the ECB and the Fed have sounded less inclined to QE recently. Senior ECB officials have talked about a higher bar for more direct bond buying (through the SMP) after the liquidity provisions (LTROs) and the Germans even want to start preparing an exit from QE. The Fed minutes suggested that the bar for more QE has been raised in the US as well.

Why this change? The main reason is probably that the tail risk of a complete meltdown in Europe has diminished after the LTROs. Even in the US, a meltdown in Europe was seen as the biggest downside risk to the economy. The underlying problems have not been fixed, but that was never the aim of central bank QE. QE has helped break the negative feedback loop from panicking markets that affected growth adversely and fed back to more market panic. QE has bought time for governments and banks to deleverage in an orderly fashion. With the economies now slowly recovering and markets functioning then it is time for politicians to do their part and central banks have turned out to be much less inclined to QE than expected.


… but may be forced back into the game

So no more QE? Well, as we recently reiterated, we still expect QE from the Fed in June. This is based on expectations that incoming data will push the Fed back into QE. We have doubts when it comes to Europe. In case incoming data start to worsen significantly then the ECB will obviously be ready to do more. There is no one else and the ECB has now taken the role as the ultimate back stopper. However, we doubt that key figures will really turn that bad in Europe (even after yesterday’s disappointing PMI numbers) and believe that the LTROs still have an underlying positive effect on the economies.

Event risks are the joker that could change economic sentiment. Elections are looming in France and Greece, the Netherlands has no government and the deadline for banks to meet higher capital requirements is nearing. It is not for the ECB to rescue specific member states, but market panic that affects economic sentiment would force the ECB to act.

So what do we actually believe? US key figures will surprise on the downside in the near term and force the Fed to embark on QE again in June. In our baseline, the ECB and now also the BoE are done with QE, as we expect gradual recoveries through the year. However, given the large number of serious event risks, it would not be a big surprise to see either central bank being forced back into the game of QE.

Still, we no longer expect the BoE to expand the asset purchase programme in May as a baseline scenario!


More on the Fed view: http://research.nordeamarkets.com/en/?p=4455



Latest research

TRY: Regime change?

Despite a clear recovery in the Turkish lira, the situation in Turkey continues to be riddled with uncertainties and the potential for market-unfriendly surprises – especially in the political arena, where Prime Minister Erdogan may be fiddling with an overhaul of the political system.

Volatility Watch

Was that a pre-warning of QE or just loose talk? The latest ECB meeting managed to both disappoint (by delivering nothing) and excite (by laying the groundwork for something big) action seekers in the market. The truth is likely in the middle, and we expect no immediate easing from the ECB. We have seen a rebound, albeit modest, in gamma vols. Early vega options (1y-2y expiries) are moving down quite quickly Overall we still see the gamma segment as cheap, whereas we’re rich/neutral on vega.

SEK Rates: SGBi auction preview

The Swedish National Debt Office will sell 1 bn SGBi 3108 (1 Jun 2022) on the 24th April

Euro area PMIs: a good start into Q2

Higher PMIs in April, both in manufacturing and the service sector. Germany strong, France weaker.

SEK FI & FX Strategy - Market Views

A re-cap of market views...

Swedish Morning Briefing - Wednesday 23 April

• Kerry warns Russia to tone down its rhetoric • Chinese PMI looks set to rise

China: Not yet spring for the PMI

China’s flash PMI rose unsurprisingly to 48.3 in April. On the backdrop of favourable policies to small companies, the improvement is likely to continue in the coming months, but PMI is likely to stay below 50 because of excess capacity and debt overload.

FI Eye-Opener: China not rebounding like it used to

Bond markets with a rather calm day after Easter. Bonds with more potential in the near term. Intra-Euro-zone spread narrowing not run its course. Chinese PMI still depressed. Downside risks to today’s PMIs. Portuguese and US auctions ahead.

Euro Rates Update

The latest Euro Rates Update is now available

Preliminary Prepayments

Preliminary Prepayments

RUB: mixture of capital outflow, Central Bank’s policy and geopolitics

RUB has been under pressure recently as tsunami of capital outflow, caused by the threat of sanctions against Russia, washed away optimists and buyers of RUB-denominated assets. The pace of capital outflow increased in Q1 2014, reaching unimaginable $51 bn. (compared with $62.7 bn. in 2013). The volatility stays high on the Russian markets and the rouble remains focused on geopolitics.

Sweden: March Labour Force Survey better than it seems

Unemployment remained unchanged at 8.1% in March (seasonally adjusted). This was above forecasts at 8.0%. However, employment rose more than forecast and was up 0.3% m/m after an uptick of the same magnitude in February. Thus, the higher than expected unemployment reading in March is (once again) explained by unexpected strong growth in the labour supply, +0.3% m/m.

Swedish Morning Briefing - Tuesday 22 April

• Deal clinched during Geneva meeting • Ingves says deflation not likely

FI Eye-Opener: Portuguese bond auctions back

US Treasuries with a beating ahead of the Easter. Some gains ahead for bonds today. US existing home sales out today – Euro-zone flash PMIs later. A flood of auctions on the agenda already today. Portugal to resume its bond auctions. Fresh cash injection to boost French bonds this week.

Euro Rates Update

The latest Euro Rates Update is now available

Swedish Morning Briefing - Thursday 17 April

• Separatists in Donetsk plan for a local referendum • A summit in Geneva to discuss the crisis in Ukraine

FI Eye-Opener: Easter bunnies to boost bonds today

Yields edged higher yesterday – long positions with potential today. Equities rebound, but more weakness likely ahead. Euro-zone core inflation back to record-lows. Italy taps retail investors for huge amounts again. Big US banks boosting their lending to companies – Euro-zone doing much worse. Philly Fed, jobless claims and LTRO repayment announcement. New French 2-year benchmark and US auctions ahead.

US Rates - Market in doubt

• It has been a bumpy ride for US rates in 2014. A two month rally started the year and recently the Fed has added substantial volatility with their somewhat wobbly way of commenting on future policy. • Further, the last NFP on April 4th was quite a disappointment. • In this note we look into the market perception (through futures and options) of all this, and in particular find indications towards a loss of faith (on rising rates) on behalf of the option market.

Swedish Morning Briefing - Wednesday 16 April

• Putin urges UN to condemn Ukraine’s intervention • Chinese growth at weakest level for six quarters

FI Eye-Opener: No support can survive constant pounding

German 10-year yield finally broke important support – mood remains bullish. A correction higher in yields still looks likely today. US equities recover after early losses. Q1 effect hits Chinese GDP numbers again. Ukraine’s military starting to use force US core inflation bottomed out? Euro-zone inflation and US housing market data ahead – Germany to sell 10-year bonds.