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

Preview of Swedish Q2 GDP – households take off

We expect GDP to have expanded by 0.9% q/q in Q2. The second quarter is characterised by strong consumption growth, subdued exports and higher productivity. Our forecast is above the Riksbank’s view.

Preliminary Prepayments

Preliminary Prepayments

Swedish Morning Briefing - Tuesday July 29

Further sanctions against Russia Israeli PM preparing for long-term conflict

FI Eye-Opener: Gravity

Core bond yields edge higher – yields with some more upside potential today. Spanish and Italian 10-year yields hit record lows. US housing market continues to struggle – confidence indicators positive. Russian sanctions on the agenda again. US house prices and consumer confidence ahead.

Euro Rates Update

The latest Euro Rates Update is now available

Swedish Morning Briefing - Monday July 28

Europe’s debts at record level Higher rating for Portugal

While you were busy ...

If you are just back from holiday, here are a few bullets on what happened while you were busy …

FI Eye-Opener: Prepare for a big week

Bonds rally again ahead of the weekend, but core yields to creep higher today. Equities under pressure on Friday. German Ifo disappoints – UK growth still strong. The surge in LTRO repayments not repeated. Portugal receives good news from Moody’s. What is with Germany and a tighter EU? A huge week ahead: the Fed, US GDP, Euro-zone inflation and payrolls. Italian & US auctions and plenty of coupons and redemptions.

RUB: Central Bank decided to raise the key rate, inflation is in focus

Today Bank of Russia Board of Directors decided to raise the key rate by 50 b.p. to 8%. RUB may find support, but geopolitics will remain the focal point for the Russian currency market.

Week Ahead: 26 Jul - 01 Aug 2014

Big week in the US with GDP, Fed, ISM and payrolls. Flash estimates on July inflation will be out for the Euro Area and ECB will publish the Bank Lending Survey on Wednesday. In Norway the labour market will be in focus. Sweden will be out with both PMI and GDP Q2 (early estimate)

UK: leaving previous peaks behind

Strong GDP growth continued in the UK economy in Q2, with growth coming in at 0.8% q/q, in line with expectations, which was enough to lift the y/y rate to 3.1%, the highest since the last quarter of 2007. On a q/q basis, growth has been running at 0.7-0.8% for five consecutive quarters already, a remarkably stable performance.

Germany: Ifo decline once again highlights external vulnerability

The manufacturing motor sputters but growth is not over.

Sweden: retail sales and lending; households getting more confident

Strong retail sales. Continued increase in household lending.

Swedish Morning Briefing - Friday July 25

Japanese CPI up 3.6% in June Swedish retail sales due at 9.30

FI Eye-Opener: Bulls to strike back today

Yields headed higher on both sides of the Atlantic yesterday. Buying of core bonds to resume today, as concerns over Ukraine/Russia continue. S&P 500 squeezes another high. Market impact from positive PMIs likely short-lived. US economic data mixed. Busy Friday ahead: UK GDP, Ifo, Euro-zone credit data, Russian ratings. Another sizable LTRO repayment to put some upward pressure on the short end.

IDR: Jokowi win paves way for strengthening

The official election result is out and Indonesia has got a new president, the popular Jokowi. This is already priced in the market so IDR will be range-bound for now. It would be IDR positive in a longer perspective, if he succeeds in promoting growth and improving standards of living.

Euro area: PMIs offer hope amidst gloomy headlines

The flash PMIs for July point to a continued recovery in the Euro-area economy. Positive development in sentiment indicators is certainly welcome at a time, when the effect of e.g. the Ukrainian/Russian crisis is weighing on the economy. It is worth remembering that the numbers are unlikely to capture the recent escalation in geopolitical tensions, but the latest weakening of the euro and the ECB’s June easing package, on the other hand, are supportive of the Euro-area economy.

Sweden: Same old story in unemployment

Unemployment bounced back somewhat in June after the stronger than expected reading in May. Seen over the last two years, it is very hard to spot any clear trend downward in unemployment, despite the clear trend upward in employment. Today’s number did not change this overall picture and the expected, future decrease in unemployment seems to continue to be very gradual.

Swedish Morning Briefing - Thursday July 24

South Korea presents stimulus package Reserve Bank of New Zealand lifts policy rate

China: Good PMI no guarantee for growth outperformance

The Chinese economy is currently in a cyclical upturn. But the long-term perspective has not changed. The economy will continue to readjust to the new normal, meaning that a significant pick-up of growth is unlikely.