What's the latest on the headline issues ? ..... the ECB Taper, a BoE hike, and jockeying for the lead in the race for the Fed Chair.

Wednesday 25th October 2017

ref :- "Forget ECB's Taper, Investors Want to Know When Rates Go Up" , Wall Street Journal, Markets

The real significance of the ECB's timetable for winding down the final stages of its QE bond purchasing programme is that we get to hear the end-date, according to the WSJ. With the current arrangements in place until the end of the year, predictions for the programme's finale in 2018 have ranged from €60bn per month for 6 months (too big a total given the scarcity of available bonds ?), to €20 per month for 12 months. Current consensus is comfortably in the middle of both size and time scales  --  €30 per month for 9 months.

The date when the programme finally finishes is crucial because the ECB have repeatedly said that it won't start raising rates until "well past" the point when purchases have stopped. If the US experience is anything to go by (and of course being much further down the line in this process, they're now embarking on actual balance sheet reduction rather than just slowing further expansion), tapering can be achieved without any great market disruption  --  notwithstanding the Taper Tantrum panic of 2013, which can now be attributed largely to jittery investors and clumsy Fed-speak as they both contemplated a process entirely unknown in their previous experience. 

ECB boss Mario Draghi had his own uncomfortable experience in this area in June when the market (mis)interpreted a speech as suggesting that the pace of the taper might be faster than expected, and he's bound to be cautious. But current thinking contradicts the theory that  because QE had such an impact when implemented, it must have an equal and opposite effect when reversed. The thinking is now that following the US precedent, the central bank's moves on QE will become divorced from actual interest-rate policy, and it's interest rate hikes that have the capacity to spike volatility and upset the market uptrends if not handled carefully.

So, let's take the current favourite September 2018 as the end of QE ..... overnight index swaps (derivatives used to calculate future interest rates) suggest that March 2019 is the likeliest date for the first Eurozone rate hike. That would seem to fit pretty well with the ECB's "well past the end of QE" stipulation  --  along with everyone else, we'll wait on Mr Draghi's statement tomorrow. Of course, it's just possible that he's so cautious ..... and nervous about the strength of the recovery in peripheral nations ..... that he leaves the possibility of additional QE open. 

ref :- "UK Growth Surprise Clears Path for Bank of England Rate Rise" , Bloomberg Markets

Well, it's looking more and more like a sure thing ..... Q3 GDP growth seems to have defied other less upbeat data and Brexit gloom to come in at 0.4%, above estimates of 0.3%. Being the last major piece of data before next week's BoE rate decision, it would seem to give the green light to those on the Monetary Policy Committee (MPC) and elsewhere who are advocating a rate rise to tackle the UK's 3% inflation, which is a full 1% above the rate targeted by the central bank.

Mmmm ..... looked at through the narrow field of vision provided by headline inflation data, we can see how some will consider a rate hike necessary. Not all will, though .... and that may even apply to those on the MPC. Today's data, whilst mildly stronger than expected, hardly represents a buoyant economy  --  an economy which may be further undermined by faltering Brexit negotiations. Moreover, whilst 3% inflation that outstrips wage growth is inconvenient to politicians and central bankers alike, some would argue that as a reflection of a sizeable fall in the exchange rate, it should be treated differently to a surge in inflation caused by domestic demand, say.

Whatever ..... it looks like a hike's coming and Sterling and UK Gilt yields have been boosted accordingly.

ref :- General

Some races are just too difficult to call ..... well, quite a lot of them in our experience unfortunately, but the race to be the next Chairman of the Federal Reserve is really hotting up. 

Of the four candidates that we've been looking at, the longtime favourite Kevin Warsh seems to be running out of steam. This might have something to do with his long-term spat with Randall Quarles, newly appointed by Donald Trump as a Fed Governor and vice chairman in charge of the key area of banking regulation. Of the other three, all have their claims.

Probably the new favourite (just) is Jerome Powell ..... a current Fed board member whose views you'll remember are close enough to those of incumbent Janet Yellen to provide continuity, and his slightly more hawkish tone on certain topics may be enough to quieten Republican conservatives.

Economist John Taylor, considered the most hawkish of the three, apparently came out top in a show of hands conducted by Mr Trump amongst Republican Senate leaders. In that this was an extraordinary and probably not terribly wise way to help the President select the US's top central banker, this was a very Trump-like manoeuvre. Of course, if he was to ignore the consensus entirely ..... well, that would be very Trump-like, too.

Most remarkable perhaps is the position of Janet Yellen in the race, and the identity of the latest figure to shower praise upon her. Yes, it's Mr Trump again. By all accounts, Ms Yellen's interview at the White House went extremely well and the President was "very impressed". Only he could go from chief Yellen-basher to blowing her trumpet for her in such a way. If he was to choose Ms Yellen, he would certainly upset Republican conservatives who definitely did not support Mr Trump to see him re-install a Democrat-appointed "dove" (in their eyes) at the top of the Fed. Still, Mr Trump has shown himself to be unafraid of upsetting the Republican hierarchy, so who knows ?

We all will by the end of Nov 3rd ..... assuming the President sticks to his promised schedule.