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Globally Coordinated, or Not?

07/05/2012

Hoping everyone had a wonderful 4th of July holiday. It certainly was quick, given the oddity of the calendar. Back at it this morning with the multiple monetary policy easing initiatives signaling that global central banks are fully coordinated. None of the initiatives are a surprise, nor is the coordinated timing of the announcements from the Bank of England (BOE), European Central bank (ECB), and People’s Bank of China (PBOC).
 
Investors should view the announcements in a broad macro sense. I do not expect the announcements to place any particular risk asset at the forefront for immediate allocation increases. Rather, the coordination provides investors with a good macro understanding of the monetary intentions of central banks for the duration of 2012.
 
Growth stimulus measures will continue to be introduced to counter the recessions in Great Britain and the euro periphery. Chinese policy makers, in preparation for their July 12 second quarter GDP release, are also attempting to comfort markets that the current domestic slowdown is a pause that will refresh. 
 
Bank of England
 
QE3 was officially introduced by the BOE this morning. The asset purchase program will be raised by $50 billion, from $325 to $375 billion, over the next four months. Currently in the midst of a recession, today’s announcement should not be a surprise to investors. I would expect further QE initiatives from the BOE on the other side of Labor Day.
 
People’s Bank of China
 
Benchmark interest rates were reduced this morning for the second time since June 7.  Prior to June 7, the PBOC had not cut benchmark interest rates since December 2008. Figure 1.1 provides evidence of the aggressive manner with which the PBOC operates once interest rate reductions are initiated. From August 2008 to December 2008, four reductions were announced for a total lowering of 216 basis points.
 
Last week’s weak PMI Manufacturing certainly contributed to the easing. Next week, a CPI print below 2.5% is expected, while on July 12, a second quarter GDP print below 8% is also expected. Investors should view this morning’s announcement as a shift to a much awaited more aggressive strategy by the PBOC.  We shall be hearing from the PBOC once again, most likely before Labor Day.
 
European Central Bank
 
The ECB lowered both the main refinancing rate and deposit rate by 25 basis points. I consider these moves “gestures” with no real market consequence. Growth is practically absent from the euro zone and this reduction doesn’t provide the type of firepower to stimulate it. I expect Europe will continue to “muddle along” for many months to come.
 
Additionally, ECB President Mario Draghi commented that “downside risks to the euro-area economic outlook have materialized.” That should not be a surprise to any capital market participant. However, what is both surprising and troubling are German Chancellor Angela Merkel’s comments rejecting shared bank liability - further evidence to investors that Europe will muddle along until fiscal unity is confirmed. The significant weakening in the euro currency (Figure 1.2 and Figure 1.3) post ECB announcement confirms that.     
  
Figure 1.1 PBOC Benchmark Interest Rates - May 2008 to July 2012

Source:  Bloomberg
 
Figure 1.2 and Figure 1.3 Euro Intraday & One Year Charts

Source:  Bloomberg


Source:  Bloomberg

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