In a recent Weekly Comment entitled ‘The Big Picture US Interest Rate Debate ’ penned by Scott Campbell (no relation to your modest scribe), the article underlined that we are in the early stages of a multi-year period of rising US interest rates. What wasn’t touched on, however, is the divergence in monetary policy currently being employed by the world’s Central Banks after a prolonged period of synchronised loose policy measures, particularly by developed economies, since the global financial crisis.
With the current rate tightening cycle being implemented by the Federal Reserve (the ‘FED’), coupled with ‘Quantitative Tightening’ as the FED reduces its balance sheet, we’ve witnessed a departure from this synchronisation that had helped pave the way for a recovery, of sorts, for the global economy. The ramifications of such, it has been argued, is that it has been responsible, through a tightening of global liquidity conditions and a strengthening US Dollar, for the sudden spikes in volatility we’ve seen throughout 2018 – or is this just a return to a ‘normal’ market environment? In any event it seems we’ve come to an end of the steady rise in global markets.
But I digress. As 2018 comes to a close and the divergence in rates widens, I thought it would be useful to take a look around the globe to see, as the consensus seems to indicate a slowing of US rate rises in 2019, if we can expect to see a re-convergence of rates in the new year as other Central Banks embark on their own tightening programmes.
If we start in the UK there is a small matter of ‘Brexit’ to contend with, of which, the political turmoil does not look like abating anytime soon as Ms May tries to get her EU divorce deal through Parliament. The UK service industry barometer has just hit its lowest level since the Brexit vote, the November number falling to 50.4 (though still expansion) from 52.2. Yet, as labour conditions remain tight and inflation expectations remain steady, the Bank of England would, as previously indicated by Carney, be eager to hike rates in 2019. This however, will very much depend on the political minefield which is ‘Brexit negotiations’ and whether a deal can get through Parliament.
On the other side of the Channel, the Eurozone nations have their own concerns. In June, Mario Draghi indicated the European Central Bank’s (ECB) stimulus programme would end this year and a rate hike could be expected in late 2019. More recently, in October, it reaffirmed that asset purchases would end at the end of the year and it was detailed that the ECB will start to discuss the timing of an interest rate hike in January 2019. Concerns over the Italian budget were not expected to derail the schedule, though, in November, Italian Manufacturing PMI numbers fell to 48.6 from 49.2 showing the country is on the verge of recession. With Italy being the third largest economy in the Eurozone, there is certainly cause for concern.
In Japan, the Bank of Japan (BOJ) short term interest rate is still negative at minus 0.1% and they will maintain ultra-loose monetary policy which shows no sign of slowing, particularly as expectations are for lower inflation than previously indicated. Third quarter GDP numbers showed a contraction, down 0.3% and the economy shrank 1.2% on an annualised basis. The data indicates a rate hike in 2019 is doubtful with BOJ Governor Kuroda stating “There is no thought about raising rates for quite some time”.
China’s monetary authority has resisted increasing rates in line with the US despite the risk of pressure coming on the Yuan. The People’s Bank has instead used various other stimulatory measures. Most economists expect rates to remain unchanged until the end of 2019, largely as growth has been decelerating with rising trade tensions with the US and further tariffs expected into 2019. Recent talks have, however, indicated there may be a resolution, though, as always where Mr Trump is involved, a degree of caution is necessary.
Historically, Central Bankers were very reluctant to give any formal indication of intended shifts in policy, something that thankfully has improved somewhat since the financial crisis. Central Bankers are now more prepared to give guidance when delivering policy statements, even though said guidance can be quite cryptic at times and almost always accompanied with the ‘data dependent’ caveat. Central Bankers want to raise rates, if only to give them some tools in the tool box for when the next inevitable crisis arrives. The below chart indicates Octobers’ market forecasts of interest rates for global economies over the next 15 months. Though I agree that the majority of developed economies’ Central Banks will look to start their rate hiking cycle in 2019, I would think it will be in the later stages of next year.