Fed monetary policy amid a global backdrop of negative interest rates

Transcription

1 Fed monetary policy amid a global backdrop of negative interest rates Kathy Bostjancic Head of US Macro Investor Services kathybostjancic@oxfordeconomics.com April 2016

2 Oxford Economics forecast highlights Baseline world GDP forecast for 2016 cut to 2.3% from 2.6% in January slowest pace of global growth since Forecast for 2017 cut further to 2.7% from 2.9%. Sell-off in global financial markets since start of 2016 a factor; overall financial conditions tightened significantly since mid-2014 despite the rally in financial markets since mid-february. Though near-term growth supported by recent rally in markets and still-healthy US and Eurozone. Slippage in consumer confidence has been modest compared to and Central banks - e.g.. ECB & BoJ - increased use of unconventional policy tools also lends support to near-term growth and the financial markets. Global economy looks likely to avoid recession, but risks lie on the downside OE concerned that financial market slump could create negative credit and confidence shock and negative wealth effects 2

3 Global forecast summary 3

4 Oil supply/demand balance not restored until 2017? Global Demand chg mb/d Global Supply chg mb/d o/w OPEC o/w US Stock Build Brent Oil Price Source: Oxford Economics/ IEA 4

5 5 US Outlook

6 GDP forecast and breakdown for 2016 Non res Residential GDP PCE Investment Investment Exports Imports Inventories 2016 (Annualized %) (Change in Bil. $) Q Q Q Q

7 Domestic fundamentals remain quite strong 7

8 Wage growth should pick up Currently wage growth remains sluggish at 2.2% y/y in February 8

9 Should support healthy consumer spending growth ~2.5% 9

10 Housing activity continues to firm 10

11 Core orders & shipments have slowed sharply 11

12 Headwinds from strong $ and weak global growth 12

13 Expansions end by overheating not old age 13

14 More room for this expansion to run US: GDP output gap estimates % 4 Alternate Gap OE Fed Q1 Q1 Q1 Q1 Q1 Q1 Source : Oxford Economics/Haver Analytics Q Q1 14

15 CRI model suggests no sign of recession 15

16 Bond market continues to price in very low rates Expectations of Fed funds rate (%) Market implied rate Fed Dot Plot Oxford Economics Eurodollar futures yield* median rate forecasts forecast Month as of Apr as of Mar-2016 Mar-16 Dec Dec Dec Dec ** 3.13 Source: CME group, Federal Reserve, Oxford Economics *Adjusted for estimated risk and term premiums **Long-term forecast 16

17 Inflation is key focus goal is 2% 17

18 Inflation expectations move with oil prices 18

19 Risk premia reduced further 19

20 Spillover from ECB QE 20

21 21 China in focus

22 What is PBoC doing to the RMB? NEER, REER and equilibrium REER Index (2010=100) NEER REER Fair value trend REER Source: Oxford Economics, CEIC Data RMB exchange rate RMB/US$ Dec 12: announcement on more focus on trade weighted exchange rate 6.60 Nov 2015 Dec 2015 Jan 2016 Feb 2016 Source: Oxford Economics, CEIC Data Spot rate Fixing rate CFETS basket End 2014=

23 Financial outflows have become very large Balance of payments (US$ bn) FX reserves stock 3,821 3,843 3,330 Change Valuation changes Net FX flow Current account Net FDI Net financial flows Source: Oxford Economics, CEIC Data China: Capital flows and balance of payment US$bn Valuation effects -200 Basic balance Net financial capital flows Change headline FX reserves Source : Oxford Economics, CEIC Data 23

24 How the CNY could shake the world World: GDP in FX spillover scenario % difference in level of GDP vs baseline, 2016 Mexico Korea Taiwan Singapore Australia S. Africa Turkey China Thailand Malaysia Philippines Indonesia UK World USA Brazil Russia Hong Kong Chile India Japan Argentina Eurozone 10% USDCNY depreciation Source : Oxford Economics World: Policy rates in FX spillover scenario absolute difference in policy rates vs baseline, 2016 eop Russia Argentina Turkey Malaysia India Mexico Philippines S. Africa Taiwan Australia Korea Singapore Brazil Indonesia Thailand Chile Japan USA 10% USDCNY depreciation Source : Oxford Economics Modest CNY depreciation has recently been associated with sizeable repercussions on global FX markets. We ran two scenarios. In one other currencies move only modestly. In the other the global FX response is in line with the more hefty response displayed during recent episodes of CNY depreciation, and it persists. Simulations show that significant moves in the CNY against the dollar in themselves only have a minor impact on global growth and inflation and China s output does not benefit significantly. But if there is a persistent response from other currencies, the effects on global GDP are more substantial and differentiated: economies with currencies perceived as safe havens see lower growth

25 25 Europe

26 Euro area forecast in a nutshell Momentum slowing; domestic resilience vs external slowdown Growth slowed in H2 2015, momentum weaker at start of 2016 Domestic indicators still show resilience, but exports struggling since mid-2015 Inflation likely very weak this year, gradual rise in 2017 Oil prices have taken headline inflation to negative territory, will remain close to 0% in 2016 However, nominal rigidities in wages should prevent persistent deflation ECB loosens policy further ECB expands QE programme and cuts interest rates further QE likely to work mainly through keeping euro weak and low bond yields Reform agenda implies a decade long adjustment Monetary policy cannot replace the need for deep structural reforms to address a lack of competitiveness and increase potential growth 26

27 Downward forecast revisions to 2016 GDP We have lowered our GDP forecasts for this year. Forecasts for 2017 remain broadly stable. GDP forecasts % y/y 2.0 Jan-16 Feb-16 Mar Source : Oxford Economics 27

28 Weaker oil price points to slower rise in inflation Eurozone: CPI Inflation (Bottom-up f'cast model) % y/y / contribution Core Energy Food alcohol and tobacco Headline Source : Oxford Economics/Haver Analytics Forecast 28

29 Draghi deploys arsenal The ECB announced last week a comprehensive package of measures to combat slowdown and lift inflation Cuts to the refinancing rate to 0% and to the deposit rate to -0.4% Expansion of QE to 80bn per month; now includes corporate debt Four new TLTRO programmes with more favourable conditions for banks Barring some massive shock, this represents the end of full-scale measures for the time being. 29

30 As interest rates go more negative Sweden: Exchange rate, daily Index 18/11/92= KIX (trade-weighted EER), lhs Repo rate cuts 100 Kronor/euro, rhs SKr/euro Amount of cash that will take up 1 cubic metre Highest denomination 1m 3 $1bn =?m 3 USA $100 $85,951, Eurozone ,254, UK 50 33,369, China ,147, Switzerland Fr. 1,000 Fr. 660,710, Japan 10,000 7,277,596, Source: Oxford Economics Feb 13 Aug 13 Feb 14 Aug 14 Feb 15 Aug 15 Feb 16 Source : Oxford Economics/Haver Analytics Sweden s Riksbank has just cut its repo rate to -0.5%, the ECB lowered its deposit rate to -0.4% and the BoJ is the first non-european central bank to follow suit. They key impact of negative interest rates seems to be on the exchange rate; but even that is not given, as the Swedish example shows. Moreover, the more countries go negative, the less bang there is for the buck. The feared move to cash has not materialised, for a number of reasons, incl. storage space and costs. A bigger problem is that negative interest rates, unless passed on by banks, threaten to erode banks profits and thus balance sheets, slowing credit growth. 30

31 Negative interest rate and yield curve 31

32 Brexit lowers GDP growth moderately 32

33 Brexit would weigh on the pound & stocks 33

34 Thank you! Any questions? Kathy Bostjancic: