Through Amit Pabari
During the COVID-19 pandemic, central banks flew their jets and offered a ‘Helicopter money’ option to deal with the deteriorating economic situation due to the lockdown. It is nothing more than an unconventional monetary policy aimed at getting a faltering economy back on track. Using this tool, they flooded the market with sufficient liquidity to pull it out of a recession. Other than that, vaccination campaigns since the start of 2021 have worked quite well for the reopening. Demand returned, but the supply disruption was noted. This has led to soaring commodity prices and therefore inflation expectations across the world.
In the given scenario, which central bank will lift its easing? Let’s read their minds one by one
1. Federal Reserve: Market participants have high expectations for the Fed’s June 16 monetary policy. Two key factors the Fed is focusing on are inflation and the number of jobs. Core PCE (personal consumption expenditure), the best indicator of inflation, rose faster than expected to 3.1% in April, as price pressures intensified in the rapidly growing US economy. expansion. But the labor report still falls short of the rating the Fed plans to lower. Apart from that, an interesting observation in the Fed’s balance sheet suggests that something is brewing. As part of QE, the Fed buys $ 120 billion worth of securities and bonds and circulates liquidity in the market. But since April, the Fed has offered Overnight Repo-ON RRP (the Fed borrows from U.S. commercial banks to control excess liquidity) and has pulled $ 8.8 trillion from the market. As liquidity stopped increasing, risky stocks stopped behaving as they were before April.
This can be compared to the taper tantrum case of 2013 where, with QE, the Fed did the same ON RRP, then we saw the tapering announcement. Overall, the Fed is expected to announce a tapering, either in June, at the Jackson Hole meeting in August, or finally at the September meeting. The higher vaccination rate, Biden’s infra spending and stronger economic data will require talk of reduction very soon. Therefore, we expect the Fed to be the first central bank (like 2013) to go hawkish.
2. Bank of England: The United Kingdom which has undoubtedly carried out its vaccination program very well and has a good chance of reopening on June 21; just before the BoE revised its policy on June 24. However, the Indian variant or so-called Delta variant poses a risk in its potential to undo some of the country’s hard-earned progress towards reopening. On the data front, retail sales and number of manufacturers have been higher than estimated, but growth numbers are expected to recover well in the coming days. At the last meeting, the BoE previously announced that it would slow its bond purchases to £ 3.4bn per week between May and August, from the current pace of £ 4.4bn, but made it clear that this should not be seen as a change of position. One MPC member has already spoken out in favor of tapering, and likely many will join him at the next meeting if the economy outperforms and inflation persists above 2% levels. The BoE is standing right behind the Fed to turn hawkish and shrink.
3. European Central Bank: The monetary policy of the ECB which is due to meet this week on June 10 will be a non-event but very exciting. Because since the April meeting, European countries have done a remarkable job in the deployment of the vaccination campaign. It helped them think about reopening like in the United States. The economic outlook has improved further and inflation forecasts are expected to be revised upwards. Another interesting element will be the first official quarterly assessment of financing conditions in the euro area will be presented. The yield on the German bund has been in negative territory for the past 2 years, was seen recovering almost 50 basis points from the 2021 low of -0.60 as the rally squeezed the yield. The ECB could avoid the tapering discussion, but for that, solid reasoning must be presented, otherwise doubts about the sustainability of the economy and the euro will be called into question. Compared to the Fed and the BoE, the ECB is still lagging behind in terms of reduction as many European countries still face higher debt problems and the rate hike will also increase their cost of debt. Therefore, the ECB could stay behind the Fed and the BoE.
Below are key facts about the 3 countries you need to look at.
Outlook
Out of 3 central banks, the Fed is more likely to turn hawkish once the labor market meets Fed expectations and inflation stays well above Fed target levels for a reasonable period of time. Therefore, we expect the US 10-year benchmark yield to resume its uptrend towards 1.80% -2.00% and the US dollar index to move towards the 91.00-91.50 levels. . After the Fed, the BoE has a higher likelihood of scaling back its bond buying program and becoming hawkish, but a new variant fear threatens reopening. . In Europe, the ECB still has a long way to go, as indebted countries could not afford to lift their support system. As a result, EURUSD has limited the upside to 1.2250-1.2280 area and may revert to 1.2000-1.1950 levels in the near term.
(Amit Pabari is Managing Director of CR Forex Advisors. The views expressed are those of the author.)