A economic market review of the last 3 weeks

The last three weeks have seen central banks do what one would probably simply describe as “amazing” stuff as follows; 

§  the Sweden Cut Rates to minus 0.5% from minus 0.35% – in its battle to revive inflation and keep the krona from appreciating. How this works is that lowering the rate to larger negatives is intended to impose a charge on banks when they make their deposits with the central bank. This charge will encourage them to lend thus stimulating the economy and then pushing inflation higher. This doesn’t worry the central bankers because Swedish banks are well leveraged and highly profitable for the charge to be too much of a disincentive in their business.

In terms of the currency, krona, the Swedish central bank, the Riksbank is seeking to control the exchange rate in lowering interest rates as well. How this happens is that negative rates will discourage foreign investors from holding krona and pushing the krona value down which in turn pushes import prices up which gives inflation a further kick.

§  the People’s Bank of China (PBOC) did a series of eye-popping liquidity injections in that same period;

o   starting with a $1.5 billion injection,

o   then another Yuan Devaluation and a $54 billion injection,

o   then another $49 billion injection,

China’s PBOC is releasing extra cash to ensure China’s cash machines are continually oiled. This is a way to ease monetary policy without using the traditional toolkits like interest-rate cuts. By continuing to devalue, China is hoping to encourage investment as they seek acceptance into the international monetary system. A lower yuan means more foreign demand for yuan, boosted export demand due to the devalued prices. Hopefully then a devalued currency will gain the favour of outsiders and economists as China seeks to push on to join the basket of Special Drawing Rights currencies.

§  the ECB cut rates and added more Quantitative Easing (money-printing). The ECB has also sent rates further into the negative territory (-0.4% now from -0.3%) with the hope that it would stimulate bank lending and QE raised to 80 billion Euros from 60 billion a month to provide a boost in liquidity and prevent deflation. Things are not looking so great for the ECB as inflation is moving nowhere as desired and the uncertainties in the world economy are still with us.

§  Norway cut rates to 0.5%. Norway being a big oil producer continues to hurt from the low oil prices.

§  the Reserve Bank of New Zealand cut rates in a shock move that economists didn’t seem to expect. The NZ dollar fell 1% from the announcement but the main reasons to cite for the reserve bank wanting to maintain the lowest interest rate at 2.25% is weak China demand and global growth uncertainties.

§  the US FED cut the number of interest rate hikes for 2016. The sentiment from Janet Yellen the Fed Chis is that the pace at which the FED will hike rates will slow down in 2016. Expectations for growth and inflation have been cut and eyes are on the rate at which the US economy will travel for the remaining year.

Key themes in the world economy continue to be oil, inflation fears and the Fed. The Fed’s decision to weaken the dollar has put great pressure on Europe and Japan (we may even see more devaluations). European banks are in a tight squeeze with the ECB lowering rates and adding more QE as this means they will not be profitable in 2016. These pressures could be negative in a global sense if things worsen. With a weakening USD, commodities (as they strongly correlate to the USD) have gained strength and this has put relief on US banks and lenders that provided capital to the commodities complex. Oil at $40 though may not be sustainable so it will be very interesting to watch what happens in the coming months. 

Reference: Stig and Preston updates for pointers.