• Home
  • About
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews

James Bevan: The Fed and ECB’s divergent paths

0
  • by Gavin Hinks
  • in Treasury
  • — 10 Dec, 2015
James Bevan

James Bevan

At our “all staff” briefing this week, we discussed that the European Central Bank was expected to drive Euroland interest rates even further into negative territory when its policy-making committee met last week we did indeed get further easing by the ECB, although not by as much as some had expected.

With the prospect that the Fed will deliver its first hike on 16th December, after the upcoming Open Markets Committee meeting, we have highly divergent policy.

Divergence of policy is not new, with the Fed ending its QE campaign at the end of October 2014, and ever since then, there has been much chatter about when the Fed might proceed with a first hike of the Federal Funds rate.

Equally the ECB had cut their deposit rate for bank reserves from zero to -0.1% on 11th June 2014, and again to -0.2% on 4th September 2014. Last week, the ECB Governing Council lowered this rate again, and  also implemented a QE programme at the start of this year. So while the Fed’s balance sheet has stopped expanding since late last year, the ECB’s balance sheet has increased by €515bn during the first 10 months of this year.

Results show

Photo (cropped): Curtis Garbutt, Flickr

Photo (cropped): Curtis Garbutt, Flickr

One result is that the euro is down from last year’s peak of $1.39 on 6th May 6 to $1.06 currently. The decline in this key currency has certainly contributed significantly to the 19% appreciation of the trade-weighted dollar since 1st July 2014.

On balance, the strong dollar seems to be weighing more on the US economy than it is lifting the Euroland economy. It is also depressing commodity prices, which is weighing on the global economy as commodity producers and exporters are forced to reduce payrolls and capital spending.

In other words, the divergent paths taken by the Fed and the ECB are still leading to the same outlook for the global economy – secular stagnation.

The conclusion may be that the Fed won’t be able to stay on hiking tack next year. Thus, we have commodity prices still falling freely.

The CRB raw industrials spot price index is down 27% from last year’s peak on 24th April, to the lowest reading since June 2009. It remains highly correlated with the inverse of the trade-weighted dollar.

The drop in commodity prices is weighing on the Emerging Markets MSCI stock price index, which is down 5.8% ytd in local currencies. With the global context in focus, US exporters are suffering.

As a sort of illustration of the difficult times, West Coast ports’ outbound container traffic is down 11%yoy through October based on the 12-month sum of this series and it tends to be highly correlated with real export data. Equally illustrative, we have the strong dollar and weak commodity prices hitting some of the biggest US exporters, companies that manufacture mining equipment.

The forward revenues of the S&P500 Construction Machinery & Heavy Trucks industry (CAT, CMI, JOY, and PCAR) is down 31.7%yoy and 49.5% from its record high in 2012.

Tigers and Euroland

As for Euroland, the weaker euro hasn’t helped much thus far. Lending is picking up a bit, but MFI loans are up only 1.6%yoy through October and loans to nonfinancial corporations are up just 0.3%. More encouragingly, Euroland exports in euros are up 4.3%yoy through the three months ending September. In contrast imports have been flat since 2011, suggesting that the domestic economy remains stagnant.

Also receiving very little benefit from the strong dollar are Japan and the Asian Tigers. The yen is down 37% since late 2012. Japan’s industrial production rose 1.4%mom during October, but is down 1.4%yoy and is up just 4.8% since October 2012. Household spending fell 2.4%yoy during October – and over the past year through October, the CPI is up just 0.3%, or 0.7% excluding food, beverages, and energy.

Industrial production indexes have hardly moved since 2011 for the major Asian markets. Thus, from October 2011 through October 2015, production has been -2.1% for Singapore, +1.4% for South Korea and +5.4% for Taiwan.

Weighing it up

On balance, the strong dollar seems to be weighing more on the US than it is benefitting the rest of the world.

The real problem is that there are lots of forces weighing on global economic growth that can’t be offset by declines in the euro, the yen, and other currencies.

Easy monetary policy is not boosting demand largely because it’s been easy for a very long time, resulting in high debt burdens that depress demand. Meanwhile, easy money has facilitated the expansion of excess capacity, which has been very deflationary, particularly for commodities.

Then we have demographic trends around the world that are depressing global growth, with people living longer and fertility rates falling. This may be good news for the planet eventually but are stressful for now. Even more disruptive in the near term, we have technological innovations that affect lots of business models and provide ways to replace workers with automation and robotics.

The net result is that easy money can’t fix all of the problems, and might actually exacerbate them. Currency devaluation may also not work with the ECB’s campaign to drive the euro lower likely to have the same poor outcome as the BoJ had with depreciation of the yen.

Negative interest rates also could backfire – financial institutions may shun central-bank reserves in favour of cash stored in vaults, freezing the flow of capital and if negative rates get passed on to a wide range of big and small depositors, businesses and consumers may hoard cash too, denting banks’ profits.

Equally, as a behavioural response to low money rates, savers may save more. This is a tricky environment for businesses and investors. The watch words for both are a focus on sustainable growth and sticking to quality.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla

* CCLA is a supporter of Room151

Federal Reserve Photo (cropped): Curtis Garbutt, Flickr.

Get the Room151 Newsletter

Share

You may also like...

  • Accounting for investments: time to get under the bonnet Accounting for investments: time to get under the bonnet 19 Feb, 2013
  • David Green: Streamlining the Prudential Code is the best tonic for capital investment David Green: Streamlining the Prudential Code is the best tonic for capital investment 23 Mar, 2017
  • Finnegan’s Take: Co-op alarm bells sound all too familiar Finnegan’s Take: Co-op alarm bells sound all too familiar 31 Jul, 2013
  • CIPFA calls for due respect for section 151 officers CIPFA calls for due respect for section 151 officers 5 Dec, 2018

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 2 days ago

    The vaccine may help settle cash flows but inflation remains a risk: Sponsored article: Lauren Sewell examines the prospects for long-term borrowing as Brexit settles and vaccines are deployed against Covid-19. On the 9th October 2019 Whitehall sent… dlvr.it/RqZXCr pic.twitter.com/PzgOZOGQ0k

    Room151 2 days ago

    ESG in liquidity: Sponsored article: Gavin Haywood looks at the integration of ESG in Federated Hermes’ money market funds. Federated Hermes has over 300 public sector clients invested in our AAA rated money[...] dlvr.it/RqZX5f pic.twitter.com/E87sBXsay8

    Room151 3 days ago

    New realities of investing cash and liquidity: “What to do now?”: Sponsored article: Brian Buck looks at the “unique challenge” for cash management strategies. As investors assess the ongoing impact of the pandemic on their business, levels of cash and… dlvr.it/RqVbk9 pic.twitter.com/ZElVASmEUV

    Room151 3 days ago

    Extra finance promised by the government receives a broad welcome: Sponsored article: The financial pressures facing local authorities this year continue to pose challenges for council treasurers. While the launch of the UK’s Covid-19 vaccination… dlvr.it/RqTzTF pic.twitter.com/HCjH0pyHR5

    Room151 3 days ago

    A savvy approach to managing your cash: Sponsored article: Caroline Hedges examines the need for active cash management to achieve a higher than average return. Last year saw the already mountainous pile of negative-yielding debt around the[...] dlvr.it/RqTzMK pic.twitter.com/uP0RQYTJLt

    Room151 4 days ago

    Putting alternatives at the heart of multi-asset portfolios: Sponsored article: Nick Edwardson looks at the assets that provide the “most attractive opportunities”. We believe that asset allocation is the primary driver of investment returns and that the… dlvr.it/RqQ2Qt pic.twitter.com/WLBzvRRRUQ

    Room151 4 days ago

    Thriving in the pandemic: Avoiding the stragglers: Sponsored article: George Crowdy looks at the sectors providing opportunities for sustainable investment. Throughout much of 2020, we talked about why sustainable investing has thrived in the pandemic,… dlvr.it/RqQ2NQ pic.twitter.com/dxiPWKFsPl

    Room151 4 days ago

    The development of CCLA’s mental health benchmark: Sponsored article: Amy Browne examines the importance of investing in mental health in the workplace. We are living through a public health emergency in more ways than one. Physical health[...] dlvr.it/RqQ2Jx pic.twitter.com/o6yRSCX3oF

    Room151 5 days ago

    Brexit: What the EU trade deal means for the UK economy: Sponsored article: Hetal Mehta looks at the impact of Brexit on economic prospects. Four and a half years after voting to leave the EU, on Christmas Eve the UK finally[...] dlvr.it/RqLBDt pic.twitter.com/No62srfE8h

    Room151 5 days ago

    Cash dethroned: The quest for liquid yield: Sponsored article: Peter Hunt and George Carne ask how treasury departments can balance the need for yield and liquidity. The massive stimulus and waves of liquidity provided by central banks[...] dlvr.it/RqLBDj pic.twitter.com/05g6Zhu1kU

    Room151 5 days ago

    Richard Harbord: Delayed “capital determinations” make section 25 opinions a new crunch point: The severe pressure on local government budgets now means section 151 officers confront a tricky call on  whether they can make a judgement on the robustness… dlvr.it/RqLBDV pic.twitter.com/vTAbDKFzkI

    Room151 1 month ago

    PWLB Consultation: Analysis straight from Dickens: Helen Radall and Paul McDermott present a legal examination of the new PWLB borrowing rules as Charles Dickens might have imagined it. Free and easy PWLB (“Marley” to his friends)[...] dlvr.it/RnmwLq pic.twitter.com/yFxcPrQqEG

    Room151 1 month ago

    Room151’s top stories from a momentous year: 2020 was the year in which local government grappled with Covid-19, funding strains, controversy over borrowing rules and the threat of financial collapse. It has been an exhausting and historic[...] dlvr.it/RnlpZg pic.twitter.com/g3myNyox6J

    Room151 1 month ago

    Tracy Bingham: 2020, a year best forgotten but also one of learning: Many will rush to erase 2020 from their memories but, writes Tracy Bingham, there were also many lessons about finance teams, strategic planning and leadership. 2020: A year we’d… dlvr.it/RnlpY2 pic.twitter.com/m7G1krrtCu

    Room151 1 month ago

    Settlement must address ‘precarious’ local government finances: Dan Bates crosses his fingers for “no nasty surprises” in this week’s funding settlement but argues the “bigger prize” is post-Covid financial certainty. Thursday (17 December) should be the… dlvr.it/Rnj9dG pic.twitter.com/KLKjjuBqJE

    Room151 1 month ago

    PWLB consultation: Big change on the way but there are ‘grey areas’ and opportunities: The consultation on PWLB borrowing has concluded creating a new landscape for funding property acquisition. Our experts look at the implications. Tracie Langley The… dlvr.it/RndRvJ pic.twitter.com/KEqXEBmEfq

    Room151 1 month ago

    2021: Better income outcomes?: Sponsored article: Investors should be mindful of structural challenges posed to income generation as a result of rapid thematic change. Jon Bell looks at the prospects for the coming year.[...] dlvr.it/RndRsw pic.twitter.com/TxVk8aXkMq

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Stephen Sheen: The reserves iceberg
  • Next story Failure prospects, South West pool, value for money warnings, divestment rules slammed, building societies stable

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we'll assume that you are happy to receive all cookies from this website.OK