June, 02 2017 by lsr team

Ken Wattret, Chief European Economist, talks about our latest Europe Watch publication Economics: ECB meeting – what to expect 
- Upbeat on growth, cautious on core inflation; financial conditions a concern
-  Easing bias  should go but probably stays for now; exit discussion more likely Politics: Italian elections draw near; May’s wobbles 
-  A risky autumn election in Italy is looking more likely
-  PM May still in pole position but weakened by a poor campaign Markets: Dancing round the May pol...

April, 07 2017 by lsr team

The Fed surprised markets and commentators, including us, as the FOMC minutes showed plans to shrink the balance sheet beginning in 2017. Steve Blitz says this is significant because:
 
•       Signalling shrinkage of its balance sheet shows Fed planning for three increases
•       Fed’s intention is also to present a smaller target to its critics

October, 21 2016 by lsr team

  • Mario Draghi dismissed press reports that he is planning a QE taper
  • This is because the ECB must first extend QE and address scarcity problems
  • But tapering remains a strong possibility for 2017 H2

September, 23 2016 by lsr team

The RBA’s shift to a neutral bias at its meeting in September, following 50bps of rate cuts in 2016, did not come as a surprise. Perhaps more interesting was the discussion of the most recent collateral damage in the global monetary policy race to the bottom. Officials took note of the distortive impact of the BoJ’s policies on Australia’s repo market, manifested in rising repo rate spreads relative to the RBA’s cash rate. In turn, persistently high repo rates put upward pressure on Australian banks’ funding cost base, further strengthening the...

August, 05 2016 by lsr team

In our UK Outlook published shortly after the UK’s Brexit referendum, we outlined our expectation for the August MPC meeting of a 25bp interest rate cut and a new QE programme of around £100bn. At the time, the market was expecting a rate cut but the resumption of QE was a firm off-consensus call. When it came to it, the Bank of England delivered the quarter-point rate cut and, as yesterday’s re-pricing of sterling and the gilts curve demonstrated, surprised the market with a new £70bn QE package. To find out more, click above to watch the video o...

July, 22 2016 by lsr team

Our preliminary estimates show that Chinese GDP growth stabilised at 6% in Q2. Domestic demand growth slowed to 5% in Q2, but offset by net trade. With the improvement in activity momentum largely a result of policy stimulus, it is highly questionable whether the government’s growth target can be achieved without fresh stimulus to boost investment. More worryingly, despite the recent stabilisation in industrial profits, private fixed asset investment growth has remained weak. With the outlook of domestic demand souring, companies are under pressure to deleverage an...

July, 15 2016 by lsr team

With central banks ready to raid their emergency tool kits and the ECB rapidly absorbing most of the euro area’s bond market, it is perhaps understandable that Brexit hasn’t triggered a wider deterioration in European financial conditions. The economy however will take a hit in coming months as the UK is an important market for many euro area exporters. That said, Brexit has had a significant impact on European banks, especially Italian lenders. Currently, Italian non-performing loans stand at around €210bn-360bn, or around 20% of GDP. Click above to wat...

July, 07 2016 by lsr team

Last quarter we warned that, although growth was likely to remain positive during our 2-year forecast horizon, the end of the cycle was now in sight. Since then the Brexit vote has dragged forward the debilitating effect of final demand uncertainty on investment that we would normally associate with the very late cycle. As a result we expect a technical recession during H2 2016. To find out more about Brexit’s impact on the UK economy, click above the watch the video or below for our latest UK Outlook report.  

June, 22 2016 by lsr team

June would have been a busy month for event risk by any measure, with ECB, Fed, BoJ and BoE policy decisions, an OPEC meeting at the start of the month and Spanish elections at the end. But all these have been completely overshadowed by the EU referendum the UK will hold tomorrow on June 23. With the emphasis very much on the short term, we focus on two aspects of Brexit: what’s likely to happen and how to position for it. Click above to watch the full video or below for our latest Asset Allocation report on Brexit strategy.

May, 12 2016 by lsr team

Following a surge in new loans earlier this year, investors are concerned again about the sustainability of China’s debt. Severe producer price deflation and decimated profits show just how unproductive investment has been. The good news is that China’s total non-financial debt is still low compared to most advanced countries. However, China’s refusal to tackle zombie companies has caused a massive slowdown in productivity, compromising China’s ability to grow its way out of the debt problem…

April, 21 2016 by lsr team

Charles Dumas, director of Lombard Street Research, discusses the EU referendum’s impact on the UK unemployment numbers, and Bank of Japan Governor Haruhiko Kuroda’s latest comments on monetary easing. He says the Bank of Japan has no control over the currency market and that people have an exaggerated understanding of the power of central banks. Click here to download and listen to the Bloomberg podcast or below to read his la...

April, 20 2016 by lsr team

Freya Beamish, senior economist at Lombard Street Research talks about the risks on the horizon for Japan on FundForum Asia. Click above to watch the full video.  

April, 13 2016 by lsr team

Back in January, economists were gloomily warning about currency wars. The Bank of Japan had just announced negative interest rates and seemed to be threatening even lower – possibly much lower – rates to come. The ECB was set to respond at its meeting in March. And, of course, everyone was concerned about the prospect of a major Chinese devaluation. A few months after much of this talk has disappeared. There seems to be a ceasefire in the global currency ‘war’ and many economists attribute this to February’s G20 meeting in Shanghai. Even...

March, 04 2016 by lsr team

March is a busy month for central bank watchers. The fun starts next Thursday in Frankfurt with the ECB policy decision, before moving to the BoJ (15th), the Fed (16th) and the BoE (17th). With investors concerned about the state of the global economy and wondering whether monetary policy is reaching its limits, markets are looking for a central bank response. But outside the euro area, we don’t expect a great deal of action. Market rate expectations for the Fed and the BoE have already dropped sharply (down 75-90bps since December) and some comforting words should be...

February, 17 2016 by lsr team

Beijing has pledged to embark on the necessary reforms to lower debt levels in the economy. Yet the latest money and credit numbers show that Chinese banks expanded their loan books at a record pace at the start of 2016. In January, Chinese banks extended a whopping RMB2.5 trillion in new loans, or 4% of GDP. On a seasonally adjusted basis, RMB 1.6 trillion new loans were extended. Given that local government bond issuance has come to a halt ahead of a new debt swap programme, local government financing companies might have taken out bridge loans from banks to refinance...

February, 10 2016 by lsr team

It was almost exactly a year ago that various bond yields in Europe turned negative, unleashing a wave of questions from our readers. Clients wanted to know what this strange phenomenon meant and how long it would last. Twelve months on, far from proving to be a temporary aberration, central banks in Europe have taken their policy rates deeper into negative territory. Now the Bank of Japan has joined in and helped push the 10-year government bond yield to almost zero today. With risks to the global economy intensifying, there is even speculation that US and UK rates coul...

February, 09 2016 by lsr team

Ironically, financial market turbulence has hit just as the world economy’s chances of rebalancing successfully had increased. We published our year ahead piece in early December with the title “Don’t panic!”, but investors returned to work after the holidays worried about China’s slowdown, collapsing oil prices, global debt unwinding and the dearth of policy options left open to leading central banks. Widespread anxiety pulled the rug from under asset prices. As is our tradition, we asked our clients in mid- January for their top questions...

February, 02 2016 by lsr team

The BoJ followed through on recent threats to loosen policy by cutting its interest rate on new reserves to -0.1% last Friday. A comparison to Europe pushing into negative territory is misguided at best. Japan has a government deficit of 6% of GDP to finance and a huge pile of public debt to service so it needs to keep its investor audience captive. The increase in reserves each year is huge because of the BoJ’s asset purchase programme. If a central bank buys 80trn yen of JGBs then by definition, this eventually creates 80trn yen of reserves. Reserves at the BoJ incr...

December, 09 2015 by lsr team

Twelve months ago we said 2015 would be a year of ‘deceptive calm’. With the S&P 500 up 5% and US 10-year yields around 5bps higher, you could say our forecast was accurate. Markets spent much of the year in an anxious state, fretting about Greece, then China, then the risk of a synchronised global recession. In 2006 and 2007, LSR had a high conviction that a financial meltdown was about to wreak havoc on the global economy. This time around we stick with our 2015 theme ‘Keep Dancing’ but with no great conviction. Looking ahead to 2016, China...

November, 24 2015 by lsr team

Beginning in the early 1970s, Japan embarked on a long quest to reform its financial sector. Liberalisation in one area brought unintended consequences in others. Excessive leverage and regulations that failed to keep up with changes inevitably led to a crisis. Today, China has come to a point where financial reform is critical. While China does not have Japan’s luxury to pursue financial reform gradually, Japan’s experience however could shed some light. We visit Japan’s story and look at its implications and what China could do to avoid Japan’s...

November, 16 2015 by lsr team

Back in 2008 when central bankers were battling the global financial crisis, they knew they needed extraordinary measures to calm markets and guard against a collapsing world economy. But no one expected that seven years later interest rates would still be at emergency levels and that quantitative easing had not only been on a greater scale than first envisaged but had not even started to be unwound. Clearly, in the words of Lord Mervyn King, governor of the Bank of England (2003-2013), “the conventional approach to thinking about monetary policy doesn’t seem to...

October, 29 2015 by lsr team

Japan’s central bankers are locked in the same vicious cycle as the rest of the world. The US in isolation could easily have raised rates by now, but the rest of the world is not ready and is now big enough to give the Fed cause to pause. However, unwilling to relinquish their grip on America’s coat tails, central banks outside the US have responded to Fed hesitation by lowering the bar, pushing interest rates below zero and devaluing currencies. The result is a race to the bottom. Japan’s QE is already huge and expanding the programme would hasten the...

October, 15 2015 by lsr team

The FOMC decision to keep interest rates on hold in September left a number of economists confused and angry. Some argued the committee was ignoring its mandate and pandering to external considerations. With GDP growing at a healthy pace for a seventh consecutive year and the labour market approaching full employment, a broad reading of US data made it hard to justify emergency levels of interest rates. Some investors, particularly those based in the US, were worried that the Fed was trying to become the world’s central bank, rather than staying within its own ju...

October, 14 2015 by lsr team

We have written before on this subject but continue to receive questions on it and some of these questions deserve careful consideration. To recap, initially, the question was simply ‘can’t central banks just write off some of the massive of government debt that they have amassed through the quantitative easing programs.’ To this we answered ‘yes they can but to what end?’ In this note we answer a selection of the most intriguing questions asked by clients. Is the central bank’s funding liability really a liability? Wouldn’t this...

September, 16 2015 by lsr team

When oil prices crashed last winter, the world’s major central banks were planning to ‘look through’ this development. They argued the impact would be temporary, with inflation quick to rebound. This view has been broadly correct- inflation in developed economies is close to a trough and should rise by early 2016 thanks to favourable base effects. That said, the global economy is clearly more deflationary than policymakers anticipated at the start of the year. Meanwhile, China’s slump has caused a broader EM downturn, which is weighing heavily on...

September, 10 2015 by lsr team

A weaker currency is good news for overvalued and overinvested China, but a collapsing yuan will be a disaster for all. According to data from the Bank for International Settlements, international bank claims on China fell by $120 billion in the three quarters to Q1 2015. The past five quarters have also seen record-high net capital outflows of $440 billion. Capital flight has intensified after Beijing announced that it will allow its currency to be driven by market forces, starting with an initial 1.9% depreciation on the 11th of August. So far the authorities have allo...

July, 28 2015 by lsr team

The Fed continues to prepare the market for imminent rate hikes. Yet, while most economists anticipate a move in September, it seems many investors remain sceptical. Perhaps this is a classic case of the boy who cried wolf – the central bank has been threatening to raise interest rates for so long that many investors think it is bluffing. We think that the timing of lift-off really isn’t as important as the pace and extent of policy tightening thereafter. This will depend on two crucial things: 1) what happens to the neutral interest rate over the new few wee...

July, 07 2015 by lsr team

Contrary to broad expectations of a split vote, Sunday’s much-awaited referendum produced a resounding ‘No’. The ball is now back in the creditor’s court, and all eyes are on this week’s Eurogroup and leaders’ summit. Whatever the outcome, this negotiation process has cost Greece dearly. The economy is sliding deeper into recession and the financial system is starved of liquidity. Should Greece default on a €3.5 billion bond payment to the ECB on July 20th, the gates of Grexit will be forced wide open. Click below to find out more.

July, 06 2015 by lsr team

The People’s Bank of China (PBoC) simultaneously cut its benchmark lending rate and reserve requirement ratio a week ago in response to the country’s slowing economy and sharp fluctuations in the stock market. This is no surprise to us as we’ve been expecting the PBoC to keep easing policy through further lending rate cuts, more mortgage credit easing, implicit support for the equity market and sharp RRR reductions to help with the cleansing of banks’ balance sheets. According to our estimates, China’s real GDP fell 0.2% in Q1...

July, 02 2015 by lsr team

All eyes are on the unfolding Greek drama, yet arguably what is going on in China is of equal if not greater importance for markets. China’s stock market has the blessing of the ruling Communist party, but this doesn’t mean equity prices can’t swing violently. Beijing would rather see money pouring into shares than inflating a new property bubble that could burst with potentially more severe social consequences. Yet it does not want a re-run of the market’s collapse in 2008 either – hence the recent crackdown on margin trading that set off t...

June, 22 2015 by lsr team

China’s economy is losing steam fast under the burden of local government and corporate debt. According to our estimates, non-financial debt including shadow banking reached 240% of GDP in 2014, while real GDP growth averaged just under 5%. Beijing’s local government debt bailout plan buys time, but we estimate that a proper clean-up could mean government debt rising to as high as 105% of GDP. Click below for our exclusive report on ‘’Defusing China’s debt bomb” to find out if Beijing can afford to clean up past excesses, whether its d...

June, 18 2015 by lsr team

The Greek central bank reported on Wednesday that €30bn deposits were pulled out of Greek banks between October 2014 and April 2015 and warned that Greece is likely to default and exit from the eurozone if it fails to reach a deal with lenders. Prior to that, we’ve also seen a massive sell-off in Bunds, triggered by modest inflation in the eurozone and markets’ refusal to believe that the QE programme will be implemented in full. While a Grexit isn’t our central scenario, we believe that the markets may be too complacent about the impact of a Greek...