June, 16 2017 by lsr team

Steve Blitz, Chief US Economist talks about how:
-  Inflation eludes Yellen yet again, nevertheless she continues to chase it
-  But core inflation down means Fed funds rate now normal – inflation is for 2018
-  2017 outlook has changed: balance sheet reduction in Sept, no rate hike until Dec

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...

March, 24 2017 by lsr team

We believe investors have stopped worrying about secular stagnation but are convinced the ‘new neutral’ will keep bond yields at very low levels. While the global economy looks structurally deflationary, there is still a cycle in inflation and interest rates. And the major economies may not be as rate sensitive as everyone assumes.

March, 01 2017 by lsr team

Dario Perkins on: • Markets are now more realistic on President Trump
• US tax agenda more important than fiscal 
• Stimulus will come late in the business cycle
• No likely improvement in productivity and medium-term growth
• Border adjustment tax unlikely to happen

January, 23 2017 by lsr team

Questions: 1) Last October you noted that Sterling(£) was getting oversold and that the market was overly concerned with respect to the UK’s external balances. 2) Currently on a real effective exchange rate basis how cheap is Sterling(£)? 3) You also highlighted previously that within an overall negative view on sovereign bonds(ex EM high yielders), gilts might be particularly vulnerable? 4) So one of our key macro trades remains short gilts/long US Treasuries? 5) Last week before PM May’s speech you suggested that whatever its content...

January, 20 2017 by lsr team

- Germany & EA both growing above-potential, inflation rising
- Less inordinate ECB stimulus to be announced this summer
- Rising euro vs. dollar later in 2017 to put pressure on Italy
- Germany to accept fiscal union, or Italexit a risk in 2018-19
- Ultra-cheap euro, huge trade surplus: a cause of Brexit-Trump
- World impatient with prolonged resolution of new euro-crisis
- German domestic imbalances could shrink over 10-15 years
- Baby boomers retire – saving down. Immigration raises capex

December, 21 2016 by lsr team

Highlights
- EMs to benefit from US and Chinese reflation in 2017
- But global macro ‘push’ factors set to recede thereafter
- Mature US recovery at risk from tighter monetary conditions
- Beijing’s debt-RMB dilemma pressing as the mini-cycle turns
- Global search for yield to persist, albeit tempered
- Lift-off growth phase elusive for North Asia’s exporters
- Clogged rate and FX channels leave fiscal stimulus option

December, 02 2016 by lsr team

Highlights: - 50% of S&P stocks gain from inflation, 20% lose
- Financials are the main winners 
- Consumer discretionary and Healthcare also benefit 
- Real Estate the big loser    

October, 28 2016 by lsr team

The PBoC’s trade-weighted RMB basket has weakened by a little over 8% since its launch last December. The drop has been orderly, in line with Beijing’s intentions. However, the low-hanging fruit from RMB depreciation has already been picked. Despite successively weaker CNY fixings against the dollar, the RMB basket has failed to decline since late August and this month it has been creeping higher. What is causing this divergence? Is it sustainable, and what does it mean for Beijing’s policy choices?

October, 14 2016 by lsr team

The euro area LI continues to put in an above consensus call. It is probably over predicting growth somewhat but its strength is fundamentally underpinned by the newly emerged German locomotive. While German demand often turns out to be derived from others, chiefly China, in this case it is genuine. In fact, this is highlighted by our below consensus Australia call. China’s stimulus has not fed through to a rebound in private demand, although easing PPI deflation is helping manufacturers.

October, 07 2016 by lsr team

We think that an ECB taper is increasingly likely in 2017. But the bank’s immediate problem is how to overcome a scarcity of bonds available for purchase in order to complete the current programme. The ECB needs to be able to credibly declare victory before it heads for the exit.

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, 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.  

May, 26 2016 by lsr team

The surprise rise in the yen and the less surprising rise in the euro this year have removed Ms. Yellen’s international concerns about why she should not be hiking interest rates. Specifically, a dollar spike now seems least of our concerns… Our Chief Economist, Charles Dumas talks us through the domestic conditions in the US and Euro area and the risks of rising bond yields by next year. These issues will be further discussed in our upcoming LSR View, stay tuned!  

April, 29 2016 by lsr team

Investor sentiment has started to perk up recently on the back of a series of strong data. On our preliminary estimate, Chinese GDP expanded 7.1% at an annualised rate in Q1. That is up from 5.5% in Q4 and is the fastest pace in almost two years. China’s economy has re-gained strength thanks to Beijing’s orchestrated policy stimulus. But how much longer can Beijing go on creating debt at a breakneck pace to generate growth? Click above to watch the full video.

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, 15 2016 by lsr team

Welcome to our LSR Weekly View. In this video, our senior economist, Freya Beamish discusses Japan's monetary policy following the recent yen strength .These key issues are also covered in our latest LSR View. Click above to watch the full video or below to read the full report.  

March, 30 2016 by lsr team

Who said markets overshoot? Back in February, inflation expectations looked unhinged and investors were talking themselves into a state of panic. Every client meeting was dominated by talk of deflation and whether central banks were running out of ammo. Since then, sentiment has certainly improved. Equities rebounded from their lows and with US core inflation unexpectedly picking up, we are even hearing complaints that the Federal Reserve is falling behind the curve. So is this the end of the deflation scare? Click below to find out more.

March, 15 2016 by lsr team

The Bank of Japan left monetary policy unchanged today. The effect of negative interest rates on the currency in January was the opposite of that intended: the central bank’s aggressive adoption of negative deposit rates merely fuelled global angst at a critical juncture, driving repatriation flows into Japan and pushing up the currency. The ECB’s policy easing last week had a more beneficial effect on asset prices but has again left the currency unchanged, reinforcing the message for the BoJ. For Japan, where currency moves dominate the equity market, it’...

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...

January, 29 2016 by lsr team

Both the UK and the US are relying on consumers to power recovery. But while British households have largely shaken off the after-crisis blues, their US counterparts seem to be suffering from a case of Post-Traumatic Stress Disorder caused by past job and home losses. The difference is clearest in the savings rate. In both economies, there is a strong historical relationship between wealth and savings. However, whereas American consumers are currently saving more than their wealth ratios would suggest, UK consumers are setting aside less. What has driven this divergence?...

January, 21 2016 by lsr team

Not all the countries have joined in the global currency war. To some of the currencies most exposed to the slowdown in Chinese growth and associated deflation currency pegs are a symbol of normalcy; a signal to investors and speculators alike that the strains wrought by falling prices are only temporary difficulties. No one should be fooled; at best these pegs are illusions of stability and in many cases are making a difficult position worse. In this note we look at the two dollar pegs frequently mentioned in client queries; the Hong Kong dollar (HKD) and the Saudi Arabian...

January, 08 2016 by lsr team

While it is always dangerous to extrapolate from the recent past, the consensus expects 2016 to look remarkably like 2015. The issues that have dominated market commentary over the past 12 months – EM weakness, global deflation and central bank divergence – remain the sellside’s favourite 2016 themes. There is also a surprising amount of agreement about what will happen. Growth will move sideways, inflation will remain too low and the divergence trade has further to run. T...

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, 25 2015 by lsr team

Last week we published our LSR View explaining why US growth is likely to accelerate into 2016 and that, by inference, recent scares about the potential for a US recession are greatly overplayed. We think US real GDP growth is set to quicken to 2½ -3% from the 2% average of the past five years. This exceeds most current estimates of US growth potential and fully justifies the Federal Reserve’s expected rate increases. Rapidly growing household spending, on housing as well as consumption, plus an end to five years of fiscal drag will be the main engines of gr...

November, 12 2015 by lsr team

Brazil is battling a host of structural, cyclical, external and political risks. It faces headwinds from a turn in the metals supercycle, tighter liquidity conditions, diminished competitiveness and a payback from poor policy choices. It is one of the most vulnerable economies on almost all the metrics that we use to assess growth prospects in emerging markets (EMs). Brazil has been one of our least preferred EMs for long time now and we see no reason to change our stance. In fact, the pain is set to intensify. Click below to find out more.

November, 09 2015 by lsr team

The Bank of England’s Mark Carney, who has been a accused of flip flopping over the past few years, turned dovish again on ‘Super Thursday’ as he unveiled new macroeconomic projections that served to push back market rate expectations. Given the downside risks to global growth and with the ECB on the verge of expanding its stimulus, the MPC clearly felt that a little dovishness couldn’t do any harm. As a result, most investors don’t expect interest rate ‘liftoff’ until late 2016, with increasing speculation the first rate hike might...

October, 26 2015 by lsr team

Though few economists expected concrete announcements from the ECB last week, many thought Mario Draghi would hint at further action by the end of the year. Mr Draghi doesn’t like to disappoint markets and this occasion was no exception, as he delivered a dovish message and emphasized the central bank’s willingness to reassess its policies in December. The recovery is proceeding, but global risks have increased. Moreover, the ECB seems determined to keep its currency down, especially with the Fed apparently backtracking from its plans to raise interest rates....

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, 09 2015 by lsr team

Abenomics is a response to frustration with Japan’s poor economic performance since its bubble burst in 1990. But Abenomics treats the symptoms, especially deflation, rather than the disease, which it makes worse. Disastrous consequences of Abenomics have only been avoided so far, because it has failed to generate inflation – courtesy of the oil price slump and Japan’s enfeebled domestic demand. But can QE ever be stopped and more importantly, is Japan about to face a financial crisis? Click below to find out our latest View on Japan.

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, 01 2015 by lsr team

The yuan’s relatively small depreciation cannot explain its huge impact on investors’ attitudes. Rather, it served as a reminder of the persistent, powerful global deflationary trend. In the UK context, sterling strength has amplified global deflationary pressure on UK economy. Our analysis suggests that currency strength alone will have been sufficient to push annual CPI inflation around 0.5% lower today than it otherwise would have been. Along with large falls in energy prices, global deflation has done more than enough to contain any pick-up in inflation t...

August, 27 2015 by lsr team

As we approach the crucial September Fed meeting, the debate about whether the Fed will/ should raise interest rates has intensified.  Even before the recent drama in global markets, a clear split had emerged on the FOMC about whether it was time to attempt lift-off. Now, domestic US data still justify a move, but jittery markets and the slowdown in China, which will intensify global goods deflation, suggest it might be prudent to wait a few more months. The decision looks finely balanced and might come down to how markets behave over the next few weeks. Our report...

August, 24 2015 by lsr team

The recent devaluation of the yuan appears to have been the main reason why expectations of a Fed rate rise been pushed back. As recently as mid-June a hike of 25bp by the end of 2015 was fully priced in, but that has now been pushed back to Q1 2016. Given the increasing FX uncertainty and global deflation, we think there is a significant risk that investors could perceive an earlier-than-expected rise in Fed rates as a policy mistake. There is already some evidence of this concern, with long-term breakeven inflation rates falling to post-crisis lows as two-year yields h...

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...

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...