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, 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.

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...

September, 02 2016 by lsr team

It’s our concern that inflation in the US will eventually outpace market expectations in 2017, as sturdy demand plays out against a weakened supply side and wages and inflation spur each other along. However, for now, real wage growth may even moderate in the US, as wage negotiations typically reflect inflation 6 quarters previously. In this video, we outline what is holding down the long end of the curve in the US and highlight a tactical trade from our strategists before these deeper themes play out. Is it Draghi that holds the key?

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.  

June, 08 2016 by lsr team

The housing market has long played a central role in discussions about secular stagnation in the US. This is hardly surprising given it was the collapse in American house prices that brought so much destruction in 2008. Credit was tight, job/income prospects were poor, would–be homebuyers had reassessed potential long-term capital gains and there was a substantial overhang of unsold homes/foreclosures. An intense and long-lasting squeeze on housing investment explained why the economy had failed to bounce back as quickly as in previous recessions.   Since...

May, 06 2016 by lsr team

Falling oil prices have been a key driver of economic performance, for better or worse, in all global economies.  The trough in prices that we expected during the first quarter has now passed.  Get ready for the next stage of the global oil revolution – the path to $50…  

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...

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...

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...

September, 04 2015 by lsr team

Recent falls in equity markets have reignited the debate about the appropriateness of monetary tightening in the US and elsewhere. Those economists committed to a ‘secular stagnation’ view of the global economy perceive recent market falls as a vindication; how could the Fed, or indeed the Bank of England, be considering raising rates from emergency levels when there is still clearly an emergency? Yesterday was the turn of Mario Draghi and the ECB to make their contribution to this debate. While recent euro strength will be a concern, the ECB’s QE progr...

August, 10 2015 by lsr team

China’s overall monetary conditions have been kept tight for some time now with broad money growth - the best indicator of overall monetary conditions in an economy, slowing to its lowest rate on record in recent months. Despite the introduction of new monetary policy tools – SLO, SLF, MLF, PSL, etc by the People’s Bank of China over the past few years, liquidity injection through these facilities has not been large. Meanwhile, real lending rates are high and capital is flowing out of the country. While many have argued that China is witnessing capital...

August, 04 2015 by lsr team

The Reserve Bank of India (RBI) kept the policy repo rate unchanged in its monetary policy meeting today while leaving the door open for more rate cuts. Our report answers two critical questions: to what extent the RBI can afford to loosen policy and more importantly, whether it would work. Interbank liquidity conditions are improving in India. In fact, liquidity conditions are looser than at any time since 2009. This is in line with our expectations and is one of the reasons why we think economic recovery will gain traction. But will fears about excess liquidity cause t...

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...