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

March, 17 2017 by lsr team

- Chair Yellen dampens market’s policy trajectory - she has to, we don’t
- February retail sales weakened by tax refund delays; underlying demand strong
- CPI details indicate a change - rising prices for discretionary goods

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

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.

September, 30 2016 by lsr team

Events such as Brexit throw a spanner in the works of economic models and analysts are left with a wide range of plausible inputs. At the worst extreme, fear of Brexit becomes self-fulling and weighs on spending decisions, in turn crimping consumers’ style. Over-gloomy estimates prompt businesses to delay expansion plans. Firms make their capital spending projections based on these forecasts and they have not been in short supply. Undoubtedly, capex plans will be adversely affected by the uncertainty hanging over them. While a wide range of business sentiment indicato...

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...

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, 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, 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’...

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, 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, 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...

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, 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, 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, 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...

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, 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, 17 2015 by lsr team

Japan’s Q2 real GDP declined at a 1.6% annual rate, led by consumer spending and exports. While Q1 was buoyant, underlying growth since the start of Abenomics –QE in late 2012 has been no better than on trend. The Q2 contraction would have been a lot worse if the government had not resumed boosting public investment, and government spending in general, to complement continued massive QE. The basic problem in Japan remains that only exports seem capable of generating growth in the economy. Japan has two alternatives: implement structural measures to slash corp...

June, 24 2015 by lsr team

As the start of the rate hiking cycle in the US draws closer, concerns are intensifying about the tightening of liquidity conditions in emerging markets (EMs). Some investors cite the aggressive QE policies of the BOJ and more recently the ECB as forces that will keep official liquidity provision abundant. But our analysis continues to show that the evidence so far, at least from Japanese QE, does not offer much room for hope. Annual outflows from Japan have increased since the start of BOJ’s latest QE programme and are now the highest since the global financial crisi...

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...