Monetary Policy

The euro area bank lending survey for the second quarter of 2019, released yesterday, suggests European banks are becoming more cautious and beginning to tighten lending criteria to various parts of the economy.

One of the market’s chief obsessions in 2019 has understandably been the shifting stance of the US Federal Reserve in relation to the path for interest rates, with investors now pricing in a 100% chance of a rate cut at the end of this month. Now that the June FOMC minutes, Nonfarm payrolls, Jerome Powell’s testimony to Congress, the June CPI and PPI numbers and the Trump-Xi meeting at the G20 in Osaka are behind us, what is the next set of data that may shed some light on the Fed’s next policy move?

Yesterday we heard from US Federal Reserve Chairman, Jerome Powell, as he testified at the House Committee on Financial Services. Obviously the main focus for markets was to glean any additional information regarding the future timing and path of the Fed Funds rate. However, as important for fixed income investors as the future path for rates is, listening carefully to central bankers can also provide insight into the bigger picture economic environment. My ears pricked up in particular at two important and related topics Mr Powell discussed.

European bond markets can breathe a sigh of relief this morning as Christine Lagarde is poised to be the new president of the European Central Bank, succeeding Mario Draghi in October.

The big monetary policy event over the month was the increase of monetary stimulus announced by the ECB after two years of slowly weaning the Eurozone off extremely easy money. At the ECB meeting of Thursday the 7th of March Mario Draghi announced the introduction of new TLTRO (the last round ended in December 2018, so this is TLTRO III) and interest rates guidance was modified for the current levels to remain to the end of 2019 (previously mid 2019). Market consensus is for an even longer pause.

So far 2019 has been supportive for risk markets. The Fed appears to have adopted a more passive approach, easing market fears of a potential policy error, and in early January we heard conciliatory rhetoric from the US and China pointing to a workable solution to the trade tariff situation. However, the investor exuberance we saw in January has become noticeably more cautionary this week, as geopolitics have once again heightened uncertainty along with some softer looking economic fundamentals and a rather mixed set of corporate earnings. No surprise, then, that asset prices have undergone a slight correction as we head into the weekend.