Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

As Easy-Money Era Winds Down, Investors Bet on Growth

Posted by hkarner - 20. März 2017

Date: 19-03-2017
Source: The Wall Street Journal

Exuberant U.S. markets are in some cases offsetting central banks’ shift away from low rates

Global stock markets as a whole have rallied over the past half year.

Central banks around the world are signaling a move away from ultra-easy money, but financial markets are responding as if the low-interest-rate party isn’t stopping.

A day after the Federal Reserve raised short-term interest rates a quarter percentage point, the People’s Bank of China raised a suite of key short-term interest rates and the Bank of England signaled that an increase in rates may not be far off. Turkey also raised a lending rate, while central banks in Japan, Norway and Indonesia held rates steady.

The events marked a striking turn from the low-interest-rate policies many central banks ushered in as recently as last year to spur markets and slow-growing economies. Low rates make it cheaper for businesses and individuals to borrow, spend and invest and tend to push up the value of asset prices like stocks.Markets sometimes shudder at the prospect of higher borrowing costs, but that isn’t happening now. U.K. stocks ended at a record Thursday, and European and Asian indexes rallied.

Following Wednesday’s Fed meeting, U.S. stocks climbed, benchmark bond yields sank and the dollar slid. Global stock markets as a whole have rallied over the past half year. The Dow Jones Global Index, which tracks 47 developed and emerging countries, has gained 9.7% since mid-September, while the Dow Jones Global ex-U.S. index is up 7.9%.

The market reaction can be seen as a sign of growing confidence that global growth is picking up, lessening the need for central banks to prop up spending and investing with low rates. Booming markets, if they continue, could even encourage central bankers to speed the pace of monetary tightening.

The Bank of England held its benchmark interest rate steady at 0.25% Thursday, saying uncertainty surrounding Britain’s economic prospects as it prepares for exit talks with the European Union justified keeping policy on hold, even as a falling pound fuels faster inflation.

Minutes of deliberations revealed signs of growing unease about the BOE’s easy-money stance. One rate-setter on the nine-member Monetary Policy Committee voted for an immediate increase in the BOE’s benchmark rate to 0.5%, while other members indicated that they might not be far behind.

The BOE cut its main policy rate to a new low of 0.25% and revived a crisis-era bond-buying program two months after voters chose to leave the EU in a referendum in June. But the British economy showed resilience, and officials in recent months have grown concerned about quickening inflation.

“This is clear evidence the BOE is changing its tune, moving gradually toward an overdue tightening cycle,” said Kallum Pickering, senior U.K. economist at Berenberg Bank in London.

China raised several short-term interest rates for the second time this year, just hours after the Federal Reserve’s latest monetary tightening.

The unprecedented, nearly simultaneous rate increase showed Beijing’s desire to prevent capital from flowing outside the country toward places like the U.S. Higher rates are meant to tempt investors to keep deposits parked in domestic banks. Beijing is also trying to cool booming domestic markets.

Minutes before Chinese markets opened, the People’s Bank of China announced it had raised the interest rates it charges commercial banks in the money market on seven-day, 14-day and 28-day loans each by 0.1 percentage point. These rates are also known as reverse repurchase agreements, or repos.

The central bank pushed the benchmark seven-day repo rate, for instance, to 2.45% from 2.35%. The PBOC also raised the interest rate it charges on special loans, known as a medium-term lending facility, to 22 financial institutions.

The PBOC said the rate increases reflected “strengthening market expectations” for higher funding costs in light of a recovering Chinese economy and the Federal Reserve’s recent rate increases.

“Besides the tough task of cutting leverage in the economy, the PBOC’s decision also reflects a hope to keep the interest-rate gap between China and the U.S. at an appropriate level, so as to avoid pressure on the yuan and capital flows,” said Liu Dongliang, a senior economist at China Merchants Bank.

Investors liken cheap money to a punchbowl at a cocktail party: Guests help themselves to as little or as much as they like, until someone takes the punchbowl away and ends the party.

The Fed started draining its punchbowl in December 2015 by raising its benchmark federal-funds off zero for the first time in seven years. It raised rates by a quarter-percentage point again in 2016 and a third time this week.

Interest rates remain low by historical standards, but this week’s rate increase moved the U.S. central bank into a new, more aggressive phase of withdrawing easy money from the financial system as the economy improves.

Central banks in other major economies are lagging behind but still seem to be moving in the same direction as the Fed.

“Places like the euro area are where the U.S. was maybe three years ago, so moving in the right direction, things are getting better, but still a ways to go,” said Goldman Sachs economist Jan Hatzius.

European Central Bank President Mario Draghi last week left the central bank’s policies in place and indicated that the ECB probably won’t need to enact fresh stimulus to support the economy, citing diminished urgency to fight deflation.

Developments in the U.S. show how exuberant markets are in some cases offsetting central banks’ shift away from easy money.

Even though the Fed raised short-term interest rates by a quarter percentage point Wednesday, U.S. financial conditions eased by the equivalent of a quarter-percentage-point rate cut, according to a Goldman Sachs index that measures the cumulative effect of stock, bond and currency movements on overall financial conditions. An easing of financial conditions means funds are more accessible to households, businesses and investors for borrowing, spending and investing.

Analysts attributed the U.S. market reaction to the fact that the Fed stuck with its projection for nudging rates higher two more times in 2017. In December, the Fed said it expected to nudge rates higher three times in 2017, likely in quarter-percentage-point increments. It stuck with that expectation after Wednesday’s meeting. The Fed still sees inflation rising gradually back toward its 2% target, a sign of the economy’s return to normalcy.

“Reflation is good inflation, it’s a proxy for economic growth and it’s what the global economy has been waiting for over a decade,” said Douglas Coté, chief market strategist at Voya Investment Management.


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