Bonds

After years of the Fed pumping $85bn a month into financial markets, the strength of the American recovery will be tested. The Federal Reserve chairman is expected to make the symbolic gesture this week of announcing the beginning of the end of QE…

 


Powered by Guardian.co.ukThis article titled “Bernanke set to begin Fed’s tapering of QE – but is the US economy ready?” was written by Heather Stewart and Katie Allen, for The Guardian on Sunday 15th September 2013 20.25 UTC

As Barack Obama gears up to announce Ben Bernanke’s successor, the Federal Reserve chairman is expected to make the deeply symbolic gesture this week of announcing the beginning of the end of quantitative easing – the drastic depression-busting policy that has led the Fed to pump an extraordinary $85bn (£54bn) a month into financial markets.

It will signal the Fed’s belief that the US economy is on the mend, but it could also frighten the markets and hit interest rates. So what exactly is Bernanke doing, why now – and how might it affect the UK and other countries?

What will the Federal Reserve do?

After on Tuesday and Wednesday’s regular policy meeting, the Fed is widely expected to announce that it will start to “taper” its $85bn-a-month quantitative easing (QE) programme, perhaps cutting its monthly purchases of assets such as government bonds by $10bn or $15bn.

Is that good news?

It should be: it means the governors of the Fed, led by the chairman, Bernanke, believe the US economy is strong enough to stand on its own, without support from a constant flow of cheap, electronically created money – though they still have no plans to raise base interest rates from the record low of 0.25%, and they expect to stop adding to QE over a period of up to a year. “We really want to see a situation where central banks should not be pumping money into markets. It’s not a healthy thing to be doing,” says Chris Williamson, chief economist at data provider Markit.

Why are they doing it now?

Economic data is pointing to a modest but steady recovery. House prices have turned, rising by 12% in the year to June. Unemployment has fallen to 7.3%, its lowest level since the end of 2008, albeit partly because many women and retirees have left the workforce.

Since QE on such a huge scale carries its own risks – it can distort financial markets, for example – the Fed is keen to withdraw it once it thinks an upturn is well underway. However, some recent data, including worse-than-expected retail sales figures on Friday, have raised doubts about the health of the upturn.

There’s another reason too: Bernanke’s term as governor ends in January next year, and he may feel that at least making a start on the process of tapering – marking the beginning of the end of the policy emergency that started more than five years ago – would be a fitting end to his tenure.

How will the markets react?

With a shrug, the Fed hopes, since it has carefully communicated its intentions. Scotiabank’s Alan Clarke said: “I think it’s pretty much priced in … Speculation began months ago, the market has already moved and we are still seeing some very robust data. The foot is on the accelerator pedal just a bit more lightly.”

However, a larger-than-expected move could still cause ripples – and a decision not to taper at all would be a shock, though some analysts believe it remains a possibility. Paul Ashworth, US economist at Capital Economics, said: “I don’t think they’ve actually decided on this ahead of time.”

What will investors be looking for?

First, the scale of the reduction in asset purchases. No taper at all might suggest Bernanke and his colleagues have lingering concerns about the health of the economy; a reduction of $20bn a month or more would come as a shock. The tone of the statement, and the chairman’s subsequent press conference, will also be scrutinised, with markets hoping for reassurance that even once tapering is underway, there is no immediate plan to raise interest rates: Bernanke has previously said he doesn’t expect this to take place until unemployment has fallen to 6.5% or below. Williamson said: “I think they will accompany the announcement with a very dovish statement designed not to scare people that the economy is too weak but to reassure stimulus won’t be taken away too quickly.”

What does it mean for the UK?

Long-term interest rates in UK markets have risen sharply since the early summer, at least in part because of the Fed’s announcement on tapering, and that shift, which has a knock-on effect on some mortgage and other loan rates, is likely to continue as the stimulus is progressively withdrawn.

If tapering occurs without setting off a market crash or choking off recovery, it may help to reassure policymakers in the UK that they can tighten policy once the recovery gets firmly under way, without sparking a renewed crisis. David Kern, economic adviser to the British Chamber of Commerce, said: “it will strengthen for me the argument against doing more QE in the UK.”

How will the eurozone be affected?

It could cut both ways: a strengthening US economy is a welcome market for Europe’s exporters, and if the value of the dollar increases against the euro on the prospect of higher interest rates, that will make eurozone goods cheaper.

However, the prospect of an end to QE in the US has also caused bond yields in all major markets to rise, pushing up borrowing costs – including for many governments. That could make life harder for countries such as Spain and Italy that are already in a fiscal tight spot.

What about emerging markets?

Back in May, Bernanke merely had to moot the idea of ending QE to send emerging markets reeling. A side-effect of the unprecedented flood of cheap money under QE has been that banks and other investors have used the cash to make riskier investments in emerging markets. The prospect of that tap being turned off has already seen capital pouring out of emerging markets and currencies, potentially exposing underlying weaknesses in economies that have been flourishing on a ready supply of cheap credit.

“It has triggered all sorts of significant movements around the world out of emerging markets. It’s had big ramifications for India and other parts of Asia,” said Clarke.

Central banks in Brazil and India have been forced to take action to shore up their currencies; Turkey and Indonesia also look vulnerable. Many of these markets have looked calmer in recent weeks, but the concrete fact of tapering could set off a fresh panic.

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USA 

The Japanese economy is looking decidedly shaky. Exports and domestic consumption are falling, while the current account deficit is growing. After years of rising spending and debt, the world’s third largest economy could find itself spiraling downwards…



Powered by Guardian.co.ukThis article titled “Is Japan really on the brink of a sudden downward spiral?” was written by Phillip Inman, economics correspondent, for guardian.co.uk on Friday 23rd November 2012 19.42 UTC

First Britain was compared to Greece – sunk by debt. Then when the worst of the financial crisis passed and a battered exchequer was still solvent, Britain was likened to another capitalist basket case – Japan.

With two lost decades under its belt, Tokyo is considered the capital of stasis, a place where nothing grows.

Hardly a week goes by without someone arguing that Japan’s lack of growth, its ageing population, massive debts or its strong currency spell the end of a renaissance that propelled the country into the first rank during the 1970s.

To many people the situation remains benign. If you are happy with your domestic situation, job and income, an economy that is going nowhere does little to provoke the forces of change. So far outside investors have adopted a similar view.

However, not everyone is content.

The traditional prop for a government that repeatedly spends more than it generates in taxes, is the Japanese saver. They put their money aside to lend to their own government. Japanese government bonds (JGBs) are famously 95% owned by Japanese investors (who believe misguidedly that it is better to get a return on loans to the government than pay tax, which has no return).

Japan’s savers have been ageing for some time. Every year there are fewer people putting money aside. In recent times the banks have made up the difference, but this has only made the situation worse as they tie themselves to the fortunes of the government in an ever-closer union.

Polls this week showed the refusal to pay enough tax persists and voters are turning to opposition leader Shinzo Abe’s plans to unleash unlimited amounts of free cash to push inflation up to 3% and interest rates below 0%.

This free cash is printed by the central bank and will flood the Japanese financial markets in the hope that some people will spend it. It is a scheme that has worked in the US, but in Japan is more likely to mimic the Bank of England’s quantitative easing programme, which has flopped as a spur to growth. In the UK, the people who benefit – those who discover their debt payments are cheaper – tend to hoard the savings while those without debts find their income cut as savings interest declines. All the new money gets swallowed by the banks, which are grateful because they are also suffering terribly, and recycled back to the government.

Japanese banks are by some measures in better shape than their UK counterparts, but the rest of the economy is looking decidedly shaky.

Exports fell in October by 6.5% on the previous year (imports dropped by 1.6%). Exports to the EU are down 20%, while exports to China have slumped by 11.6%, in part due to tensions over disputed islands in the East China Sea. Sony, Panasonic, Sharp are on the slide along with much of the tech sector.

Worse, domestic consumption dropped 0.5% and capital expenditure fell 3.2%, both registering the second-largest falls since the height of the 2008-09 recession.

Graham Turner at GFC Economics says Japan stands on the brink of an almost complete reversal in fortunes. After years of rising spending and debt, supported by domestic and foreign lenders, the government could find itself spiralling downwards.

He says: “The determination of the government to beat deflation via a loose fiscal policy could be the tipping factor, which drives the current account deeper into deficit. In this respect, Japan may begin to mirror the peripherals of the eurozone, prior to the euro crisis, where a loose fiscal policy goes hand in hand with poor external fundamentals.”

The poor external fundamentals he refers to are the lack of demand for Japanese goods and the increasing unease of foreign lenders at Japan’s plight. Already the interest rate the government pays on its debt has risen. It doesn’t need to go up by much to add billions of pounds to the bill.

George Osborne is also looking at rising debts and zero growth. He is relying on the Bank of England to create growth with money created in the bowels of Threadneedle Street. We didn’t want to follow Greece, and we don’t want to be the next Japan. If we continue on the same path we will undoubtedly have the same outcome.

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The Japanese economy is looking decidedly shaky. Exports and domestic consumption are falling, while the current account deficit is growing. After years of rising spending and debt, the world’s third largest economy could find itself spiraling downwards…

ECB Mario Draghi announced the details of the central bank’s bond-buying program. ‘Almost unanimous’ vote overrides German fear of inflation. Countries benefiting must enter bailout programs. Eurozone growth forecast downgraded…



Powered by Guardian.co.ukThis article titled “Eurozone crisis: ECB introduces unlimited bond-buying programme” was written by Josephine Moulds, for guardian.co.uk on Thursday 6th September 2012 13.48 UTC

Mario Draghi, the president of the European Central Bank, has pushed through a controversial scheme to save the euro, trampling over German opposition.

At the same time, the ECB said that the economic outlook for the eurozone had deteriorated. It now expects the eurozone economy to shrink by 0.4% in 2012 and grow by 0.5% in 2013, while inflation rises to 2.6%.

Draghi said the vote to start buying the bonds of crisis-hit states in unlimited amounts, in an attempt to bring governments’ borrowing costs down, was “almost unanimous”, with one exception.

The scheme has faced furious opposition from German central bank chief Jens Weidmann, who argues that it is tantamount to printing money in order to pay off a country’s debt, which is expressly forbidden by the ECB’s mandate. He also fears the measures will fuel inflation, ease the pressure on overspending governments to get their finances in order and erode the ECB’s independence.

Ranvir Singh, chief executive of market analysts RANsquawk, said: “Even by the inscrutable standards of Mario Draghi, the ECB president’s speech revealed little of huge tectonic pressure that has built up under the eurozone’s surface. To fly in the face of Germany’s wishes will not have been easy. For the Bundesbank, keeping inflation in check is an article of faith. Its president has made no secret of the fact that he regards the ECB plan to buy the debt of the eurozone’s weaker members as the road to perdition.”

Draghi said the buying-up of bonds, which will be known as outright monetary transactions (OMTs), would be unlimited and that countries benefiting from the scheme would need to submit to certain conditions. The ECB would seek the involvement of the IMF to design and monitor such programmes. Governments to benefit from the OMT would also have to be attached to a programme with one of the eurozone bailout funds. Draghi said the ECB would stop buying a country’s bonds if it failed to comply with the bailout programme.

The ECB said it would buy bonds with a residual maturity of one to three years. That means it can buy bonds with a longer maturity, as long as they only have three years remaining until they are paid back.

As expected, the ECB said the bond-buying programme would be “sterilised”. This means the central bank will not increase the money supply as a result of the bond purchases; instead it will take the equivalent amount of money out from other parts of the system.

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