If I were able to ask Jay Powell a question today I’d ask him where is the empirical evidence that shows that QE helps to stimulate economic activity. As none exists and about 15 years of global QE can attest to that, it remains clear that the Fed remains instead on the leash of the stock and credit markets and the US Treasury in financing their debts and deficits. The US economy is this incredible regenerative machine that just needs population growth and productivity to grow and the lack of faith in this remains apparent with most of Powell & Co. I will say this, even if the spike in inflation is short lived, it should not change at all the discussion on the timing and composition of tapering as it should be happening anyway. What non temporary inflation will do instead will then just force a speed up of it.
Other central banks however are continuing to move towards beginning the normalization. The Bank of Korea today left their benchmark rate at .50% but said get ready for an August rate hike assuming all else equal between here and then. Interestingly Governor Lee said this, “Almost every board member agreed that it was time to place our utmost priority in addressing financial imbalances.” The won is rallying in response, matching its biggest one day move since early May. Short rates jumped with the 1 yr yield up by 7 bps and 2 yr higher by 5 bps. The Kospi though was not bothered as it rallied by 2/3 of a percent.
We also got some hawkish commentary from Bank of England member Michael Saunders who said “If activity and inflation indicators remain in line with recent trends and downside risks to growth and inflation do not rise significantly, and these conditions are important, then it may become appropriate fairly soon to withdraw some of the current monetary stimulus.” His definition of ‘fairly soon’ is “ending it in the next month or two.” Not tapering it, ending it. Currently the plan of the BoE is to end QE by year end. Short rates jumped in response as seen in this daily chart of the 2 yr gilt yield. The pound is higher too but only slightly.
Likely the last to taper will be the ECB and that was confirmed again today by Governing Council member Ignazio Visco who said “We have to avoid tapering before the time comes that we’re really confident we’re back where we should. We really have to show to be determined.” Seven years of negative rate policy and massive QE is sure a level of determination but with not just no positive results other than financing government debts and deficits and with negative ones for the region’s banking system, the heart and soul of lending in the region.
The Reserve Bank of Australia that could be the next to taper after Australia’s unemployment rate fell to 4.9% from 5.1% and that is the lowest since 2011. Obviously the Covid flare up will be the possible excuse not to, but the RBA is also way over doing it as they also have short term rates at just .10%.
China’s economy grew by 7.9% y/o/y in Q2 just under the estimate of 8%. As for the month of June, retail sales, IP and fixed asset investment were all just above expectations. China continues to balance the economy between wanting more consumer contribution to growth and less from the industrial side. Also, in wanting to deleverage an economy but at the some time trying to encourage more lending to small and medium sized businesses. Because of still selective Covid restrictions in most of Asia, call growth uneven but still trying to power thru. Maybe because the June data was above the estimates, Chinese stocks rallied about 1%. Their 10 yr yield rose 2 bps while the yuan is little changed.
The Investor Intelligence sentiment survey reflected even more bullishness with Bulls now at 61.2 from 60.8 last week, the highest since mid April. Bears fell further to just 15.3 from 15.5 and that is the lowest since January 2018. This level of enthusiasm is extreme for the short term and a level of complacency that will likely be tested. The more fickle and volatile AAII survey of individual investors showed less bullishness however as Bulls fell 4 pts to 36.2 and Bears were up by 2.3 pts to 26.8.
Lastly and back to the UK, June jobless claims fell a sharp 115k and May was revised down to a decline of 151k from 93k initially as the UK is on the cusp of fully reopening. Thru May, their unemployment rate stands at 4.8% vs 4.7% in the prior period. Yes, the delta variant is a concern but the UK has decided to live with it by no longer restricting the movements of both businesses and households.