Recent central bank actions have had a whiff of panic about them. Setting aside the ECB’s long-expected foray into quantitative easing, the Bank of Canada, the Swiss National Bank, Denmark’s Nationalbank, the Monetary Authority of Singapore, the Norges Bank, the Reserve Bank of India, the Bank of Russia and the Central Bank of Turkey have all cut deposit or policy rates since the beginning of the year. Among those that have not formally eased policy yet this year, the Reserve Bank of Australia, Sweden’s Riksbank, the People’s Bank of China and the Bank of Korea are likely to do so soon. Others, like the Bank of England and the Reserve Bank of New Zealand, are instead signalling that policy will probably remain on hold for a considerable length of time. The US Federal Reserve remains one of the few hold-outs, with last week’s statement suggesting that it is doing its best to look through the inflation shock and focus on the ongoing improvement in the economy and labour market. While most of those that have loosened policy are using falling inflation or the negative impact of lower oil prices to justify their change of stance, the desire for a weaker currency has been another, more sinister motive. Little wonder then that the US dollar has continued its rapid ascent.
One of the most striking features of the monetary landscape is the increasing prevalence of negative short-term policy rates in Europe. The Eurozone, Denmark and Switzerland all have at least one of their benchmark rates below zero at present, and we would not be surprised to see the Riksbank follow them. One wonders how long it will be before there is a surge into cash, to avoid this implicit tax on bank deposits. For now, though, the upshot is that an extraordinary 16% of JP Morgan’s Global Bond Index is currently trading at negative yields and the US 10-year government bond yield is as it is lowest level since December 2012 (see Chart 1). The irony of all this, of course, is that incoming data are tending to confirm the thesis that the global recovery is gathering pace. Japanese and Eurozone business cycle indicators have picked up noticeably in recent months, while the US looks set to grow above 3% this year. Emerging market industrial production is also showing signs of life. Perhaps someone should tell the bond market.
Source: Weekly Economic Briefing, Global overview. Standard Life Investments.