Central banks / bond markets

Europe in a dilemma: national interest outweighs community spirit

The Eurozone has failed to solve its structural problems since the sovereign debt crisis; nor does the Union seem prepared for any economic downturn. It would make total economic and political sense for core as well as periphery countries to put their own short-term interests to one side a little, in order to improve the economic performance of the Eurozone as a whole. Solutions could include a European monetary fund, provided it was able to provide financial assistance and was also given the power to actively influence the fiscal policy of a member state and impose sanctions if necessary. A functioning Union also requires the loss of a bit of freedom. A more expansionary fiscal stance would be very sensible in the event of deteriorating economic conditions. This might include investment incentives for companies, bringing forward public spending, and tax breaks for private households. However, this would need to be…

Bank of Japan – the doves are soaring again

The challenges that the Bank of Japan (BoJ) faces when it comes to monetary policy have changed noticeably in recent months. Initially, global factors in the form of the sharp rise in yields on US Treasury bonds put the interest rates on Japanese government bonds (JGBs) under pressure. From November 2018 onwards, the key factor has mainly been an outflow movement not induced by monetary policy. The fact that 10-year JGBs at the end of the year actually slipped into negative territory temporarily was an “occupational accident” in thin trading comparable to the “flash crash” on the foreign-exchange markets. Yet even after the latest correction, JGB yields have not succeeded in significantly climbing past the 0.00% mark. The latest trend in the JGB market may fit into the picture of domestic developments in Japan, especially the setback as regards inflation and growing economic concerns. We should not trick ourselves into…

FOMC in 2019: Dovish tilt

Ever since the interest-rate turnaround in December 2015, market participants have been asking themselves at the outset of every new year how often the Fed will be likely to tighten the monetary reins in the twelve months ahead. Last year, market actors underestimated the Federal Reserve’s rate-hike momentum, banking on two tightening steps whereas the Fed in the end implemented four. This may well have been due to the fact that the hawkish camp had the upper hand in the Fed’s chief monetary policymaking body during 2018. Towards the end of the year, the Fed adopted a more free-handed approach to inflation fighting, while concerns about the economic trend grew more pronounced. The upshot of this shift in the dominant monetary-policy consensus prevailing during the past year was that FOMC members pencilled in an average of only two further key-rate hikes for 2019, rather than the previous figure of three,…

Positive rating outlook for 2019 – with the exception of Italy

The leading rating agencies announced their rating review calendar for this year at the end of December. Prospects are good for a continuation of the positive rating trend. A total of six states have at least one positive rating outlook from one agency – in the case of Greece, as many as three out of the four leading agencies assign a positive outlook. By comparison: at the beginning of 2018, only three states were assigned at least one positive outlook. Another striking factor is that, apart from the periphery states Greece, Spain and Portugal which were already among the group of candidates with rating upgrade potential a year ago, the (semi-)core states of Finland, France and Austria have now also joined the group. Once again, Italy is the only country in the eurozone whose rating is pointing downwards. In spite of the downgrades which have already taken place in 2018,…

Fed: Key rates remain (for the moment) on hold

At the latest meeting of the Fed’s Federal Open Market Committee (FOMC), the target range for the fed funds rate was, as generally expected, left unchanged. The Fed had already expressed a good deal of optimism about the economic growth path in the previous FOMC Statement, and the tenor of the new statement from Dr. Powell and his team remains positive. For example, they have reaffirmed that momentum in the domestic economy is very strong. The unemployment rate is now said to no longer be “low” but to be “declining.“ Only business investment is perceived to have “moderated” from its rapid pace earlier in the year. It has also been pointed out that longer-term inflation expectations are unchanged. Overall, FOMC members have gone on record as saying that economic risks appear “roughly balanced,” adding that further gradual key-rate increases are warranted against this background. It is therefore extremely likely that…

Fed refuses to bow to the President’s dictates

US President Donald Trump has sharpened his criticism of the Fed’s monetary policy orientation. After initially saying only that he was unhappy with Fed policy, he went on to raise the tone, describing the central bank and its monetary watchdogs as “crazy.” With his latest statements the US President is again stepping up to the next stage of escalation. Not only has Trump said that he now regrets appointing Powell as Fed Chairman, but in response to a journalist’s question as to under what conditions he would fire the central bank Chairman, Trump also replied that he didn’t know. A few weeks earlier he had replied to the same question with the clear answer that he would not dismiss him. What’s more, Trump is now openly calling for lower key rates.   The power of the US President: He determines the Fed Chairman The most important question that financial market…

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