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Amid a host of central bank developments, one constant remains: global market pressure

Last week brought a number of key
developments from central banks around the world, from the release of the
Federal Reserve’s (Fed) latest meeting minutes, to a reaffirmation of the Bank
of Canada’s (BOC) monetary policy, to the first speech from European Central
Bank (ECB) President Christine Lagarde. These underscored the key differences
between each central bank, but I see one constant: the continued pressure
imposed by trade war tensions and a slowing global growth outlook.

Despite trade war pressures, BOC expected to maintain
current rates

In a
speech last week, BOC Governor Stephen Poloz admitted that global trade
conflicts have inflicted some damage on the Canadian economy, hurting both
exports and investment, but he asserted that he is confident that the economy
is in solid condition. It seems clear that this assessment is the basis for his
belief that current monetary conditions seem appropriate, which he underscored
in his speech. This helped to confirm expectations that the BOC will maintain
the status quo for its key discount rate at its December meeting. Of course,
Mr. Poloz did acknowledge that the BOC is concerned that trade-related weakness
could spread from exports and investment into other areas of the economy,
including the housing and service sectors, but he stressed that the BOC is
monitoring the situation closely. The BOC has been unusual in that it has not
provided any easing in 2019, despite the fact that its southern central bank
neighbor, the Federal Reserve (Fed), cut rates three times in 2019.

Fed in a likely holding pattern with rates

Turning to the Fed, last week saw
the release of the minutes from the most recent Federal Open Market Committee (FOMC)
meeting. They show a Fed that continues to reiterate the same rationale for the rate cut in October that it had for previous rates
cuts in 2019: “persistent weakness in global growth and elevated uncertainty
regarding trade developments.” The minutes also
confirmed that the Fed is on hold for now. “Most” participants viewed current
monetary conditions as being “well-calibrated” to support the Fed’s policy
goals, and feel they are likely to remain so. It would take a “material
reassessment” of the outlook for policy to change. I believe this was important
because it re-confirms that there is a high bar for the Fed to raise rates,
suggesting that conditions will remain accommodative for some time to come.

The FOMC
minutes also included a lengthy discussion about the policy tools that the Fed
could use to combat the next recession. This was a necessary conversation — but
the conclusions were entirely predictable. It is clear that the Fed believes a
zero interest rate-policy (ZIRP) remains a possible tool in its toolkit. However, the Fed does not believe a negative
interest-rate policy (NIRP) is a viable option; per the minutes, “all
participants judged that negative rates currently did not appear to be an
attractive monetary policy tool in the United States.” The minutes gave the
strong impression that the Fed will stick to the post-global financial crisis
(GFC) tool kit — the trifecta of
lowering discount rates (to zero if necessary), forward guidance and quantitative
easing — even though many
members recognized that the power of these instruments is likely diminishing.

Also
last week, US President Donald Trump met with Fed Chair Jay Powell on a variety of topics related to the economy
and monetary policy, including interest rates, low inflation, monetary easing,
dollar strength and trade tensions. The Fed issued a statement after the
meeting, where Powell emphasized that the path of future monetary policy “will
depend entirely on incoming information that bears on the outlook for the
economy,” and that rate-setting decisions are “based solely on careful,
objective and nonpolitical analysis.” In other words, the Fed remains a
politically independent but data-dependent central bank.

Amid
global slowdown, ECB again calls for fiscal stimulus

Also last
week, Lagarde made her first speech as the new ECB president. Lagarde called
for a new policy mix in Europe, one that relies more on fiscal stimulus. This
is similar to requests we have heard from other central bankers including former
ECB president Mario Draghi and Jay Powell; in recent years, all have implored
governments to increase fiscal stimulus, but for the most part, their pleas
have fallen on deaf ears. Lagarde suggested that the situation is now more
dire, given the current trend toward deglobalization: “Ongoing trade tensions
and geopolitical uncertainties are contributing to a slowdown in world trade
growth, which has more than halved since last year. This has in turn depressed
global growth to its lowest level since the great financial crisis.”

I believe Lagarde
is truly between a rock and a hard place. She is desperately in need of more
fiscal stimulus but remains at the mercy of governments; all she can do is
continuously request they increase fiscal stimulus. She also has the problem of
a divided ECB, with a significant faction apparently opposed to more monetary policy
stimulus. However, I still hold out hope that she is the central banker most
likely to explore new monetary policy tools, which could be more effective than
the GFC toolkit.

PBOC defends
against trade conflict headwinds with rate cut

Finally, last week saw a small 5 basis-point cut in loan prime rates
(LPRs) to 4.15% for one-year loans and 4.80% for five-year loans in China.1
This is important because it confirms that banks are lowering lending rates in
response to recent cuts in lending facilities by the People’s Bank of China
(POBC). In other words, banks are passing on rate cuts to borrowers, which
should ease stress on corporate balance sheets and support credit growth. I
expect this to provide a boost to the housing sector, since mortgage rates have
moved slightly lower. It is also a reminder that the PBOC continues to slowly ease
and stands ready to do whatever is needed to continue to support the Chinese
economy in the face of headwinds created by the ongoing trade conflict (while
ensuring it doesn’t need to make major concessions in its trade negotiations
with the US).

Central
bank developments come amid disappointing global outlooks

These central bank developments come at a time when the global economy
is coming under pressure, as Lagarde pointed out. Just last week, the Organization for Economic
Cooperation and Development (OECD) said in its quarterly report on the global
economic outlook that global growth remains at the slowest pace since the
financial crisis, and it doesn’t expect any improvement next year. The OECD
lowered its forecast for global economic growth in 2020 to 2.9% from its
September forecast of 3%. Laurence
Boone, the OECD’s chief economist, explained, “What we are seeing is investment
stalling, paving the way for growth to stay at this very low level.”

Moreover, a separate report from
the World Trade Organization last week indicated concern that members of the
G20 leading economies continued to impose restrictions on trading in the six
months through October, with new measures affecting $460.4 billion of goods (the
second-highest figure for a six-month period on record).

And so, as we look ahead, it’s
clear that many market participants are worried about the slowdown in global
growth. Many are also dismayed about the lack of progress in the US-China trade
talks, as it does not look like a phase-one deal can be reached in 2019
(although hope was reignited earlier today by news that China is reportedly
tightening intellectual property protections).

We have anticipated both these
developments and so we are not rattled by them — although we recognize that economic
policy uncertainty could be exacerbated if the trade war were to get worse (especially
if the US chooses to impose additional tariffs in December). As a result,
companies might not just curtail business investment, but that uncertainty
could spill over into the postponement of some hiring. That could have a
negative impact on currently financially solid but vulnerable consumers such as
those in the US — which has a large cohort of consumers with little or no
savings who rely on a strong employment environment to remain financially
healthy. But that is a “worst case” scenario.

The far more likely scenario is
that if economic data deteriorates, central banks become more accommodative.
Although their tools may be becoming less effective, I believe they will still
be impactful — especially for the stock market. And there is the potential for
upside if central banks begin to implement new, more effective tools or if/when
certain governments (China, India and possibly the US) increase fiscal
stimulus.

Looking ahead to this weekend’s
retail spending

Looking
ahead, I will be focused on retail spending for Black Friday and Cyber Monday —
an important economic bellwether given how critical the consumer is to the
overall US economy. We saw the strength of the Chinese consumer on display with
the results of Singles Day. While I don’t expect the results to be as robust, I
still expect consumers in the US to put in an impressive performance on Black
Friday and Cyber Monday given the strong labor market and very positive
consumer sentiment. However, these spending events are not just about the US; a
number of other countries have implemented these sales events, which should
provide some insight into not just the health of the consumer but consumer
sentiment in countries such as Canada, the UK, Japan, Mexico, India and China. Stay
tuned.

1
Source: Bloomberg, L.P., “China Lenders Trim Borrowing Costs, Following Central
Bank,” Nov. 19, 2019

Important
information

Blog header image: Witthaya Prasongsin / Getty

A basis point is one hundredth of a
percentage point.

The G20 refers to an international forum for the governments and central bank governors from 19 countries and the European Union.

The opinions referenced
above are those of the author as of Nov. 25, 2019. These
comments should not be construed as recommendations, but as an illustration of
broader themes. Forward-looking statements are not guarantees of future
results. They involve risks, uncertainties and assumptions; there can be no
assurance that actual results will not differ materially from expectations.

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