CENTRAL BANKS DIVERGE

Transcription

1 GLOBAL OUTLOOK CENTRAL BANKS DIVERGE MAY 21, 2015

2 MACROECONOMICS OF POLICY DIVERGENCE WHAT S AHEAD Global Overview: Roots of Divergence Federal Reserve Preparing for Liftoff QE in the U.S. Versus the Euro-Zone Impact on Emerging Market Economies

3 CENTRAL BANKS: GOING THEIR SEPARATE WAYS The Federal Reserve and Bank of England are Preparing to Raise Rates Aggressive monetary and occasionally aggressive fiscal policies bearing fruit. U.S. is about on par with Reinhart & Rogoff averages for financial crisis recoveries. Central Banks for Other First-Tier Large Economies are Easing The ECB and BOJ have launched their own large-scale QE programs. China faces a delicate and multi-faceted process of restructuring and readjustment, but has plenty of room and plenty of tools for providing accommodation. EMEs and Commodity-Based Economies are Easing Too Structural weaknesses revealed, including dependence on: o o Demand from China Capital flows from developed economies

4 FEDERAL RESERVE LIFTOFF Is the market ready? The IMF is voicing concerns, while the Fed is projecting optimism. Smooth sailing so far sign of success, or delaying the inevitable? Outlook for Rate Hikes Emphasis on clear communication and flexibility since the taper tantrum. Every step of the exit under the Yellen Fed has been carefully telegraphed well in advance. Q1 data have been soft, but the second half of 2015 is still in play. o 5 months of data left between now and September.

5 FOMC DOT PLOT: XLTP XDOTS<GO> FOMC rate expectations continue to decline, but so do the markets. Median FOMC member projections 1 Market-implied rate path 2 Values listed at bottom 3

6 KEEPING TRACK OF THE SLACK FED FORWARD GUIDANCE DASHBOARD ECST<GO> à Custom Views

7 QUANTITATIVE EASING AND ITS EFFECTS U.S. & EURO-ZONE Program Size ECB: 60 ($65) billion per month: 1.2 ($1.3) trillion over 1.5 years Fed: $85 billion per month: $1.6 trillion over 2 years Effects of QE First-order effects: financial conditions and foreign exchange Downstream effects: credit growth, net exports, and overall economic performance

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9 EMERGING MARKET ECONOMIES (EMES) EMEs during U.S. tightening cycles Economic performance generally good (industrial production up 7.5 to 10% in 12 months after liftoff), because U.S. growth usually strong. Financial performance uneven: strong post-2004, weak post-1995 was weak, due to gap between market expectations and actual Fed monetary policy. EMEs Are Better Prepared After the 2013 Taper Tantrum & 1997 Asian Financial Crisis Better fiscal, monetary, and foreign exchange positions More robust financial systems ECB easing will provide additional cushion Note that initially, the taper tantrum led to broad-brush moves, but markets became more discriminating about EMEs over time.

10 WHAT S AHEAD: IMPACT OF THE FED ON EMERGING MARKETS THE USD MOVE TO 10-YEAR HIGHS THE IMPACT OF THE USD S MOVE ON VOLATILITY TRENDS IN FDI FLOWS EMERGING MARKET CORPORATE DEBT THE TWO-WAY IMPACT OF USD VOLATILITY

11 FED RATE HIKE CYCLES: THE IMPACT ON EMERGING MARKETS G<GO>

12 WHEN CENTRAL BANKS DIVERGE, VOLATILITY SURGES VCA<GO>

13 THE DOLLAR: DECADE AND HIGHS BBDXY INDEX GP<GO>

14 LT FX VALUATION: PPP VS USD/CAD 14

15 FOREIGN DIRECT INVESTMENT: OUTWARD BOUND MA<GO>

16 EM CORPORATE DEBT: ROLLOVER RISK? DDIS<GO>

17 TRENDS IN EM PORTFOLIO FLOWS 17

18 EM DEBT ISSUANCE: ORIGINAL SIN PART 2? 18

19 SHORT TERM FLOWS: THE RISE OF ETFS 19

20 WHEN CENTRAL BANKS DIVERGE: FINANCIAL STATEMENT NOISE INCREASES BT<GO>

21 THANK YOU! Stephen Jonathan Market Specialist FX and Economics Bloomberg +1 (212)