In February 2015 Denmark’s central bank had had negative interest rates on deposits. The Bank reviewed the effect of the move in its quarterly report. If you are interested in the impact of negative rates on an economy, in particular the demand for cash you can read about it here. The report is a little out of date as it is from June 2015 but for those interested in technical monetary policy discussions it has a number of interesting observations.
Inflation forecasts in the eurozone have been slashed again by the European Commission to 0.5%, around half the rate of inflation forecast only last November and well below the ECB’s target of 2.0%, prompting further pressure on the ECB to add stimulus. Economic growth is tipped to rise slightly to 1.7% from 2015’s 1.6% but this is lower than the 1.8% growth also forecast in November.
The eurozone faces strong headwinds from deflating emerging market economies, terrorism, a surging refugee crisis and other geopolitical risks. It also forecast a “disorderly adjustment” in China and the likelihood of higher interest rates in the US.
The RBA has again lowered its forecasts for GDP growth in the latest quarterly Statement on Monetary Policy. While most of the forecast ranges are unchanged, the estimate for GDP to the end of December 2015 was increased by 0.25%, while 2017 forecasts were trimmed. Yet, unemployment is forecast to fall further with the services sector the driver behind the rate falls.
The Statement suggests some of the price increases for imported goods and services coming from a lower exchange rate is being passed on to consumers and it expects the exchange rate to place pressure on the prices of imported goods over the next few years. Even so, underlying inflation is expected to remain low. CPI forecasts are essentially the same, with inflation expected to be consistent with 2%-3% band.
In something a little reminiscent of David Bowie and his royalty stream backed bonds, cheese maker 4 Madonne Caseificio dell’Emilia has sold €6million (AUD$9.3 million) worth of 5% January 2022 bonds which are backed by wheels of Parmesan. The company is based in Italy’s Emilia Romagna region and it is part of the wave of small Italian companies raising money under a government – backed scheme where borrowers issue bonds backed by assets worth 120% of the bonds’ face values. The recent trend has emerged as Italy’s banks struggle with past bad debts and are less willing to take a risk with new loans to businesses.
The RBA left the cash rate at 2.00% at its February 2016 board meeting today. The board had not meet since early December 2015 and with plenty of volatility in global markets, investors were keen to see how the bank thought this would influence local interest rate policy.
Well it seems not much.
The bank said that the global economy was continuing to grow albeit more slowly than forecast. Inflation was “quite low” as opposed to previous statements where it had said inflation was “consistent with targets” and that consumer price inflation was likely to remain low for the next year or two.
The AUD was largely unchanged as were interest rate markets. Overall the message was seen as ‘dovish’.
Standard & Poor’s has cut BHP’s credit rating on senior secured notes from A+ to A as a result of falling commodity prices and the “very challenging market conditions and increased demand uncertainty over the coming years”. Subordinated notes were also downgraded from A- to BBB+. The downgrade came with a “credit watch with negative implications” meaning the rating could be cut again should conditions worsen. The downgrade was flagged in YieldReport on 22 January after S&P slashed its commodity price forecasts. BHP said in a statement that it had the “strongest credit rating in the sector and remains committed to maintaining its strong balance sheet”.
The US economy grew a disappointing 0.7% in the December quarter compared to an expected 0.8% growth rate. This compared to growth of 2.0% in the third quarter and 3.9% in the second quarter. Business spending, weak exports and a drop in inventories were the main culprits. Households were still active albeit cautious given volatile financial markets and unseasonal warm weather that held back some spending. US growth for 2015 totalled 2.4%, in line with growth in 2014.
The TD Securities inflation gauge has been released showing that prices for consumers rose an estimated 0.4 per cent in January. This follows from a rise a 0.2 per cent in December. The change over the year to January was 2.3 per cent.
The monthly and annual rise in tradable inflation confirms that a lower currency level is feeding through to the price of imported goods to the consumer.
In mid-December, the US Federal Open Markets Committee (FOMC) commenced “lift off”; the first rise in official rates in nearly ten years and the beginning of the latest interest rate cycle. There is, as usual, a lot of conjecture over the pace of interest rate rises with most assuming the trajectory of rate hikes will be much more gradual than in previous rate hike cycles.
At its latest meeting held this week, the FOMC left rates unchanged which was largely as expected. There were no dissenting votes and all voted to maintain the official rate’s target range. The US bond market took the decision in its stride and 2 year bonds barely moved while 10 year bonds edged up 2bps to finish at 0.84% and 2.00% respectively.
Unlike the December meeting there was no post meeting press conference although there was the usual accompanying statement. The statement was similar to September’s as it referred offshore events which were thought to have led to a delay in raising the official rate last year. “The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor (sic) market and inflation, and for the balance of risks to the outlook.”
ANZ said the statement’s cautious tone was to be expected “but the Fed hasn’t deviated from its previous message, with future moves in rates remaining in the hands of the incoming data.”
Westpac noted how the FOMC had downgraded growth and inflation outlooks slightly,
“while appearing to acknowledge the risks which have surfaced since the December meeting. Against that, improvement in the labour market was noted.” Westpac said markets regarded the statement as “dovish”.
Shane Oliver, AMP Capital saw the statement as “dovish” as it acknowledged a strong labour market but referred to slower consumer spending and recent financial market turmoil. He thinks the FOMC will be “backing away from four hikes this year” and one rise or none is more likely.
QTC has tapped its July 2026 benchmark line of bonds in what will be the first semi government bond issue for 2016. $1.1 billion worth of the bonds were issued via a syndicated deal at ACGB + 66.25bps. The July 2026 line was first issued in a syndicated offer worth $1.75 billion towards the end of October and it was priced at ACGB + 63bps.