Getting to the core of global inflation
Stock markets have spent the year rising on bets of a resurgence in inflation, while central bankers trying to manage the global economy have spent the same time repeatedly reassuring everyone it’s just around the corner. Policymakers gathering at an annual monetary retreat in Jackson Hole, Wyoming in the coming week no doubt will be collectively pondering why the textbook rule that says low unemployment leads to labour shortages, then higher wages, and then in turn higher inflation, isn’t working. Yet the global economy is growing strongly. Apart from the risk of a stock market correction, there is no evidence of disinflationary threats like those that emanated from the financial crisis that started to smoulder a decade ago. The latest Reuters Polls of more than 500 economists covering more than 45 economies around the world showed almost no move in inflation expectations since the start of the year. In the United States, where the Federal Reserve is raising interest rates, inflation pressures are in an extended lull, which has led to contorted arguments trying to explain it away.
ECB Searches for Stimulus Flexibility as End of QE Approaches
The European Central Bank wants more scope to unleash monetary stimulus even as it heads toward unwinding it. An account of the Governing Council’s July meeting released on Thursday shows that officials are still uncertain how to signal changes in their policy settings as the economic outlook improves and the need for broad-based bond purchases lessens. Reaching a consensus is critical if they are to avoid missteps as the institution enters a new phase of its multi-year battle to avert deflation and restore euro-area price stability. Some policy makers signalled they are anxious to press ahead with adjusting the ECB’s forward guidance to avoid a “misalignment” between communication and the assessment of the economy, while others were looking for an insurance should the situation worsen. They argued for “more policy space and flexibility” to adjust stimulus “if and when needed, in either direction” in response to any overreaction to economic improvements in financial markets. “The ECB is aware of the fact that some changes to the current policy stance are about to come,” said Carsten Brzeski, chief economist at ING-Diba in Frankfurt. The comments “fit into the picture of an ECB which wants to steer and moderate the process toward tapering extremely cautiously.”
Chinese banks battle slowing loan growth, default risks loom
Chinese banks are set to see a slowdown in lending growth in the second half of the year, having exhausted most of their annual credit quota, raising the spectre of corporate defaults as financing costs climb further in the world’s No.2 economy. Beijing’s crackdown on riskier lending has already stretched financing costs and hurt profit margins. Analysts estimate banks have used 80 percent of their yearly credit quota over January-June, versus the usual 60 percent, amid a regulatory push to bring shadow financing activities to the main loan book. “Loan demand is strong throughout the whole year,” said Ma Kunpeng, chief financial industry analyst at China Merchants Securities. “The core conflict in the second half is loan quota – whether banks will be able to extend more loans than they originally planned.” The country’s top five lenders, including Industrial and Commercial Bank of China (ICBC), China Construction Bank and Agricultural Bank of China, will report their first-half results over the next two weeks.
TREASURIES-U.S. yields slip on doubts on fiscal stimulus
U.S. Treasury yields fell on Thursday as investors, unnerved by a deadly attack in Barcelona and speculation about a top White House economic adviser quitting, favored safe, low-yielding bonds over stocks and other
risky assets. Rumors that Gary Cohn, director of the National Economic Council, would resign began circulating on social media early Thursday, sparking a sell-off on Wall Street and kindling safe-haven demand for Treasuries, traders and analysts said. Cohn is seen leading the White House’s effort on tax reform and is a front-runner to possibly succeed Janet Yellen as head of the U.S. Federal Reserve. Speculation that Cohn would quit stoked concerns President Donald Trump would struggle to deliver on his tax plan and other economic changes promised during his campaign, they said. A White House official said Cohn “intends to remain in his position.” The denial failed to soothe investors who were already jittery after Trump dismantled his two business advisory panels on Wednesday. Several chief executives quit those groups after Trump blamed weekend violence in Charlottesville, Virginia, on both the anti-racism activists as well as white nationalists.