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Out of the Box: Some Consideration of the Central Banks

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There was a time when each nation, and their central bank, was perceived on a stand-alone basis. That changed with the formation of the European Union and with the emergence of China. Now, there are regional considerations and the financial markets are much more global, I would assert, than ever in history.

It is true that the Dollar is the world’s reserve currency and that the Fed has more influence than the other central banks, because of the size of the U.S. economy. However, it is also true that the other major central banks have huge sway over their parts of the world and that all of the regions, in a variety of ways, influence each other.

Ctrl BK Rate Current Last Chg Chg Real Rate Meeting
U.S. Fed Funds 2.25-2.50% 12/19/2018 0.25%  0.60%
Japan Policy Rate 0.10% 1/28/2016 0.20% 0.60%
EU Refinance 0.00% 3/10/2016 0.05% 1.40%
Swiss Target Rate 0.75% 1/15/2015 0.50% 1.45%
Aus. Target Rate 1.50% 8/2/2016 0.25% 0.30%
China Lending Rate 4.35% 10/23/2015 0.25% 2.05%
HK Base Rate 2.75% 12/20/2018 0.25%  0.65%

 

NOTES:  Switzerland sets a range for target interest rates, which is currently -1.25 percent to -0.25 percent.

Real rates are calculated using the year-over-year change in the headline figure for consumer prices. For the U.S., the real rate is calculated by subtracting the year-over-year change in consumer prices from the Upper Bound of the Federal Funds Target Rate (0.25 percent).

*Data provided by Bloomberg

What we witness above is America, with much higher rates than anywhere else, except China and its offshoot, Hong Kong. Since everyone is competing with everyone else, and since borrowing costs consistently outweigh investor’s yields, it also means that the Fed has plenty of room to lower rates, and help the economy, if it chooses to make that move. With the current Administration, and even many in Congress, wanting to grow the economy, I point out that the Fed has plenty of room to maneuver. I also point to Bloomberg’s Global Inflation Linked Index which is -1.25% for the past year. I note that if the economy begins to recede that a flat-lining Fed might not be enough, and I bring this to your attention, for your consideration.

With 25% of S&P 500  companies having reported earnings, as of last week, 73% have beaten earnings forecasts but just 42% of companies have surpassed revenue expectations, according to an analysis by Bank of America Merrill Lynch. “One of the things we’ve noticed is that as the cycle has extended, the top line recovery has been oddly absent, whereas companies are getting really creative at manufacturing earnings-per-share growth from other areas,” Savita Subramanian, head of equity and quant strategy at Bank of America Merrill Lynch stated.

Lagging revenue is a concern because S&P 500 companies were already reporting slowing sales growth in the fourth quarter of last year. This has helped spark a negative feedback loop of reduced business investment that may, in turn, lead to lower revenue growth. If this, in fact, occurs, it may force the Fed’s hand and lower rates could be forthcoming.

If this did happen you would hear the clapping from the White House. President Trump has not been shy about his opinions on this matter. Chairman Powell might, in the end, do just what the President desires, blaming it on the economy, of course.

“Having been forced into being the only game in town, the Central Banks now find that their destiny is no longer entirely or even mostly theirs to control. The legacy of their exceptional period of hyper policy experimentation is now in the hands of governments and their political bosses.”

-Mohamed El-Erian

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
Mgrant69@Bloomberg.net
U.S. 954-468-2366

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