August 27, 2015

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The doves are winning

All’s well that ends well. The six-day rout on global equity markets ended with a rally in the US, but this swing was to a large extent influenced by two important policy pronouncements from the US and Europe. The Fed signalled that it would not, after all, raise interest rates in September. And the ECB signalled that it might have to continue QE beyond the first potential close-off date of September 2016.

The first is the more important in the short-run, the second is ultimately the more important overall. William Dudley, the head of the NY Fed, is quoted by the FT as saying that the case for a US rate rise seemed “less compelling to me [now] than it was a few weeks ago” due to international developments that have increased the downside risks to US growth. The factors he cited were the economic slowdown in China, falling commodity prices, strains in emerging markets, and market volatility.

Peter Praet, as reported by Reuters said the risk that the ECB is missing its inflation target had increased due essentially to the same reasons that Dudley cited above. The clear inference is that QE would continue because this is how the programme was defined: As Mario Draghi put it, QE will end only after inflation registers “a sustained adjustment in the path of inflation that is consistent with our [inflation target]”. While that definition still leaves a lot interpretative wiggle-room, it is looks increasingly probable that inflation is likely to undershoot the target for some time to come – as we have persistently argued here.

Bloomberg has a report, based on anonymous sources, according to which the ECB is now stepping up its purchases of ABS by buying from investors directly rather than from issuing banks. It has hired ABS fund managers who are now soliciting sales directly from ABS holders. The ECB started an ABS and covered bond purchase programme two years ago with the intent to spur new issuance and with it new lending. However, the programme has not had the desired stimulating effect on new issuance. Lacking experience in the ABS market (though it had bought covered bonds previously) the ABS purchases were done through investment banking intermediaries and with a lengthy approval process. As a result, ABS purchases have been about 10% of the covered bond purchases made under the equivalent programme. Moreover, its Public Sector Purchase Programme has overshadowed the covered bond purchases.

Our other stories

We also have an in-depth analysis on the latest political developments in Greece, in particular the threat to a meltdown of Syriza, as bits of the party are falling off. We also take a closer look at the recently recorded fall in global trade volumes, and at the discussion of whether Greece needs a debt haircut, or whether other forms of debt relief will do.

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