ECB - End of the Cycle?
BOJ - Rate Normalization, But At A Snail?s Pace
PBOC - Diplomatic, Yet Ineffective
Yield Spread Analysis 05/22 - 05/29
Short term and long term rates around the globe rose over the course of the week as funds flooded out of the bond markets and into equity markets, with multiple stock indices hitting record highs. In Europe, traders are anxiously awaiting the ECB?s next meeting on June 6th, when they are widely expected to raise rates to 4.00 percent. However, the key part of the event is whether ECB President Trichet signals additional rate hikes later in the year. In Switzerland, strong economic data signals that SNB will continue on their path of rate normalization on June 14th with a hike to 2.50 percent. New Zealand long term rates continued to gain after NZ Finance Minister Michael Cullen said, “The economy is still growing unsustainably fast,” signaling that additional tightening may be needed in order to cool expansion.
Looking ahead, Canadian government bonds could see quite a bit of price action as the Bank of Canada issued an overtly hawkish policy statement after announcing their decision to leave rates at 4.25 percent this morning. With key GDP data due out this week and labor market data set to be released next week, traders will likely continue to price in a July 10th hike to 4.50 percent.
ECB - End of the Cycle?
Next Thursday, the European Central Bank is widely expected to raise rates to 4.00%, but will it conclude the most recent series of rate hikes? Markets will have their eyes on the news wires to see if Trichet still cites a need for “strong vigilance.”
Axel Weber, European Central Bank Governing Council Member
“If it should be necessary, in order to keep inflation under control, we must also go into a territory that is described as restrictive?The European Central Bank will stop using code words to signal interest rate changes when the current tightening cycle ends.” - May 29, 2007
Lorenzo Bini Smaghi, European Central Bank Executive Committee Member
“Being focused on inflation over the medium term, rather than on a combination of inflation and output stability, helps to anchor inflation expectations and keep inflation persistence low and thus to foster output growth. Therefore, a central bank focused on price stability does exactly what a central bank aimed at promoting sustainable growth would do.” - May 25, 2007
Joaquin Almunia, EU Economic and Monetary Affairs Commissioner
“I know that the strength of the euro is accused by some of being an obstacle for our companies. As a matter of fact, net exports have held up well since 2002 and throughout this period of appreciation.” - May 23, 2007
On June 21-22, the European Council will meet again. Will the newly elected French President Nicolas Sarkozy be able to organize a compromise on the EU treaty previously rejected by his country?
Jose Manuel Barroso, European Commission President
“I believe that it is possible to reach a compromise at the European Council in June (about a new EU treaty proposed by French President Nicolas Sarkozy). I believe that we can get a clear mandate for an inter-governmental conference which, in my view, could immediately follow, possibly in July.” - May 24, 2007
BOJ - Rate Normalization, But At A Snail?s Pace
Central bankers and government officials alike agree that the economy has stabilized and the outlook for price growth remains positive:
Toshihiko Fukui, Bank of Japan Governor
“The BoJ’s stance is that – we’ve never said we ignore recent developments in prices – we will project a future path based on the current prices, and if we can expect such desirable probability, we will take monetary policy actions to implement it in a necessary timing.” - May 29, 2007
Hiroko Ota, Japanese Economics Minister
“As we have been saying in our monthly economic reports, Japan’s recovery trend remains firm despite some weakness in production.” - May 29, 2007
“They (price conditions) are around zero percent. The end of deflation is in sight.” - May 25, 2007
Nevertheless, fiscal officials remain wary of rate normalization:
Koji Omi, Japanese Finance Minister
“We’ve been saying that the economy continues to recover steadily under price stability and that we want (the BOJ) to support it from the financial side. But we are entrusting the Bank of Japan with determining specifics on interest rates, such as their levels.” - May 25, 2007
Meanwhile, international officials advocate BOJ Governor Fukui?s slow and steady approach to rate hikes:
John Lipsky, IMF First Deputy Managing Director
“Our recommendation is for a continued gradual approach to raising interest rates (in Japan), given the lack of worrisome financial imbalances and the absence of inflation pressures.” - May 24, 2007
PBOC - Diplomatic, Yet Ineffective
The completion of the China-US talks yielded much of the same commentary we?ve seen for months, leaving the markets wondering if anything was really accomplished:
Zhou Xiaochuan, People’s Bank of China Governor
“We have taken some contractionary policies, and (we) need time to observe the feedback. Therefore, (we) are not anxious to take further tightening measures.” - May 28, 2007
“We agree on the general direction of currency reform. There’s probably a little bit of difference on how fast we should carry it out.” - May 24, 2007
Wu Yi, Chinese Vice Premier
“China will expand the yuan’s trading band in the future, but the yuan exchange rate isn’t the main cause of the US trade deficit with China.” - May 25, 2007
Henry Paulson, US Treasury Secretary
“While we have much more work to do (with China), we have tangible results for our efforts thus far. These results are like signposts on the long-term strategic road, building confidence and encouraging us to continue moving forward together.” - May 24, 2007
US legislators certainly aren?t satisfied, leaving them more likely to pursue protectionist policies:
Harry Reid, US Senate Majority Leader
“If China and the Bush administration won’t take action to bring about more balance, there is growing sentiment in Congress to act.” - May 25, 2007