“ECB Meeting – A Soft Landing…..”

ECB Meeting – A Soft Landing

On Thursday in an ECB meeting policy makers decided to scale back bond buying to EUR 30 billion a month starting from January to September 2018. This is a step towards ending a program that has spent more than EUR 2 trillion trying to revive the euro-area inflation.  This will take the ECB holding to a total of at least EUR 2.55 trillion.  However, the ECB emphasised that it will move extremely cautiously and further reiterated that banks will be able to borrow as much as they need in refinancing operations.  After the announcement the EUR dropped to $1.1758 and European government bonds jumped.  The bloc is on its way towards its fastest expansion in a decade and the central bank sees the inflation finally on the verge of picking up.  The ECB officials left the main refinancing rate at zero percent, the deposit rate at minus 0.4 percent and the marginal rate at 0.25 percent.  The ECB also repeated that the borrowing rates will remain at present levels beyond the end of the Quantitative Easing program.  The ECB said that the proceeds of maturing debt will be reinvested for an extended period of time after the end of its net asset purchases and for as long as is necessary.  It further stressed that lending to banks will be done at a fixed interest rate and with full allotment for as long as needed.

Euro-Area

The euro area economy maintained its strong momentum at the start of the final quarter of this year.  Increasing workloads have encouraged companies to take on new staff.  The Purchasing Manager’s index for manufacturing and services slipped to 55.9 in October (September: 56.7) according to IHS Markit.  Although the reading has fallen to a two-month low, job creation in manufacturing increased to the highest level since data collection has started in 1997 showing strong order inflows, triggered by higher export demand.  The services PMI dropped to 54.9 from 55.8 while employment in the services sector has strengthened.  Presently the European Central Bank is stimulating the economy by buying some EUR 60 billion worth of bonds every month.  Inflation is not as yet close to the ECB’s goal and stood only at 1.5 percent in September.  The central bank predicts that it will not return to its goal of just under 2 percent before late 2017 at the earliest.

 UK

The data from the Office for National Statistics shows that third quarter GDP growth for the UK came in slightly faster than expected by economists and the fastest pace so far this year at 0.4 percent.  Services grew 0.4 percent, industrial production jumped 1 percent and construction shrank the most in five years.  Although the latest quarter was better than expected, growth is still running at a weaker pace than it was in 2016.  On an annualised basis the UK economy grew 1.6 percent in the third quarter.     This news gave a boost to the pound which trades at $1.3178 and paved the way for the Bank of England to raise interest rates for the first time in a decade in the next meeting scheduled for Nov 2. With inflation at the fastest in more than five years, Governor Mark Carney said that tightening may be needed within months.  However, not all officials on the panel are convinced that a tightening policy is presently a good idea.

Germany

The IFo survey showed that business confidence in the country unexpectedly rose to a record high in October.  The Munich-based Ifo Institute which surveys some 7,000 companies, has compiled the index for the unified German economy since 1991.  The report had little impact on the Euro.  The single currency gained more than 14 percent between January and mid-September, before stabilizing in the past few weeks.  Economists are projecting a 2.1 percent growth for Germany and the Bundesbank sees strong demand from abroad and steady consumer spending at home driving the upswing onward.  Although this recovery could mean that less support is needed, some are concerned that inflation is not as yet in line and some have argued that slow wage growth remains a key hurdle.  In September inflation in the region stood at 1.5 percent while in Germany was slightly higher at 1.8 percent.

Spain

Spain is trying to stop the independence drive that has been gathering momentum since Prime Minister Mariano Rajoy took office in 2011 and bring an end to the most dramatic political crisis for four decades. The focus is shifting to the ways Madrid can take charge of Catalonia’s institutions in the case of resistance by the secessionist.   On Thursday, an amendment was passed to the government’s plan to use the powers in Article 55 of the constitution that allow Madrid to take control of any rebellious region.  The amendment states that it should “take into account how events evolve.”   Senators in Madrid are preparing to hand Prime Minister Mariano Rajoy wide-ranging powers to seize control of the region under Article 155. On Friday Senators in Madrid are expected to pass legislation that would allow Prime Minister Rajoy to seize control of everything from the region’s budget, its police force and state-run media.  The Catalan leader Puidgemont was due to address the regional parliament on Thursday afternoon.  Protestors called him “a traitor” after reports that he was planning to back down from independence and call an election.  He is seeking ways to avoid the chaos of a secession from Spain without provoking angry supporters.

US – Fed Chair

On Monday President Donald Trump said that he is very close to announcing his nominee for the Chairman of the Federal Reserve.  In an interview with Fox Business Network he said he was considering Stanford University economist John Taylor and Federal Reserve Governor Jerome Powell for the top job at the central bank and indicated that Federal Chair Janet Yellen remains in the running for re-nomination to a second four-year term.

Japan

His gamble on an early election may have just given him a chance to lead Japan through 2021. In an election on Sunday, Prime Minister Shinzo Abe saw his ruling coalition retain its two-thirds majority in the 465-member lower house.  This increases the chances at winning another term next year as head of his Liberal Democratic Party.  This would make him the longest serving leader.  This win would pave the way for the extra ultra-easy monetary policy that has boosted stocks to the highest level in two decades and helped Asia’s second-biggest economy to expand for six straight quarters.  Pressure is increasing on the Prime minister to delve into the issue of swelling debt, increase stagnant wages and finding ways to replace the rapidly aging work force.  Since he has been in power since 2012, unemployment is at less than 3 percent and a weak currency has boosted exports.  Furthermore the benchmark Topix index is at a 10-year peak, while the Nikkei 225 stock Average has climbed to the highest since 1996. The two thirds majority win gives Prime Minister Abe the number to revise the pacifist constitution that has been in place since World War II.  He sees this move as necessary to clarify the legal status of the Self Defense Forces in Japan.  He also called for more pressure on North Korea and strengthened his ties with the US, particularly with President Trump who is scheduled to visit Japan next month when on a trip around Asia.  In the near future Abe will have to decide whether to retain the bank of Japan governor Haruhiko Kuroda as governor when his term expires in April.

Oil Production

Next month at an OPEC meeting the decision as to whether the cartel and its allies will roll over the production cuts will be taken.  So far Saudi officials have signalled they are in favour of prolonging the cuts, however no formal commitment has been made as yet, saying that all options were still open.  Saudi Arabian Crown Prince Mohammed bin Salman who has become the kingdom’s dominant political force, backed the extension of the OPEC production cuts. He spoke after Russian President Vladimir Putin gave provisional backing to an extension.  Putin earlier in the month said in Moscow that if OPEC and its allies decided to extend the cuts, they should do it until the end of next year.  If confirmed at the OPEC’s meeting next month, the extension may increase oil prices and improve the global energy industry and those countries that are oil dependent such as Nigeria and Brazil.

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