Next Up: Global Synchronized Easing

Global economic tightening is a pipe dream. It hasn’t happened yet, and likely won’t.

Bloomberg writer Komal Sri-Kumar says, and I agree, Don’t be Surprised by a Switch Global Synchronized Easing.

Global investors are positioned for a coordinated tightening of monetary policy by the world’s major central banks. Although the U.S. Federal Reserve is already far down that path, the others are just getting started. The European Central Bank is set to end its bond purchase program by year-end. The Bank of England is leaning toward hiking interest rates for only the third time in 10 years. Concerns were rising that the Bank of Japan could end the zero yield target for 10-year government bonds at its meeting last month.

A factor that may induce the Fed to delay rate increases after September is the surging dollar. U.S. President Donald Trump has already complained that an appreciating dollar has blunted the “competitive edge” of U.S. exports. By increasing the cost of American exports to foreign buyers, a stronger dollar would increase the trade deficit that Trump considers to be an important measure of how other countries are taking unfair advantage of the U.S. On July 19, he openly criticized the Fed for increasing rates several times despite a long-held tradition that the executive branch avoids commenting on monetary policy.

The ECB has to contend with a deteriorating economic situation in Turkey, which owes $467 billion to foreign creditors, including a large exposure to some of the euro zone’s largest commercial banks. The banks may have to write off a portion of their loans to Turkey, requiring an ECB backstop for vulnerable financial institutions rather than tighten monetary policy into a crisis. The central bank also has to deal with rapidly rising Italian sovereign bond yields due to the expansionary fiscal measures of the populist government that took office this year. Ending ECB bond purchases, or increasing the main refinancing rate above the current zero level, could increase bond yields in the region’s southern fringe.

The Bank of Japan concluded a meeting on July 31 by maintaining its zero target for the 10-year bond yield. The central bank justified its decision by confirming what we already knew, which is that despite five years of massive monetary stimulus, it was far from achieving its goal of a 2 percent annual inflation rate. Price increases have not met the 2 percent target anytime after March 2015, and consumer prices rose by a mere 0.7 percent in June.

The message for investors is not to believe the tough rhetoric coming from central bankers but instead watch their actions and follow the data. The data suggest that rather than a tightening, markets may have to get ready for more easing during coming months. While the reasons for policy shifts may vary — overly strong dollar, contagion from Turkey, Brexit-related fears or near-zero inflation rates — the result is likely to be a more or less synchronized easing.