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Bank of Canada line up to taper emergency stimulus

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Bank of Canada expecting strong growth

LONDON (Reuters) – The Bank of Canada set the taper ball rolling last week, becoming the first major central bank to cut back on pandemic-era money-printing stimulus programmes. So who’s next?

The big guns of central banking – the U.S. Federal Reserve, European Central Bank and the Bank of Japan – won’t officially pare stimulus for a while, a message the BOJ reinforced on Tuesday and one the Fed is expected to reiterate on Wednesday.

Yet the Bank of Canada‘s C$1 billion ($806 million) cut to its weekly bond-buying programme may remind investors that the next phase in 2021 will be the taper phase, John Briggs, global head of strategy at NatWest Markets, told clients.

With economic data confirming a brighter outlook, Bank of America estimates central bank asset purchases in the United States, Japan, the euro zone and Britain will slide to about $3.4 trillion this year from almost $9 trillion in 2020.

For 2022, the U.S. bank predicts purchases of just $400 billion.

Here’s a look at who is tapering, who may raise interest rates and who might be the last to call time on pandemic-era monetary stimulus.

 

For a graphic on major cbanks:

https://fingfx.thomsonreuters.com/gfx/mkt/gjnvwdormpw/major%20cbanks.JPG

 

1/ NORWAY

Norges Bank is at the vanguard in terms of signalling a retreat, having flagged last month that a rate rise may be coming in the second half of 2021. That has made the crown this year’s best performing G10 currency.

The central bank doesn’t intervene in bond markets, so the taper debate is not applicable.

2/ CANADA

Having announced tapering, Canada has signalled that its key interest rate could rise from 0.25% late in 2022.

 

For a graphic on Canada‘s bond market takes tapering in its stride:

https://fingfx.thomsonreuters.com/gfx/mkt/dgkvlyzyrpb/canada2604.png

 

3/ UNITED STATES

The Fed plans to keep borrowing costs near 0% and maintain monthly asset purchases worth $120 billion until it sees “substantial further progress” towards full employment and its 2% flexible inflation target.

But with the economy expected to grow by more than 6% this year and inflation to be a “little higher” – according to Fed boss Jerome Powell – markets are pricing in a rate rise in 2023 and many analysts expect tapering to start this year.

The Fed faces a delicate balancing act, ensuring that tapering at a time of massive U.S. government borrowing does not push up Treasury yields too much.

Pictet Wealth senior economist Thomas Costerg expects tapering to start by early next year and proceed at a monthly pace of $10 billion. He said that means the process would last about a year – “enough to keep expectations for the first rate hike well in the distance”.

 

For a graphic on Central bank holdings of government bonds:

https://fingfx.thomsonreuters.com/gfx/mkt/yxmvjdwyevr/CBANKS2704.PNG

 

4/ BRITAIN

The departure of Andy Haldane, the Bank of England’s hawkish chief economist, has raised expectations that the central bank’s 895 billion pound ($1.2 trillion) bond-buying scheme won’t be reduced any time soon. The BoE expects inflation will be running at 1.9% by the end of this year but says the rise is likely to be capped over the medium term by labour market weakness.

Still, NatWest analysts believe the BoE could announce a 4 billion pound reduction in its so-called quantitative easing (QE) in May, trimming it to 14 billion pounds a month.

Money markets see a 56% chance of a quarter-point interest rate rise by the end of 2022.

5/ EURO ZONE

Anemic long-term inflationary pressures mean euro area rates are unlikely to rise for years. But tapering may come sooner, especially within the European Central Bank’s 1.85 trillion euro ($2.2 trillion) pandemic emergency purchase programme (PEPP).

Technically, this runs until March 2022 but some officials are already advocating reducing bond purchases as the economy strengthens.

Danske Bank analysts reckon the ECB will end up using only 1.65 trillion euros of the total PEPP stimulus package.

“For all we know at this stage, PEPP is coming to an end in March next year, so if you think about the slowdown from the current pace, that could come as soon as June,” said Andreas Billmeier, European economist at Western Asset.

 

For a graphic on When will the ECB slow the pace of its emergency bond buys?

https://fingfx.thomsonreuters.com/gfx/mkt/xklpyyrjmpg/ECB2704.PNG

 

6/ AUSTRALIA

Australia’s economic rebound has surpassed expectations and is set for an “above trend” expansion, the Reserve Bank of Australia said in April. But the bank, which has underscored its dovish credentials by adopting yield curve control, could be among the last to tighten policy.

It wants unemployment slashed and inflation within its 2% to 3% target before shifting tack, but doesn’t see either happening until 2024. Economists expect rates to stay on hold until then and reckon the RBA could even extend asset purchases by another A$75 billion to A$100 billion ($58 bln to $77 bln).

7/ NEW ZEALAND

New Zealand’s strong recovery and red-hot property markets have raised speculation that a rate rise may come sooner than expected.

While its key interest rate is expected to stay at 0.25% this year, some analysts predict a rise in the second half of 2022. The central bank meanwhile appears to be in no hurry to taper its NZ$100 billion ($72 billion) QE programme.

8/ SWEDEN

Swedish inflation is approaching the Riksbank’s 2% target but it has said interest rates would stay at 0% for years. However, its 700 billion crowns ($84 billion) asset purchase programme will wind down this year as planned.

9/ JAPAN

The BOJ pledged this week to maintain stimulus using a yield target and purchases of government bonds and equities.

It has been accused of “stealth tapering” because its bond-buying has slowed since yield curve control (YCC) was adopted in 2016, though purchases have picked up slightly in the past year.

In March, they were about 22.2 trillion yen ($204 billion)above levels a year ago. But that’s still a quarter of the 81.96 trillion yen year-on-year increase in August 2016, just before YCC came in.

 

For a graphic on BOJ steadily ‘stealth’ tapering its JGB buying:

https://graphics.reuters.com/GLOBAL-CENTRALBANKS/TAPER/bdwpkbmllvm/chart.png

 

10/ SWITZERLAND

The Swiss National Bank does not intervene in domestic bond markets, instead capping the Swiss franc through interventions which came to nearly 110 billion francs ($120 billion) in 2020. The proceeds are used to purchase foreign bonds and equities.

The franc is less over-valued than before but the SNB shows no signs of departing from its interventionist policy and its minus 0.75% interest rate won’t rise any time soon.

 

(Reporting by Sujata Rao, Tommy Wilkes, Saikat Chatterjee and Dhara Ranasinghe in London and Leika Kihara and Daniel Leussink in Tokyo; Editing by David Clarke)

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Toronto Stock Exchange rises 0.64% to 19,310.74

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tsx

* The Toronto Stock Exchange’s TSX rises 0.64 percent to 19,310.74

* Leading the index were Ero Copper Corp <ERO.TO​>, up 13.6%, Nexgen Energy Ltd​, up 12.6%, and Denison Mines Corp​, higher by 10.5%.

* Lagging shares were Kinaxis Inc​​, down 5.2%, Ballard Power Systems Inc​, down 3.9%, and Cominar REIT​, lower by 3.5%.

* On the TSX 132 issues rose and 93 fell as a 1.4-to-1 ratio favored advancers. There were 30 new highs and 1 new low, with total volume of 246.0 million shares.

* The most heavily traded shares by volume were Enbridge Inc, Suncor Energy Inc and Manulife Financial Corp.

* The TSX’s energy group rose 3.28 points, or 2.7%, while the financials sector climbed 2.69 points, or 0.8%.

* West Texas Intermediate crude futures fell 0.58%, or $0.38, to $65.31 a barrel. Brent crude  fell 0.29%, or $0.2, to $68.68.

* The TSX is up 10.8% for the year.

This summary was machine generated May 5 at 21:03 GMT.

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Merkel wants Europe, United States to aim for new trade deal

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BERLIN (Reuters) – A trade agreement between the United States and the European Union would “make a lot of sense”, German Chancellor Angela Merkel said in a speech in which she welcomed the United States’ return to the multilateral fold under President Joe Biden.

German enthusiasm for a trade deal and stronger transatlantic ties may have to contend with a more cautious approach in France, where President Emmanuel Macron has made a priority of reducing European reliance on rival superpowers.

Merkel said that while Germany had no interest in a world divided into camps as it was in the Cold War, it was good that the United States, Europe’s “most important ally”, stood alongside Europe in rivalries with China and Russia.

“I have always supported a trade agreement between the United States of America and the European Union,” she told a Berlin conference on the future of transatlantic ties.

“We have trade agreements with so many of the world’s regions. It would make a lot of sense to develop such a trade agreement here, similar to what we have done with Canada,” she added.

Merkel’s transatlantic coordinator Peter Beyer told Reuters in February that Germany and the new U.S. administration should “think big” and aim for an ambitious agenda including a trade deal to abolish industrial tariffs and a WTO reform to increase pressure on China.

The European Union has put reform of the World Trade Organization at the heart of its trade strategy for the next decade, saying global rules on commerce must be greener, take more account of state subsidies and be enforced.

The EU itself feels bruised by trade wars, Brexit and what it sees as unfair competition from China, which it perceives as a “systemic rival”, and is taking more assertive measures to enforce global trade rules and ensure a level playing field.

Merkel said that despite issues with its ratification in the EU, the bloc’s planned investment agreement with China, the comprehensive agreement on investment (CAI), is a “very important undertaking, because it gives us more reciprocity in market access”.

At the same time, it was necessary to address “the whole range of issues” with China, including its human rights record, she added.

The EU executive has hailed the CAI, struck at the very end of 2020, as a means to secure better access for European companies to Chinese markets and redress unbalanced economic ties.

But concerns over China’s human and labour rights record and scepticism from the United States had already cast doubt on the deal’s approval process even before Chinese blacklisting of five members of the European Parliament in tit-for-tat sanctions.

 

(Reporting by Thomas Escritt, Paul Carrel and Michael Nienaber; EDiting by Giles Elgood)

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Canadian dollar posts three-year high as risk appetite climbs

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Canadian dollar

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar strengthened to its highest level in more than three years against its U.S. counterpart on Wednesday, supported by improved investor sentiment and the Bank of Canada‘s recent shift to more hawkish guidance.

The Dow Jones Industrial Average hit a record high as the market recovered from a steep tech sell-off, after investors were encouraged by U.S. Treasury Secretary Janet Yellen’s new comments on interest rates and a positive private jobs report.

“Risk-on conditions” and the recent move higher in commodity prices bolstered the Canadian dollar,” Ronald Simpson, managing director, global currency analysis at Action Economics, said in a note. “In addition, the BoC’s tapering of its QE program appears to have shifted USD-CAD’s trading range down a notch.”

Last month, the Bank of Canada cut the pace of its bond purchases and signaled it could hike interest rates in late 2022.

Further clues to the central bank’s policy outlook could come from Canada‘s April employment report, due for release on Friday.

The Canadian dollar was trading 0.2% higher at 1.2280 to the greenback, or 81.43 U.S. cents, having touched its strongest intraday level since February 2018 at 1.2252.

U.S. crude oil futures settled 0.1% lower at $65.63 a barrel as traders used weekly inventory figures as an excuse to pull back from the recent rally. Oil is one of Canada‘s major exports.

Home sales in Toronto, Canada‘s most populous city, fell nearly 13% in April from March. That bucked the regular spring trend, as demand began to ease after months of blistering growth.

Canadian government bond yields were mixed across the curve, with the 10-year little changed at 1.521%.

 

(Reporting by Fergal Smith; Editing by Kirsten Donovan and Nick Zieminski)

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