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By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
De-Coupling
US inflation and the ECB meeting might have played on different stages, but the overriding de-coupling theme resonated across the Atlantic. And is likely to echo beyond. Specifically, the Fed’s policy (non-)response de- coupled from surging inflation suppressing yields and subduing the USD.
Not to be outdone, the ECB’s smooth delivery of policy rhetoric de-coupling economic upgrades reflecting more upbeat outlook from QE exit.
But for PBoC, struggles to de-couple credit calibration from growth bias is its frustration.
US: Inflation Jumps, but Yields Fall
Admittedly, a larger than expected jump in US CPI to 5.0%, to a 13-year high (like China’s PPI), revealed red flags on accelerating headline inflation and early signs of wider spill-over.
But bond markets were unfazed. In fact, UST yields tumbled, with 10Y below 1.5% now. To be fair, the usual suspects of “re-opening inflation” and used auto prices (driven by chip shortage hobbling car production) continued to disproportionately lift inflation; which arguably underpins the view of transitory inflation that the Fed will be willing to look past.
But this is a conveniently simplistic reduction of far more nuanced and fluid inflation-policy dynamics. A point that may be teased out of the surge in inflation expectations (5Y5Y inflation swaps) even as nominal yields fell; accentuating the drop in real UST yields.
The upshot is the Fed’s presumed “patience” is premised on the breadth and durability of inflation upswing.
For now though, reverberations of dovish FOMC Minutes is sufficient to de-couple inflation and Fed outcomes. And softer nominal/real yields subdue USD.
AUD edged from low- to mid-0.77, USD/SGD and USD/JPY a tad below mid-1.32 and mid-109.
ECB: Raise, Not Rile
Meanwhile, the ECB provided a master class in how to raise growth and inflation forecasts, yet not rile markets; into a (bullish) EUR and (bearish) Euro-bond frenzy; hence, EUR remained well capped below 1.22 and Euro-zone bond yields were subdued, if not softer.
Admittedly, the ECB raised 2021 and 2022 GDP forecasts to 4.6% (+0.6%-pts) and 4.7% (+0.6%-pts) while lifting inflation outlook to 1.9% (+0.4%) for 2021 and 1.5% (+0.3%-pts) for 2022.
But ECB President Lagarde pointed out that the economic outlook is still uncertain; with risks to growth balanced. Crucially, long-term inflation expectations remain subdued.
Accordingly, the ECB emphasized that; i) it is too early for PEPP exit, which will be discussed “in due course”, and; ii) that the Euro-zone economy is not in the same situation as the US.
This artful combination of more upbeat outlook cloaked in lingering caution and taking cover behind the US’ stellar rebound underpinned the ECB’s “steady hand” ; which entails continued PEPP maintained at the “significantly higher pace”.
What’s more, the ECB has explicitly declared it is monitoring EUR strength, which contains inflation. And so, the ECB has batted away taper talks and stifled EUR bulls in the same breath that it has raised economic forecasts amid a brighter outlook.
China’s De-Coupling Woes
Unlike the Fed and ECB, which ostensibly excel at policy de-coupling, the PBoC appears to be frustrated by struggles to infuse nuance into credit calibration in the interest of financial stability.
Notably, the inability to de-couple credit calibration from recovery support. What this means for Beijing is that the PBoC is constrained by a precariously narrow policy path; flanked by the threat of slipping into credit excesses (that come back to haunt down the road) on one side and the risk of stumbling into growth setback on the other.
Credit: Mizuho Bank Ltd
