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International market analysis and insights from Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department at Mizuho Bank Ltd,
The difference between outrun and optimism
In the January update of the World Economic Outlook, the IMF revised up 2020 global growth estimate (vs. October WEO) to -3.5% (+0.9%-pts), and upgraded 2021 GDP to 5.5% (+0.3%-pts). But this outrun is heavily predicated on vaccine access and efficacy, as well as the capacity and appetite for policy stimulus. And neither of this is evenly distributed globally.
Thus, premature optimism, the IMF warns, needs to be curbed in the context the unfolding path of a mutating virus interacting vaccine rollout; and critically on policy support in the interim.
While pandemic outcomes will dictate the overall global recovery, the IMF is taking a dim view of fractured global outcomes; in which, China and US out-perform, some advanced economies muddle through and many poor EM economies languish (with lasting adverse impact).
Upshot being, outrun in recovery, realised and projected, do not absolve lingering uncertainty and unevenness exacerbating pre-existing inequality; therefore cannot inspire bona fide optimism.
Down Under, Q4 CPI outrun at 0.9% YoY (consensus: 0.7%) will not be equated with optimism about resounding restoration of demand-driven inflation; and is far from 2-3% anyway. So, AUD bulls were dampened around mid-0.77, a broadly weaker USD has EUR buoyed above mid-1.21; but underlying caution resists USD/SGD slip below mid-1.32; USD/JPY above mid-103.
For now, markets will be watching FOMC; searching for optimism but fretting valuation outruns.
FOMC: Backseat Cruising
Today’s FOMC (Wed, 27th) will by and large be a non-event. For a start, there will be no updated “Dot Plot” to reveal marginal shifts in policy rate outlook. Nor will there be scheduled revisions to economic forecasts that markets could react to.Instead, the Fed’s USD120 billion/month QE commitment, alongside flexible average inflation targeting (FAIT), which have pushed out rate hikes to no earlier than 2023 provide ample policy breathing room for the Fed to wait assess.
But above all, the raft of fiscal measures being lined up by the Biden Presidency with Yellen at the helm of the US Treasury means that the Fed can be on cruise control; albeit “cruising” in the backseat as fiscal cushion for the economy and direct Covid-related measures are prioritised in leading economic relief efforts.
To be sure, this is a dovish hold. And the Fed is more likely to maintain scope for outright expansion of stimulus (QE, liquidity/credit tools) than to mull an “exit”.
Specifically, Powell is expected to fend off discussions on “taper” as premature amid uncertainties. What’s more, the annual rotation of FOMC voting members tilts the FOMC slightly more dovish; as Evans (Dove), Bostic (Dove), Barkin (Neutral) and Daly (Neutral), replace Mester (Hawk), Kashkari (Dove), Kaplan (Neutral), Harker (Neutral).
Notably, Christopher Waller, assuming the vacant seat for a permanent voting board member will probably institute the idea of a weaker Phillips Curve inflation pass-through.
But to be clear this does not change course for whipping out new bazookas. Instead, the Fed’s default is assessing how long for, and in what for to maintain policy accommodation. Rather, on balance, the refreshed board may give more oxygen for FAIT to entrench. And be expressed in terms of solidly anchored short-end yields and to a lesser extent inflation expectations out-running long-end yields.
The resultant mix of negative (and softening) real US rates alongside scope for more UST yield curve steepening in turn squares with softening bias in the USD.
Although corresponding strength in EM currencies are likely to be differentiated by vulnerabilities to “twin deficit” risks and inflationary pressures from reflation cues.
Credit Source: Mizuho Bank Ltd
