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MACROECONOMICS

The Investment Climate and Geopolitics

macroeconomics investment climate and geopolitics

16 Jun 2014

The high frequency macroeconomic data due out in the days ahead simply do not have the heft to alter investors' perceptions of the macro-economic and financial condition of the investment climate.

That climate can be summed up as such: Growth in the US has picked up markedly after the major disappointment in Q1. The Japanese economy is weakened considerably, which does not mean unexpectedly, is Q2. The UK economy continues its robust performance. The euro zone is limping along. Targeted measures from Chinese officials are helping the world’ second largest economy stabilize, still growing above 7%.

The ECB just embarked on a course that will unfold in the coming months (targeted LTRO), including the consequences of a negative deposit rate. It is not yet, for example, fully appreciated that the ECB accounts beyond for the regional banks. Governments have funds at the ECB. The negative rate will apply to them too.

For its part, the Bank of England’s Carney is signaling the opposite direction. In part due to signals from him, the market has been reluctant to price in much chance of a hike before next May’s national election. He now says that a rate hike make come sooner than the market thinks.

The Bank of Japan continues buy securities at a prodigious rate. Officials are prepared for a contraction in Q2. It is the economic performance in Q3 that is the key to a potential policy response.

We have characterized Federal Reserve policy as essentially on automatic pilot, with $10 bln a month tapering of asset purchases. A contraction that may ultimately be closer to 2% in Q1 is not sufficient to prompt the Fed to reconsider its course. A sustained monthly increase of more than 200k non-farm payroll employment is not enough for the Fed to accelerate its tapering.

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