Rolling live coverage of business, economics and financial markets as analysts contemplate end of ‘Abenomics’ and weaker dollar
- Andrew Bailey: “Going big and fast” gives central banks more firepower
- European stocks waver despite signal of longer stimulus from Fed
- Abe confirms resignation on health grounds, hails economic policy
- Sterling hits eight-month high thanks to weak dollar
“Go big (and fast) or go home” is the the message from Andrew Bailey when assessing the use of quantitative easing to fight crises.
The Bank of England governor gave little in the way of indications about short-term policy responses or any details on his view of the UK economic situation, but he did insist that cenral banks have more firepower than previously thought during times of crisis.
We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid.
But, hindsight is a wonderful thing when you have it.
**Drumroll**
Ladies and Gentlemen; Kings and Queens... Presenting...the WORLD PREMIERE...of BOJ's long-awaited inflation-targeting dubplate for 2020, featuring Denyque and the low, stable and predictable inflation dancers! ️ #BOJSpeaks#InflationTargeting pic.twitter.com/7OMb4wEFsQ
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Andrew Bailey has now finished speaking - I think it’s fair to say that was one for the monetary policy purists.
Sterling is unmoved: it’s up 0.7% against the US dollar at $1.3291.
Governor Bailey at #JacksonHole suggesting pace of QE an important measure of its efficacy, based on research paper: https://t.co/XdMTNUrvnT feels like key takeway is suggestion that CB balance sheet should be used countercyclically to restore headroom for next economic downturn
"Expanding the range of assets purchased is another way for central banks to create more headroom. The Covid crisis has seen a further broadening of the range of assets that central banks stand ready to purchase." - Andrew Bailey
As BoE Governor Bailey talks of QE being " temporary" let me remind you it started in 2009 and not one single £ has ever been unwound.....
The banking system has stood up well to the Covid crisis, Bailey says, when asked about financial stability.
There were some signs of stress in non-bank markets. It is not a surprise that the re-regulation of the banking system would move assets away from the banking sector, he says.
Now Bailey is asked about the upside scenario - what happens if there’s a successful vaccine and the economy surges back with inflation on the rise? How would you prioritise using your tools?
That would be a happy problem to have, Bailey says.
Bailey is asked what the Bank’s own review of its monetary policy approach will look at.
The Bank is doing a “more incremental” review than the Fed, Bailey says. On communicating, Bailey says the Bank pivoted from focusing on QE to talking about forward guidance on interest rates more.
Bailey is answering questions now on his speech.
He says Jerome Powell’s comments from yesterday suggest that flexibility can be useful for monetary policy.
One of the key arguments Andrew Bailey made was that the pace of asset purchases under quantitative easing is another tool that monetary policymakers have - particularly during a crisis.
That adds another way for the Bank and other central banks to influence the economy: by adjusting the timing of asset purchases. He said:
Standing back from the Covid crisis, and looking at the UK case, there indeed is some evidence that the impact of QE over the past decade has been largest at times of market dysfunction and illiquidity. Of course the available event studies are very few in number. But, if this result proves robust, it suggests that “going big and fast” with QE is particularly effective in these conditions.
Central banks were too cautious about the firepower they had available to them to fight crises, Bailey says.
He said:
We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid. But, hindsight is a wonderful thing when you have it.
The committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably. This important step is intended to ensure monetary conditions do not tighten prematurely when there are some initial signs of an economic recovery.
“Going big and fast” on quantitative easing is particularly effective, Bailey says.
Having more headroom for expanding quantitative easing could be preferable to fight future crises, Bailey says.
But one conclusion is that it could be preferable, and consistent with setting monetary conditions consistent with the inflation target, to seek to ensure there is sufficient headroom for more potent expansion in central bank balance sheets when needed in the future –to “go big” and “go fast” decisively
The Bank of England is not out of monetary policy firepower to fight recessions by any means, Bailey says.
The structural drivers of low interest rates suggest the use of central bank balance sheets will be more long-lived than had been anticipated.
Andrew Bailey is speaking now on “The central bank balance sheet as a policy tool: past, present and future”.
Bank of England governor Andrew Bailey will be speaking very shortly at the virtual Jackson Hole conference.
You can watch it here:
FED´s new framework markets impact: US stocks should go up (they did); bond prices should go down, yields up (they did); the dollar should go down (it´s down); commodity prices should be mixed (yes, oil down, gold up); volatility (VIX & MOVE) should go up (they did).
And there has been an update from Canada, whose second-quarter GDP dropped at an annualised rate of 38.7%. In case you didn’t realise, that is a record by quite some margin.
In the more straightforward quarterly comparison, Canada’s GDP fell by 11.5%, according to Statistics Canada - so significantly less severe than the UK.
Gross domestic product, income and expenditure, second quarter 2020: Real gross domestic product (GDP) fell 11.5% in the second quarter, following a 2.1% decline in the first quarter. https://t.co/KfLqPCz65p pic.twitter.com/scP3ckFowb
Also of note in the release (particularly given the Federal Reserve’s adjustment of its inflation targeting regime): the personal consumption expenditure price index nudged up by 1% in the year to July.
That is still far below the 2% target for inflation that the Fed aims for - and there is not much sign of a big rise in inflation coming any time soon, so don’t hold your breath for tighter monetary policy.
US consumers spent more than economists had expected in July, although the figures just released still show a slowdown in the growth of spending from May and June.
Personal consumption expenditures rose by 1.9% in July, according to the US Bureau of Economic Analysis. That was more than the 1.5% predicted by economists on average.
The pound has gained 0.8% today after the Federal Reserve gave a clear signal that it will have loose monetary policy for longer.
One pound will buy $1.3308 today, the most since mid-December - a significant increase compared to almost $1.14 in the depths of the crisis in March.
Don’t forget that Andrew Bailey will be speaking @KansasCityFed #JacksonHole2020 Economic Policy Symposium at 14:05 (BST) this afternoon. Watch live at: https://t.co/Y9qEBwdQ6b.
You will also be able to read his speech at https://t.co/m3b5RasoCM
Related: Central bankers to fish for compliments at virtual Jackson Hole summit
The Japanese yen has strengthened by 0.9% today in the wake of Shinzo Abe’s resignation.
You can see the moment he announced he would step down to avoid making policy mistakes due to illness here:
Concerns for the prospects of the UK’s city centres are what has prompted the transport secretary’s firm message that Britons should be getting back to work.
What we’re saying to people is it is now safe to go back to work and your employer should have made arrangements which are appropriate to make sure that it is coronavirus-safe to work
Related: Grant Shapps says it is safe to return to work in offices in England
There’s more drama over at subprime lender Amigo, which this morning reported a 83% drop in profits to £3m in the three months to June, compared to £18m a year earlier.
The guarantor lender said it was hit by a pause on new lending - except to key workers - during the pandemic, and the granting of payment holidays to around 47,000 of its 199,000 customers.
We have today called a vote on the subject of the proposals we made last week.
We will win this vote.https://t.co/R0txhfsvyR
It appears that the German dip in consumer confidence is going against the grain of the rest of the eurozone: the European commission’s economic sentiment gauge rose for the fourth consecutive month.
The indicator includes the consumer confidence figures, but it also incorporates business confidence from around the bloc.
While remaining well below pre-crisis levels and the long-term average, the monthly indicator which gauges confidence in the economy soared to 87.7 points from 82.4 in July, above the 85.0 point average forecast of economists polled by Reuters.
The new pick-up, confirming the gradual rebound from May, was driven mostly by higher optimism in the service sector, the largest in the 19-country currency bloc. It remains in negative territory, but rose to -17.2 in August from -26.2 in July.
Looking across European equities there is... not much action today.
The FTSE 100 is up by 0.1%, with no individual moves greater than 2.7% either way. The Stoxx 600 is down by 0.3%, and the Dax in Germany has lost 0.4%.
Markets haven’t got over-excited by the US Federal Reserve’s new stance on letting inflation run higher, despite it implying that interest rates will stay lower for longer – normally something that would benefit equities.
One could argue that the Fed following this path was already expected by the market, hence why stocks haven’t surged ahead.
Japan’s prime minister, Shinzo Abe, has confirmed that he will step down for health reasons.
The famous “three arrows” of Abenomics were monetary easing, fiscal spending and structural reforms to try to add some dynamism to the Japanese economy - which become something of a byword for stagnation (although visitors to Japan might argue that stagnation doesn’t appear to be such a bad thing).
A fair question in the comments from murphharrison: why has the yen gained ground after reports of Abe’s resignation?
Some analysts said political uncertainty could prompt some Japanese to bring money back home to avoid being caught out by volatility in currency markets.
There’s some nervousness and concerns because he’s the longest serving Prime Minister, and with him gone there could be some uncertainty. Perhaps Abenomics is coming to a close. And perhaps we could see some repatriation and this is why the yen has strengthened somewhat.
There can be no denying that the timing of PM Abe’s departure is not particularly good. Covid has hit Japan hard like elsewhere, and we continue to see emerging signs of the return of deflation to Japan. [...]
Deflation helps to lift real yields when nominal yields are at the lower bound and this has been a long-term supportive factor for the yen, and will be especially so now with the Fed trying to drive real yields lower through it monetary policy framework shift.
Shinzo Abe’s reported plan to resign has given currency markets a jolt on a usually quiet late-August Friday.
The US dollar index is down by 0.5%, after the Japanese yen (one of the biggest weights in the basket) jumped. The yen is up by 0.5% today, and has just strengthened to the 106 yen per US dollar mark.
Gatwick airport has reported a £343m loss after passenger numbers plummeted by two-thirds in the first half of the year as the coronavirus takes a heavy toll on the aviation industry.
Related: Gatwick airport hit by £343m loss as passenger numbers fall
There are some quite punchy comments coming through from the UK’s transport minister, Grant Shapps, who has been talking up a campaign for people to return to work.
The government is planning on telling people they should return to workplaces where it is safe to do so in order to help the economy to recover. Whether businesses will actually choose to do so is another matter.
Our central message is pretty straightforward: we are saying to people it is now safe to return to work.
Related: UK coronavirus live: Shapps insists return to office is safe amid push to save town and city centres
The FTSE 100 has given investors something to think about this morning: it opened up by 0.5% at 8am BST, but has dropped to a 0.3% decline in the 20 minutes since.
That means London’s blue-chip index is back below 6,000 points.
German consumer confidence fell back in August, denting economists’ hopes that the rebound from the depths of the coronavirus lockdowns would continue.
The latest indicator (labelled, confusingly, as September) by GfK fell to -1.8, down from -0.2 in the previous reading and lower than the 1.2 expected by economists.
Expectations for a rapid recovery in the consumer climate in Germany were dealt a significant blow in August. After gaining for three consecutive periods, the indicator suffered a considerable decline.
An increase in the number of infections and the fear that coronavirus-related restrictions will be further tightened are creating uncertainty and consequently dampening the mood. The reduction in value added tax (VAT) which came into effect in Germany on July 1st may be boosting propensity to consume but has not yet been able to provide a stronger stimulus.
Whether or not this is just a temporary slowdown will depend primarily on what infection rates look like in future and the necessary measures to be put in place by policy makers.
Good morning, and welcomed to our live coverage of business, economics and financial markets.
Related: Japan PM Shinzo Abe set to announce resignation amid health concerns - report
#Japan stocks sink on report Shinzo Abe plans to resign. The Nikkei 225 fell as much as 2.7% while the Topix index dropped as much as 1.6%. (BBG) pic.twitter.com/VpJ57euFCX
A person familiar with the matter said Abe, the nation’s longest serving premier, had decided to step down.
Public broadcaster NHK earlier said Abe, who has battled the disease ulcerative colitis for years, wanted to avoid causing problems for the government due to the worsening of his condition
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