Reuters blog archive
By Swaha Pattanaik
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
The theory says that bonds benefit and stocks suffer when there’s deflation. In the real world, disinflation has yet to turn into persistent price declines. Sluggish price rises are no bar to equities doing quite well, just so long as there is growth. It’s too early to write off stocks.
The theory goes like this. Deflation encourages consumers to defer spending. They won’t buy as much jam today when they know it will be cheaper tomorrow. Delayed consumption depresses economic activity, leading to lower corporate profits, which make equity markets fall. But negative consumer price trends enhance the appeal of bonds, which offer positive real yields as well as capital safety.
However, the way markets work when there is deflation is not how they behave when prices are rising slowly and there’s some GDP growth - the situation right now. U.S. and European inflation rates are undershooting central bank targets but they are not in negative territory. Inflation expectations, whether derived from polls or interest rate markets, don’t see them heading below zero.
from Anatole Kaletsky:
This has been a banner week for the world economy, inspired largely by events in the United States.
In Washington, the first congressional testimony from Janet Yellen in her position as new Federal Reserve Board chairwoman reassured and impressed two notoriously petulant audiences: Tea Party congressmen, who had assembled a posse of hostile witnesses to attack the Fed’s “easy money” policies; and panicky Wall Street investors, who had spent the previous month swooning on fears that monetary policies might not be easy enough.
The European Central Bank meets on Thursday with emerging market tumult bang at the top of its agenda.
It’s probably too early to force a policy move this week – particularly since the next set of ECB economic and inflation forecasts are due in March – but it's an unwelcome development at a time when inflation is already uncomfortably low, dropping further to just 0.7 percent in January.
Euro zone policymakers like to talk. They often contradict each other at separate speaking engagements on the same day. But they have struck a chorus in recent weeks, asserting that deflation is not a threat.
Members of the ECB Governing Council have been particularly vocal, insisting they will not have to alter policy to counter falling prices.
The European Central Bank held a steady course at its first policy meeting of the year but flagged up the twin threats of rising short-term money market rates and the possibility of a “worsening” outlook for inflation – i.e. deflation.
The former presumably could warrant a further splurge of cheap liquidity for the bank, the latter a rate cut. But only if deflation really takes hold could QE even be considered.
Sabine Lautenschlaeger, the Bundesbank number two poised to take Joerg Asmussen’s seat on the executive board, breaks cover today, testifying to a European Parliament committee. A regulation specialist, little is known about her monetary policy stance though one presumes she tends to the hawkish.
Nonetheless, the European Central Bank is likely to sit tight at its policy meeting today. The Bank of England’s rate setters are also meeting but facing a very different set of problems.
Euro zone inflation, or deflation, is the focus of the moment.
Germany’s HICP rate fell to 1.2 percent last month, Italy’s hit 0.6 percent and Spain’s just 0.3 in December (not to mention Greece’s -2.9 percent). Today we get the figure for the euro zone as a whole. Forecasts for it to hold at 0.9 percent may now look a little toppy.
It’s too early for any dramatic moves but the European Central Bank, which has a policy meeting on Thursday, may well be pushed into easing policy if inflation refuses to pick up and/or the banks clam up ahead of this year’s health tests.
The surveys are likely to show the currency bloc ended the year on a reasonably robust note with Germany leading the way as always, Italy and Spain showing signs of life and France looking worryingly weak.
European shares will be the best performers next year, according to the latest Reuters poll of more than 350 strategists, analysts and fund managers. Frankfurt’s DAX is already up nearly 20 percent this year and is forecast to rally another 10 percent in 2014.
But the experts in foreign exchange that Reuters surveys each month are also saying that the euro, just above $1.37, and not far off a two-year high against the dollar, will fall.
Breaking news is S&P’s downgrade of France’s credit rating to AA from AA+ putting it two notches below Germany. Finance Minister Pierre Moscovici has rushed out to declare French debt is among the safest and most liquid in the euro zone, which is true.
What is also pretty unarguable is S&P’s assessment that France’s economic reform programme is falling short and the high unemployment is weakening support for further measures. There's also Francois Hollande's dismal poll ratings to throw into the mix.