Brief Macro: ECB, BoJ Suck Wind – EA Threatened with Japanisation and more

In this briefing:

1. ECB, BoJ Suck Wind – EA Threatened with Japanisation
2. India Monthly Report: Jan’19 – Feb’19
3. India: Outlook on Capex Recovery Continues to Brighten
4. BoJ Steps in as ECB Exits
5. Fed Remains Unfazed by Recession Doomsayers, but Political Challenges Lurk on the Horizon

1. ECB, BoJ Suck Wind – EA Threatened with Japanisation

By Charles Dumas, Chief Economist

• Monetary stimulus fails export-dependent savings glut countries
• Japan now accepts huge budget deficits and negative interest rates
• EA needs broad structural reform to avoid Japan’s deep malaise

2. India Monthly Report: Jan’19 – Feb’19

Indian indices were the least performing among the select global indices with S&P BSE Sensex and Nifty 50 generating returns of 0.01% and negative 0.73% in domestic terms respectively. In Dollar terms they fell by 2.18% and 2.89% respectively. Indian Rupee witnessed deprecation of 2.18% during the period and fell from 69.40 USD/ INR to 70.95 USD/ INR. Among the select indices, Hang Seng was the best performer with dollar returns of 10.89% and among the select currencies, South African Rand was the best performing with an appreciation of 7.88%.

Among the Sectoral indices, Nifty Pharma was the best performing with returns of 4.91% in dollar terms and Nifty Realty was the worst performing with falling by 17.41%

3. India: Outlook on Capex Recovery Continues to Brighten

As per the CSO, gross fixed capital formation (GFCF) has grown above nominal GDP for 4 consecutive quarters now (latest data for September quarter). This, after GFCF grew slower than nominal GDP in 20 of the preceding 21 quarters. Capex cycle is thus picking up. And there are good reasons to expect this continue in the foreseeable future. Capacity utilisation is increasing in a broad-based manner. Liquidity conditions have improved, and cost of capital is likely to fall. Corporate profit cycle is no longer a headwind, although it is not yet a strong tailwind. The nascent signs of a recovery in the capex cycle are thus likely to get stronger in the months ahead.

4. BoJ Steps in as ECB Exits

By Shweta Singh, Managing Director Global Macro

• Global central banks turning dovish
• But BoJ maybe the only DM central bank ‘properly’ injecting liquidity this year
• European debt – including Italian BTPs – could benefit the most  

5. Fed Remains Unfazed by Recession Doomsayers, but Political Challenges Lurk on the Horizon

Following the release of the December US retail sales report, recession doomsayers have become much more vocal and their calls will invariably become louder as economic deceleration unfolds.

There are currently no major signs of excesses in important sectors of the US economy to unhinge the flat Phillips Curve, while structural shifts over time have made forecasting inflexion points in the business cycle much more difficult.

Meanwhile, although the Federal Open Market Committee (FOMC) is concerned about externally-sourced headwinds, members seem content with the current behaviour of the domestic economy, at least for the time being.

The Trump Administration will be keen to ease fiscal policy again to prevent a 2020 recession if growth slows significantly this year, while the Democrats would face a tricky task obstructing if there was a sizeable infrastructure spending component included as part of the measures.

Meanwhile, some Democratic politicians have been exploring deploying Modern Monetary Theory to facilitate the greater provision of free government services, but financial markets would baulk at this prospect, particularly bond market vigilantes.

The behaviour of the bond market vigilantes have highlighted the problems facing the Fed in trying to raise the policy rate significantly above zero, but they have at least provided the FOMC with an interest rate buffer to counter economic slowdown, something conspicuously absent in the Eurozone and Japan.