Covered bond buying is not the start of targeted QE: At the last press conference, the ECB surprised us and the markets by announcing that it would start buying about €60 billion of covered bonds. Many observers initially viewed this as the start of targeted quantitative easing (QE) by the ECB. We disagree.
Stephen Roach, Head Economist, Morgan Stanley
Weekly Bank Research Center 05-18-09
Not Quite QE at the ECB
Stephen Roach, Head Economist, Morgan Stanley
Covered bond buying is not the start of targeted QE: At the last press conference, the ECB surprised us and the markets by announcing that it would start buying about €60 billion of covered bonds. Many observers initially viewed this as the start of targeted quantitative easing (QE) by the ECB. We disagree. It seems to us that the main aim of this policy initiative is not to ‘pump liquidity’ into the market or to indeed ‘print money’. In our view, the ECB has been in (passive) quantitative easing mode ever since it started to expand its balance sheet. At this stage, however, the ECB seems to judge the amount of liquidity the banking system is taking down as sufficient and does not see a need to force additional liquidity into the system.
More Champagne Than Funeral Feast
Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
The global economy is still aiming for a recovery after the longest period of doom and gloom in living market memory. So far, OECD’s global leading indicator hasn’t shown sure signs that the world is heading for happier days but the pace of deterioration has truly slowed and we believe the next reading will show improvement in the absolute index and not just an upswing in the change in the index. Even though PMIs are still indicating clear contraction going forward, they are continuing up in most areas and in China outlook for manufacturing production is pointing towards expansion again.
Trading Blows
Steve Chan, Economist, TD Bank Financial Group
Not only is the pace of U.S. consumer spending likely be weaker than the past, but it is likely to be less importdependent, as well. This is crucial for the global rebalancing underway. Rewinding several years, the public debate centered on the massive U.S. current account deficit that sat at 6.5% of GDP at the end of 2005. With U.S. consumers pulling back, the U.S. trade deficit has been cut in half in only six months. As a result – and in spite of the contraction in the overall economy – the U.S. current account deficit was likely just 2.4% in the first quarter of 2009.
Bond Yields, SWAPS Fall on Downbeat BoE Report
Trevor Williams, Chief Economist at Lloyds TSB Financial Markets
The dollar weakened against its major counterparts this week following a series of disappointing US economic data and a rebound in equity markets late in the week. Sterling managed to reverse early losses sparked by a downbeat BoE quarterly Inflation Report and ended the week a tad firmer against the dollar and the euro at 1.5276 and 1.1224, respectively. Two succesful gilt auctions also helped to reassure concerns about overseas support for the pound. The Swiss franc was fairly range-bound against the euro, even though the SNB reiterated its support for currency depreciation in order to support the economy.
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Compiled by: David Song, Currency Analyst
