Macro Commentary
No shirt, no shoes, no service. Earlier this week, the release of a disappointing survey of how strong the service component of the US economy is doing added to the recent list of tepid reports ranging from weak job growth to a contraction in factory activity and slow auto sales. None of the data points suggest the US economy is falling near recession, but expectations for US GDP are softening to the 1.5% – 2.0% range for 2016. Meanwhile the US is among the strongest in the global economy. Economic activity in the Euro-area was up an estimated 0.3% in the second quarter. The estimate for GDP growth in Japan for the same period was revised up to a whopping 0.7% versus 0.3% in the first guess. It’s little wonder why, with so much of the world’s economy being governed in a negative interest rate environment, there are questions being asked as to how much more monetary policy can do.
The European Central Bank (ECB) announced this week no changes to either their benchmark rate or their current securities purchasing program but used the press conference to suggest that they can always do more. That said, their self-imposed rules of what bonds qualify suggest there is a limited supply available in the market which some estimate to be only six-months’ worth. That coincides nicely with the March 2017 date ECB President Mario Draghi has suggested in the past. Granted, they can always change their own rules to increase the available supply of securities in the secondary market to buy but it is time to look to other mechanisms. Thus, the building references to fiscal policy. Federal Reserve Chairwoman Janet Yellen referenced it in her Jackson Hole speech in late August. The G-20 meeting talked about it in early September and ECB President Mario Draghi mentioned it in his talk this week. Over time, it is possible this trajectory takes us to the next big policy invention: fiscal projects financed by government bond issuance which is then bought by a central bank. What happens when there are not enough bonds to buy? Issue more. Is this the idea that succeeds in cooking up inflation where other ideas have failed? Regardless, rhetoric continues to indicate that policymakers are trying to serve up economic growth on a plate and convince the markets that the kitchen is still open.