Monetary Policy

It was a dramatic night last night as the Fed cut interest rates by 25bps, the first cut since December 2008, along with the premature ending to the balance sheet run off – however markets hardly moved!

Over the past few weeks there has been a noticeable increase in high yield new issuance, bringing a welcome flurry of activity to what has so far been a relatively benign year.

The euro area bank lending survey for the second quarter of 2019, released yesterday, suggests European banks are becoming more cautious and beginning to tighten lending criteria to various parts of the economy.

The dust is slowly settling after Wednesday’s FOMC rate decision, and more importantly the following press conference where Chairman Jerome Powell literally talked the market down.

Bloomberg reported on Monday that since the European Central Bank started its Corporate Sector Purchase Program (CSPP) in June 2016, it has purchased €177bn of investment grade rated corporate bonds. Initially, as expected, spreads tightened rapidly, but since the first quarter of 2018, they have been gradually widening back out to pre-CSPP levels.

We have been discussing for a while what the quantifiable impacts of Italy’s populist government have been for the country’s economy.

As expected, the EBA 2018 stress tests, which were widely reported on yesterday did not have much of an impact on markets generally, although it’s worth looking at some of the stresses.

A volatile last couple of weeks have certainly kept fixed income investors fastened firmly in their seats, with comments from Federal Reserve chairman Jerome Powell suggesting US monetary policy was “nowhere near neutrality” sending shock waves through global rates, credit and equity markets.

This morning the much anticipated Q3 2018 Credit Conditions Survey was released by the Bank of England.

It may come as a surprise to some that the country currently experiencing the fastest pace of monetary tightening across developed nations is in Europe, where the main refinancing rate is well and truly anchored at -0.40%.

This morning we arrived to the news that the Italian government was preparing a budget that had a deficit of 2.4%.

Having listened carefully to the FOMC news conference last night, the message to us was clear – the Fed is pushing ahead with its normalisation of rates and the gradual shrinking of its balance sheet.