MACRO COMMENTARY
It’s not all negative out there. The Bank of Japan (BoJ) gave a boost to the market’s animal spirits with an unanticipated cut to the deposit rate on excess cash held above required reserves to a negative interest rate. The Japanese yen fell as stock prices rose in Japan and across Asia which then flowed into Europe and the US. Again, many central banks are willing to show that they intend to put a little “extra” into their extraordinary measures to support economic recovery. Alas, there is still the concept of diminishing marginal returns. Japan has been an example where they have taken their monetary policy experiment to an extreme and still have little economic growth (or inflation) to show for it.
Meanwhile, the initial estimate for US economic growth in Q4 came in at +0.7%, below expectations (+0.8%) and a slowdown from Q3 (+2.0%). This slight disappoint in economic growth caused a bit of excitement in the equity markets. Why? Traders may be figuring that the Fed will surely not act too hastily with their next interest rate increase. After all, monetary tightening really started when QE began tapering so the bump of 0.25% to the Fed Funds rate last December was part of an existing trend and not the start of it. Easing by other global central banks makes our policy look all that much tighter on a relative basis. With the European Central Bank (ECB) President Mario Draghi also setting expectations for more stimulus in March, perhaps the rest of the world’s central bankers are doing Yellen’s work for her.