Webinar Replay

The Global Edge: What Will Monetary Policy Easing Look Like?

May 30, 2024

During this Global Edge Office Hours replay, Kevin Flanagan, Jeff Weniger, Aneeka Gupta and Nitesh Shah discuss where global monetary policy sits as we approach mid-year. In addition, they focus on what investors should expect from global central banks for the remainder of 2024 and ‘big’ changes in store.

This discussion can be supplemented with the latest Global Edge publication.

This webinar was simulcast on Zoom.

Irene:

Hi everyone, thank you for joining WisdomTree's Global Edge Office Hours, What Will Monetary Policy Easing Look Like? Where you'll hear from Kevin Flanagan, WisdomTree's Head of Fixed Income Strategy. Jeff Weniger, our Head of Equity Strategy, Aneeka Gupta, Director of Macroeconomic Research, and Nitesh Shah, Head of Commodities and Macroeconomic Research.

 

Kevin Flanagan:

Thanks, Irene. Good morning everybody in the US and for our European audience, it's good afternoon. It's great to be with you. And we thought what better discussion to have, especially as we're awaiting the ECB and the Fed policy meetings in June to talk about what everybody's talking about on either side of the Atlantic. And that's monetary policy. Here we are for essentially the third year in a row where the dominant theme in the markets is what is the Fed going to do? What is the ECB going to do, the Bank of England? You get the gist in terms of the developed market central banks. And here we have it. Finally, I think we're in a position where the pivot that everyone used to love to talk about could become reality.

Now what's interesting is that the Fed has typically been the leader of the pack. That may not be the case this time around. And I think what we may find out is that this is not essentially one size fits all in terms of the central banks and that's why we've seen volatility in the markets both here in the US, I'm speaking specifically more on the fixed-income side now and also in the eurozone as well. So this could very well continue. We'll see how it goes. What does easing look like? That's what this discussion is all about. We've talked about it from a rate perspective in terms of the opening here, the introduction, but we also have central bank balance sheets on part of the equation as well.

So as we get started here, we're going to pass it along to Jeff and Natasha and Aneeka. But Irene, let's start the ball rolling. Let's set the table here with the first two polling questions to get all of your pulse on this. What are you feeling with respect to central bank policy? Where are we going as we move forward here, as we get closer to the second half of the year? So Jeff, let me turn it over to you first for some opening comments.

 

Jeff Weniger:

Sure. And you can usually on these calls get a pretty good feel for street consensus because there's a large sample size here and it is a global audience. So that'll be intriguing for playing your own criminology. And it does look like at least recently, there's this decent chance that you could get this ECB cut and then the Fed is on pause and then that ends up really pushing the envelope on a lot of this intense dollar strength. It hasn't been so intense in the dollar relative to Euro, much more so dollar relative to yen, and that's the one that immediately comes to mind.

Now, let me get in the screen share here to show everyone what we published in what will be a 50 plus minute call. We published this recently. You can find this on the US and the UK and Continental European websites. This is a May 2024 publication.

In here, we're talking central banks, but of course we also talk some of the other matters at hand and I'll be able to scroll through as our colleagues speak to these various areas. We had been pointing out some of the things that were at least... As of a week or two ago seemed to be on, but there's been some reversal in some of them. Energy, for example. Coming off the boil. Just of late energy had been piping hot, but maybe now is that indicating at least sector-wise that some of the inflation fears of let's say April subside a little bit in May.

We will ask Aneeka and Nitesh that question because cause those are our resident commodity experts. For the Americans on this call, our UK business, we have some of the best commodities people in the industry. So with that, let me tee you up here Nitesh and ask you about that question because a lot of what is playing into ECB calculus, Fed calculus, that type of thing is this question of the crude oil price. Give us some of the criminology on that.

 

Nitesh Shah:

Yeah, so we have had a little bit of a pullback in crude oil prices over the last few months. We did touch $90 a barrel just over a month ago, but now we're hovering around the $85 range for Brent and a little lower than that for WTI. And what's really happening is is that some of the heightened geopolitical risks that were being priced into our prices have come off a little bit. There's some concerns around demand weakness and there's also concerns that supply is actually increasing. The oil markets are dominated by the Organization of the Petroleum Exporting Countries. Those countries with their partners control about 45% of global supply of oil. Some of those members haven't been complying with their quotas particularly well and so that has driven supply a bit higher. And some of the non-OPEC countries like the USA, which is now the largest oil producing the world, Brazil, Guyana, they are increasing production as well as OPEC is supposed to be keeping the market tight.

However, with that little bit of weakness in prices, we could see OPEC actually coming back and taking some bold action. OPEC has already slapped the wrists of the foul players in terms of non-compliance. And so Iraq and Kazakhstan have had to submit a plan to get back on track and cut back on production even more to compensate for what they overproduced previously. And this Sunday, OPEC meet again for their next policy decision and they've got to decide on what production levels to continue from June onwards. And our expectation is they'll roll for the current cuts that they've got in place. Eight of the OPEC members are voluntarily cutting back by 2.2 million barrels per day, and we expect that to continue going forward. So we could see a little bit of range trading actually in oil for the rest of the year just because OPEC is keeping things tight despite the demand weakness. Will that contribute to new source of inflation? If it's range trading, it shouldn't be that much more inflationary, but it doesn't provide that necessarily deflationary aspect that maybe central banks are looking for at this point.

 

Kevin Flanagan:

So Aneeka, I wanted to bring you into the conversation here. I'm sure we'll be getting these poll results in any second now. Aha. See, Irene, she knew we'd be getting those poll results in any second. And I wanted you to comment specifically on the first question back to what I said in the intro about the Fed perhaps not being the leader of the pack this time around on the rate-cutting side. And we have a ECB meeting next week, if I'm not mistaken, which is going to be a week before the next Fed meeting. So I think just based upon the calendar, perhaps we could be discussing the ECB cutting rates before the Fed, and certainly I'll get to the Fed question number two, but Aneeka tackle question number one for us. Give us a sense, what is the ECB thinking? There's been, especially here in the US, we're seeing them, a lot of headlines on the Bloombergs of the world, a lot of ECB participants out there discussing their thoughts about rate cuts. What are our thoughts here at WisdomTree?

 

Jeff Weniger:

And I'll try to throw some ECB screen shares on there, Aneeka, depending on what I hear you say. Go ahead.

 

Aneeka Gupta:

Thanks so much, Jeff. Yeah, Kevin, just looking at the poll results, I think we are looking at about 55%. So clients remain on the border regarding whether the Fed and the ECB will diverge quite significantly this year. And I think we have 45% polling that the ECB will lead the Fed in this rate-cutting cycle. Now our view has been coming into 2024 that the ECB would be amongst the first across the G7 to go ahead with those rate cuts. And that's because the eurozone is facing anemic growth. And at the same time, we are seeing a meaningful deceleration take place in the inflation data.

Now, the biggest bottleneck for the ECB was the acceleration in wage growth. And as we were approaching the end of Q1, there was a clear sign that wage growth wasn't accelerating at the same grade as it was back in 2023. And so that was enough of a sign that the ECB will go ahead with their first rate cut next week in June. And I think what we've been seeing from recent talk by a lot of the ECB members is that they are going to remain extremely data-dependent given the fluctuation that we have seen in inflation. Recent blog posts by the ECB has also suggested that they do... It's a bit confusing because they do expect wage growth to remain high, but they also at the same time expected to decelerate over the course of 2024. And I think that puts us on course to see about three rate cuts in 2024 with the first one coming to fruition next week in June and the following two in September and December.

 

Kevin Flanagan:

Yeah, it's fascinating to look at how the expectations have changed here in the US with respect to the Fed. And looking at question number two, which I'm going to address in a second, but Aneeka, I'm not letting you off the hook yet. Have there been the same kind of changing rate cut expectations in the eurozone as we've seen here in the Fed? There was a far more aggressive rate-cutting expectation coming into the new year here in the US. Has that been a similar scenario in the eurozone or this is like what was expected that take the first part of the year off and then perhaps mid-year is when you would get the first rate cut?

 

Aneeka Gupta:

No, absolutely not, we-

 

Jeff Weniger:

Hold on one second, Aneeka, the chart that will be presented on the screen here, just as... Something came to my mind, it's a chart of the DAX. I have a five-year chart of the DAX. Go ahead, Aneeka.

 

Aneeka Gupta:

Nice. Yeah, similar to the US, we saw a very similar pattern where we went from extreme optimism on rate cut expectations by the ECB at the start of the year to then a bit of pessimism and a bit of moderation in those expectations. So we've gone from nearly six rate cut expectations at the start of 2024 to now the market's expecting about three weight cuts to pan out in the second half of 2024.

 

Kevin Flanagan:

So let me address question number two here, like the 800-pound gorilla in the room with respect to the Fed. And we've talked about that. Much like Aneeka, you just said, six rate cuts, 150 basis points beginning in March, and now when you're looking at the Fed, if you're looking at implied probabilities, the expectation is even no longer September. I was looking at the charts just yesterday and the expectation now is more for November for the Fed to move and perhaps we get two, which will be interesting because at this Fed meeting coming up in June, we get the Summary of Economic Projections. And for those of you not familiar, every other meeting, the Fed provides these and with those SEPs, as what they're known as, comes to dot plot, which everybody focuses on. In other words, the Fed's own forecast for where they think Fed funds is going to be, how many increases, cuts, or neither of the above.

And so we're at three right now with the dot plot, but if you look a lot of the Fed speak we've had lately, and a lot of it has been from voting members, you really get a sense that dot plot is at a minimum going to be cut to two. And I find it really interesting looking at this second polling question to see that, if my eyesight is good here, talking about one third of you are now expecting no cut in 2024 I think about just a dramatic shift in expectations that we've been seeing here. You had on the tape today Atlanta Fed president Bostic, who is a voting member saying if the data come in, perhaps we could see something in Q4. And Aneeka, it goes exactly back to what you're saying.

What essentially could be maybe a little bit of divergence between when the ECB starts versus the Fed, both are extraordinarily going to be data-dependent. And I think if there's anything to hammer home for our viewing audience out there, it is that, that this data dependency and like hanging on the monthly labor market data, the monthly inflation reports, consumer spending, they're all going to be very important numbers for the markets to try to determine where the ECB, where the Fed's going to go. So Aneeka and I have been dominating the discussion up to this point. Jeff, Nitesh, I want to bring you both back in because we've talked a lot about the ECB, we've talked a lot about the Fed here, but there's two other central banks I think I want to give a little love to. What about Bank of Japan? What about what's going on with the PBOC? I think these are two other areas that we need to look at and address. So Jeff, Nitesh have at it.

 

Jeff Weniger:

And now what I'm realizing as you did that, I wanted to pull up the 10-year JGB because we were talking about this the other day, 10-year Japanese government bond. It had been 103 and then last night I was watching Bloomberg right before I went to bed. It was 107. It looks like we're at 106 on the 10-year JGB. Give me a second to pull this over to this screen. Kevin, I've been very impressed with my screen-sharing abilities this morning. I've been throwing the DAX French stocks up there, and so forth. Let me know if you do not see this here. It looks like we're about 106 here on a 10-year JGB. This has been particularly intriguing because like Dow 10,000, Dow 40,000, some of these things that make the rounds and it's ridiculousness. We are animals and animals are psychologically wed to round numbers and 1.0 on any piece of paper was psychologically critical. It's cut up here through this.

I saw 107 the other day. I don't know what the height ended up being, but 106. And this has been particularly important here, I'll have to pull up a yen chart. I believe we're at 157, at least that's where it has been bopping around of late. What we have said, and this is not inconsistent with the street, I don't think I'm going to be making a big revelation here, that it appears that the Ministry of Finance has a line in the sand at 160 for the yen relative to the dollar. It's almost. When you talk about these central bank's credibility, it almost became a little bit of a joke or maybe even a lot of a joke because we were told there was a line in the sand at 150 and then we were told there was a line in the sand at 152. It was every two yen and it got up to one 60.

And then that's when they came in late April, and we wrote about it in the Global Edge, I'll get to the screen share there, and intervened. And it was pretty bold. And what we have as a result is a ton of yen volatility. And this is one of the things that I think is notable if you're a Brit, if you're an Italian, if you're an American, whoever you may be on this call, is the extent that you are in Japanese equities. We have elevated vol in that currency right now because you know that once it hits 160 relative to the dollar, that we might get an intervention. And that last intervention sent it quickly to something like one-fifty-three before we settled here in the higher 150s. Now, here's the deal, Kevin, tell me what's the quote on a 10-year this morning in the US, 4.55 or so?

 

Kevin Flanagan:

Yep.

 

Jeff Weniger:

4.55?

 

Kevin Flanagan:

Yes sir.

 

Jeff Weniger:

I nailed it? Okay, 4.55. One of the things that I've been noticing in currency circles is this notion of, "Oh hey, now you can actually get a little bit more yield in Japan now that it is 106." But one of the things that's notable is that to the extent that they're backing this up, they've been backing up yields the world over. And if you back up the envelope this, we call it 4.55 and call it one, there is still that 365 basis points gap. And this is a similar gap between what you might see in let's say British money markets and Japanese money markets, Canadian money markets and Japanese money markets. It's several 100 basis points. And that's going to be...

As I've been saying for some time, the onus is on the yen to create its own bull case. The only bull case for the yen right now is that it has gotten so notably cheap. And I do want to speak to that because we do want to make sure that we hear both sides of this. There is a competitiveness set up for Japan on the labor front and the cost of operating a business front that I'll get to if the conversation flows that way. Let me see where Nitesh wants to pick up and we'll see if the conversation can come back to Japan.

Nitesh Shah:

Yeah, thanks for that, Jeff. Yeah, when it comes to the People's Bank of China, it's clear that China is struggling from a growth standpoint. Its last GDP print was good, but maybe a little too good if you look at all the ancillary indicators that look at the same aspects in terms of economic activity.

 

Kevin Flanagan:

Nitesh, are you saying that they're cooking the books over there in China? What's going on?

 

Nitesh Shah:

There is that sort of... The Li Keqiang index, which looks at proxies for economic growth in China. So obviously that premier passed away last year, but he made a very important point. The GDP numbers he said are man-made and so you need to look at other indicators. And then when you look at other indicators...put one in the Global Edge based on his of suggestions, looking at freight volumes, looking at monetary indicators, looking at electricity consumption, all those sort of things, do point towards slightly weaker growth than what the GDP numbers are pointing to. But...than that, if you look at the last data on financing to the real economy, the total social financing numbers. So yeah, we've got the chart I think on page number 22 comparing the GDP numbers.

 

Jeff Weniger:

I was doing a control F on...for China or Chinese right here.

 

Nitesh Shah:

Yeah, so there you go. So you've got the GDP number, that light blue line looking a lot stronger than the dark blue line on the last few prints. That does indicate that there is underlying weakness. And we've known for a while that China's real estate implosion is hurting and it's hurting because in prior cycles China had been heavily dependent on real estate markets.

Now, we also know that the total social financing that collapsed last month, it went into negative numbers. So one of the worst prints ever. Typically, policymakers try to make up for that and try to boost credit and re-engage in stimulus activity, but the PBOC's hands are somewhat tied at the moment because it can't really do really broad brush monetary loosening because that would weaken the yuan significantly, especially in an environment where the Fed isn't cutting yet. So the PBOC, I think is on a bit of a holding pattern. It's waiting for the Fed to make some moves, start doing its cuts, and then the PBOC will be able to cut towards... I assume that'll be towards the end of this year once [inaudible 00:23:00] Fed rate cuts come into place. But they're doing lots of other micro piecemeal stimulus activity. I think each and every one of those stimulus activities are relatively small and not that headline worthy, but when you aggregate them together, they are quite meaningful. But the message does get a little bit lost because it is somewhat fragmented.

 

Kevin Flanagan:

So Aneeka, I want to come back to you. So we were talking about this and this is something within the Global Edge. I know that we addressed from the Fed balance sheet part of the equation, and I'm going to talk about that first, but can you walk us through what are we seeing with respect to the ECB's balance sheet? Now, the Fed just tapered their QT at the last meeting or made the announcement, which is going to begin in June. And I'll talk about that in a second. But give us a sense in Europe, what's going on with the ECB's balance sheet? Are we seeing similar moves there as well as what the Fed is doing?

 

Aneeka Gupta:

So we are seeing a meaningful decline in the ECB's balance sheet. Essentially, they're likely to hold assets worth a combined 4.6 trillion under the asset purchase programme and the pandemic emergency purchase programme. The APP, which is the asset purchase programme, is only going to be unwound very, very gradually. And we're likely to see the portfolio shrink further at a very slow pace. So we're looking at something like €0.3 trillion until the end of 2024. So that's essentially where we're like. Any maturing bonds under the APP, the asset purchase programme, they're unlikely to be reinvested. That's the new change. And we're likely to see a reduction in the pandemic emergency purchasing programme, and that's going to be to the tune of around €7.5 billion per month in the second half of 2024. And then they're going to stop the reinvestment altogether from that point.

 

Kevin Flanagan:

Right. So Jeff, if you could go back to the Global Edge piece and let me address the Fed balance sheet. We have a nice little graph, I believe, if I'm not mistaken in there on that topic. As you're getting to that-

 

Jeff Weniger:

You got to show me where.

 

Kevin Flanagan:

It's in the beginning.

 

Jeff Weniger:

At the very beginning. Okay.

 

Kevin Flanagan:

Towards the top. There you go.

 

Jeff Weniger:

Did I pass it?

 

Kevin Flanagan:

There it is right there. For those of you who won a little Fed 101, if you go to the balance sheet, it comes out every week. So it's not as if this is some behind the scenes type of numbers for the Fed. And what we wanted to show you is just some perspective of the Fed's balance sheet, where we were before the financial crisis on the left to where we are right around now. The numbers haven't changed all that much from when we published this piece, but obviously the Fed making the announcement that they were going to lessen the amount of roll off would be something that we did discuss as well.

But as you can see, you had this below 1 trillion total. And as you could see, the blue line, mortgage-backed securities didn't exist. They were at zero before the financial crisis. So the Fed always held treasuries before 2007. That's what the securities were on the Fed's balance sheet, just treasuries. Now, there are some federal agency securities now, but it's really, I would say, not statistically significant at this stage of the game.

And the reason why I'm bringing that out, because you can see where we went, we ended up going to about 4.25 trillion after the financial crisis and the Great Recession. And as you can see, it was a combination of treasuries and mortgage backs and things held steady during the period from say 2014-ish or so to right around COVID. And then you can see the Fed doubled the size of their balance sheet in a far less period of time with both treasuries and mortgage backs carrying the workload.

So what we're at now with respect to what the Fed wants to do is they want to try and get back to just holding treasuries, back to that level all the way to the left where there were no blue lines on a graph, no mortgage-backed securities. But as you can see, that's going to take time. You're talking about something a little bit under 7 trillion in total, 4.5 trillion for treasuries, about 2.4 trillion for mortgage backs, and they're reducing mortgage backs at a pace or... When I say reducing, it's like exactly what Aneeka was saying, they're not reinvesting. So QT in this sense has not been outright selling of securities, it's just not reinvesting what's been rolling [inaudible 00:28:12] in full, either it's treasuries or mortgage backs.

So what they did was they cut back on the amount of the non-reinvestment for treasuries, but they're keeping mortgage backs at the same pace. The reason being their ultimate goal will be just to get back to treasuries. But as you can see, at 2.4 trillion rolling off 35 billion per month, it's going to take a long time. I don't have my Apple phone calculator out with me at this stage of the game, but let's just say it's a multi-year endeavor that this is not going to happen overnight by any stretch of the imagination. But the Fed's balance sheet