Money-printing slowdown leaves governments to take up stimulus slack
Stimulus explosion lifts stock markets, staunches economic bleeding and feeds hopes of inflation pick-up in developed world
Money-printing at the world’s biggest central banks has slowed to a tenth of the rate see
n in April, putting the onus on governments to spend more as a resurgent Covid-19 pandemic threatens to again freeze economic activity.
This year’s stimulus explosion from governments and central banks lifted stock markets, staunched economic bleeding caused by pandemic-linked shutdowns and fed hopes of an inflation pick-up in the developed world.
Investors may be dismayed, therefore, by signs central banks are slowing the stimulus pace, just as the United States heads into elections without signing off a much-needed fiscal package and Europe returns to lockdowns that will throttle economic recovery and jobs.
“The reality is that with the unemployment that seems to be developing, fiscal stimulus will be required,” said Oliver Boulind, senior fixed-income portfolio manager at HSBC Asset Management.
But like most investors interviewed for this article, Boulind is confident past crises will have convinced policymakers to keep the taps open for longer, creating that sweet spot of coordinated fiscal and monetary response.
The European Central Bank on Thursday left policy unchanged while providing the clearest hint yet that more stimulus was on its way. But underlying the need for more government support Christine Lagarde, the ECB president, said an “ambitious coordinated fiscal stance” remained “critical”.
The Bank of Japan on Thursday signalled that it had delivered enough stimulus for the time being.
The ECB, the US Federal Reserve, Bank of England and Bank of Japan, grew their balance sheets by just $125 billion last month, Reuters analysts shows.
That was a third of August levels of $363 billion, and well off April’s $1.89 trillion peak.
The People’s Bank of China, the other central banking behemoth, isn’t stepping up significantly either; its balance sheet, measured as a percentage of gross domestic product, is projected to end 2020 at 35 per cent of GDP, less than the 38 per cent at end-2019.
Pictet Asset Management forecasts it will decrease to around 30 per cent of GDP by end-2021.
This picture of “decelerating monetary stimulus” will be a source of concern over coming months, according to Europe’s biggest asset manager. It “may cause a sort of taper tantrum in markets and a possible re-pricing of inflation expectations,” Pascal Blanque, Group CIO at Amundi, and Vincent Mortier, Deputy Group CIO, wrote this week.
Governments stepping up?
Still, total stimulus from the Big Four plus China will come in at $8 trillion for 2020, estimates Steve Donza, senior macro strategist at Pictet Asset Management, far exceeding the $1.4 trillion annual average of the post-2008 years.
So will governments step up?
The International Monetary Fund estimates $12 trillion in government stimulus has been unveiled globally in response to the pandemic. Governments must “ensure fiscal support is not withdrawn too rapidly,” IMF researchers urged this month.
A presidential election win for Democratic challenger Joe Biden on Nov. 3 should see a new stimulus package passed, swelling fiscal support into 2021. And many governments including Germany and Britain are launching new schemes to lessen the hit from another Covid-19 wave. The IMF on Thursday told Britain it could afford to ramp up its spending push.
Jeroen Blokland, portfolio manager at Robeco, noted real US personal incomes were 11 per cent below pre-pandemic levels and would drop further if more spending support did not follow.
“Given the fact that low-wage workers are [again] bearing the brunt of the Covid burden, the case for more fiscal stimulus is pretty obvious,” he added.
Punchbowl still there
Markets appear confident more stimulus is forthcoming.
Pictet’s Donzaclculates U.S. stocks are five per cent above levels current liquidity support would imply.
Factoring in his projections for $3 trillion in asset purchases by the five big central banks in 2021, fair value for the S&P 500 index would be 3,425 points. But at Monday’s level of 3,400 it had already priced in 11 months worth of additional Fed purchases of $120 billion a month.
“The punchbowl is not going away but the marginal expected gains [from more stimulus] are fading away,” he said.
All that has ensured there are no real signs of market stress, despite stock market falls and a rise in volatility. A Goldman Sachs financial conditions index dropped recently to its lowest levels of 2020, indicating conditions remain loose.
UBP portfolio manager Mohammed Kazmi has offloaded some positions, noting policymakers’ move from a “regime of full-on monetary and fiscal surprises” to a more “reactive” stance.
But he expects them to step in should economies struggle.
“A theme that plays out in 2021 will be to see how much stimulus is provided,” he said. “I think they have learned their lesson [from the last crisis].”
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