September will be a busy month for investors given that nearly thirty main central bank meetings are scheduled this month. Since the Bank of England’s (BoE) last policy announcement, the total monthly amount in official global Quantitative Easing (QE) has reached almost 200 billion dollars, which corresponds to the cost of the war in Syria since 2011, according to official estimates. More than ever, central banks are the main actors of financial markets. In this context, the attention of investors will logically turn to the European Central Bank’s (ECB) meeting on September 8 and to the Bank of Japan (BoJ) and the Federal Reserve (FED) meetings on September 21.
Wait and Pray for the BoJ
Market expectations are low depending upon the BoJ’s next move. The timid measures unveiled in July prove that the central bank does not have much room left to act in the current monetary policy framework. The BoJ is already buying more than 90 percent of the country’s newly issued debt and it owns around 55 percent of the Japanese ETF. The next step for the central bank will depend upon when the report on the impact of the current monetary policy will be submitted to the government, which should happen by the beginning of October. Until then, no new measures are expected by the BoJ. The report could, however, open the door for implementing “helicopter money” in the medium or long term. It could consist of, for instance issuing sovereign perpetual bonds with no maturity dates that could be purchased by the central bank. This idea has especially been advanced by Ben Bernanke, former chairman of the FED.
Arguments for Rate hike in the U.S.
Expectations are, however, high concerning the FED meeting. Several FOMC members have confirmed in recent weeks that a rate hike is still possible in September, despite the disappointing GDP figure for the second quarter. The latest economic indicators for the labor market are quite good, with almost 255,000 new jobs created in July which is well-above the consensus (180,000). In addition, the increase of nearly 0.3 percent of the average hourly earnings makes a strong case for hiking rates next month. Finally, the Atlanta FED “GDPNow” forecast points to an economic growth of 3.7 percent in the third quarter, versus 3.6 percent according to the initial estimation. It is obvious that the Fed will certainly wait for more data concerning the months of July and August in order to have a more complete picture of the U.S. economy. However, it is clear that if the Fed still wants to raise rates this year, the best window of opportunity is September.
No Time for the ECB to Rest on its Laurels
Finally, the market also expects an evolution of the ECB monetary policy. Governor Mario Draghi has hinted that the ECB will conduct a review of the impact of monetary policy in September, which will likely take into consideration the effect of the corporate bond buying program that was launched two months ago. There is a 100 percent chance that it will open the door to further easing. For September, the most likely scenario is that the ECB extends QE by March 2007 to six or nine months, but we cannot rule out further deposit rate cuts. In the longer term, it is very likely that the amount of corporate bond purchase will be increased in order to lower further borrowing and investment costs for large companies. This is one of the most logical evolutions of monetary policy. Besides, this is what the BoE has decided to do by buying corporate bonds up to 10 billion pounds per month.
Long rumored and oft-discussed, QE infinity is a reality. The likely interest rate hike that the FED may decide in September will not fundamentally change anything. Global credit conditions are the loosest they have ever been. The average yield on global government bonds, all maturities included, is currently around 0.7 percent, which is well-below its 10-year average of 2.30 percent. The downward trend will probably continue for a few more years, which also means more debt in the meantime. As an economist, I am certain that there won’t be a smooth exit from global QE. The day it happens (if it ever does), investors will be facing the biggest bear market in the history of financial markets.