Perspectives Blog

Inflation consternation

Martin Harvey, Fund Manager, Threadneedle International Ltd | November 5, 2013

An inflation slowdown in the Eurozone has prompted calls for central bank action, as reduced liquidity coupled with euro strength threatens the recovery. The expectation of imminent easing by the ECB should assert downside pressure on yields, and lead Bunds to outperform other markets. It is uncertain whether the ECB will act this week; we think any intervention is likely to be verbal, at least at first. October inflation in the eurozone slowe…

The Fed’s decision tree

Zach Pandl, Portfolio Manager and Strategist | October 8, 2013

The outlook for quantitative easing remains difficult to gauge. We see decent odds that tapering begins in the not-too-distant future—primarily because we expect firm growth. If Fed officials were to revise their views on the costs and/or efficacy of QE, they may attempt to lean harder on the forward guidance tool. Last week the debate about quantitative easing (QE) was quickly overshadowed by the fiscal circus in Washington. The economic impa…

U.S. rates — The Draghi floor

Zach Pandl, Portfolio Manager and Strategist | September 8, 2014

…ding it—can be thought of as revealing a “Draghi Floor.” The only substantive change between the August and September ECB meetings was that longer term inflation expectations fell sharply, and this shift prompted a meaningful easing from the governing council. Thus, investors should infer the existence of a “Draghi Floor” on inflation expectations—struck at around 2.1% for 5y5y inflation swaps (Exhibit 1). Below this level the ECB will act. Exhib…

Does Japan’s sell-off present buying opportunities?

Daisuke Nomoto, Senior Portfolio Manager | February 10, 2014

What’s behind the Japanese stock market’s recent correction? What’s ahead for Japan’s stock market, currency and government policy? Why the risk/reward tradeoff looks attractive at current price levels Abenomics has already had a bigger impact on the Japanese economy and financial assets than the failed attempt at quantitative easing between 2001 and 2006 (see chart). Inflation has moved back into positive territory, and household income is ri…

Could tapering be good for stocks?

Fred Copper, Senior Portfolio Manager | December 16, 2013

Despite all the discussion surrounding quantitative easing (QE), there has been little theoretical justification for the link between QE and equity prices. Europe provides a glaring counter-example of the impact of central bank policy on financial markets. Once the psychic umbilical cord of QE is cut (tapered), the market may actually be cheered by the end of what has always been perceived as a temporary and extreme form of life support. Few i…

U.S. rates – Forward guidance taxonomy

Zach Pandl, Portfolio Manager and Strategist | March 17, 2014

…l not follow through on its guidance if the economy performs as expected—they are only restating the existing reaction function. In addition, this year’s guidance is backed up by a very strong form of commitment: quantitative easing (QE). Investors know that the Fed will not raise rates while they are still expanding the balance sheet. Plus, public communication from Fed officials suggests low odds that the pace of tapering ($10bn per meeting) wi…

Fed outlook over the short and longer run

Zach Pandl, Portfolio Manager and Strategist | October 23, 2013

Heightened uncertainty around quantitative easing is mostly a short run problem. We see roughly flat odds of 20% for tapering at each of the next four meetings—December, January, March and April—and an additional 20% chance that the current QE pace continues beyond that. We have turned modestly more cautious about interest rate risk in our portfolios. One of the ironies of Ben Bernanke’s tenure is that he set out with a goal to improve Fed com…