Core government bonds have rallied this week, with yields on UK, US and German 10-year debt down sharply from last Friday’s close. Further dovish commentary from the US Federal Reserve’s Jay Powell contributed to the move, as he provided the latest signal that the Federal Open Market Committee (FOMC) is set to ease monetary policy when it meets at the end of the month.
Meanwhile, Chinese GDP data showed that the world’s second largest economy grew at its slowest pace in almost three decades and, in Europe, Christine Lagarde resigned from her position as the managing director of the International Monetary Fund (IMF), as she is set to become president of the European Central Bank.
Jay Powell takes dovish stance
Speaking at a conference in Paris this week, the Fed Chair spoke about the interconnectedness of the global economy and how monetary policy in one country can influence economic and financial conditions in others.
Powell remarked that “pursuing our domestic mandates in this new world requires that we understand the anticipated effects” on the global economy, at a time when some have criticised the Fed for turning more dovish without a significant deterioration in US economic data.
One reason for the Fed’s dovishness is persistently low inflation with the core PCE price index below the central bank’s 2% target, despite a tight employment market which historically has led to wage growth and, in turn, rising inflation.
Powell said that there are a range of factors that have contributed to the weakness including improved monetary policy, demographics, globalisation, slower productivity growth and a greater demand for safe assets. These factors are likely to continue, he said, and if that is the case then “the neutral interest rate will remain low, and policymakers will continue to operate in an environment in which the risk of hitting the effective lower bound is much higher than before the crisis.”
Could Lagarde be a new broom at ECB?
Following her nomination earlier this month to succeed Mario Draghi as the head of the European Central Bank (ECB), Christine Lagarde handed in her resignation to the IMF this week. The market response to Lagarde’s nomination has been broadly positive, with expectations being that she will follow her predecessor’s dovish monetary policy.
In a departure from the norm, Lagarde does not have a background in economics, but was a lawyer before becoming the French finance minister and subsequently the head of the IMF. She will be tasked with supporting a eurozone economy that has been showing signs of strain. The current President Mario Draghi indicated recently that the ECB could respond to the weakening eurozone outlook by easing policy as early as its meeting next week.
China economy grows at slowest rate since 1992
Finally, the Chinese National Bureau of Statistics released data on Monday that showed that the country’s economy grew by 6.2% in the year to the end of June, its slowest expansion since the data series begun in 1992. Weakness in exports as a result of the ongoing trade war with the US contributed to the slowing growth, however, this was offset to some extent by the stimulus to other parts of the economy provided by tax cuts introduced earlier this year. A spokesman for the National Bureau of Statistics said that the Chinese economy has become “more and more reliant on domestic demand, especially on consumption”.