In the past few days there was news of Chinese banks restructuring bonds and tightening mortgage criteria to slow lending. US banks are also piling into ultra safe bonds and curbing lending throughout the year. Brexit has fractured loan availability across European countries, especially in Italy, including Germany.
Markets have not seemed to care, with market up from the years lows and only about 5% off the highs of the year. This should worry investors that in the medium term the lack of lending due to poor prospects could become self reinforcing and bring about the decline in economic numbers lenders are anticipating.
US election worries are front and center in the news, but after the election and the immediate smoke clears, markets will have to face year end and 2017 prospects. This is to include a rate hike that is still seen as more likely than not to be in December. The dollar has been rallying in light of that which is supposed to be a negative for the markets, but correlations have broken down throughout the past few weeks. the bond market is seeing yields spike from their summer lows on safe bonds, and even TIPS are getting a lot of attention. Market signals are looking like a rate hike is expected, while inflation will rise, and the economy continues to grow. All the while banks continue to buy more bonds and lend less. Hopefully the banks are waiting on the side lines for higher rates to start lending, but if they keep their purses tight, the economy will struggle to find the capital to keep its growth going.
The ECB rate decision is up and but the conference is where the action is going to take place. The markets are expecting policy to remain unchanged but the Language of the ECB will be of more concern to the markets. The fear is that the ECB is not doing enough to boost the growth of the Eurozone with an extension of the purchase program or additional stimulus measures. But the abilities of the ECB to take more stimulus actions are where the issues are starting to come forth.
The Eurozone has not been fully integrated with fiscal measures, and the guidelines of monetary policy are in a grey area at the moment. The problems that are slowing growth in the zone (low growth, high debt, high unemployment, etc.) need to be solved politically. With the rise in right wing politics across Europe and major elections across the continent within the next two years, very little is expected to come from the current political climate, possibly even less in the future.
It would be interesting to note in today's speech by Draghi if these needs for fiscal stimulus and political action are brought up. One thing is clear, that Draghi will have to continue to convince the markets that more measures can be taken to boost growth and inflation even without the help of the fracturing governments of the Eurozone.
Good data out of China last night and the highest inflation rate in 2 years in the US pushed pre-markets higher. The lack of a slowing Chinese economy does help with the global economic sentiment, but higher inflation will prompt the Fed to take action in raising rates. Inflation was one of the last excuses the Fed had to remain dovish on rate increases in the near and longer term. Should the rate keep going up it will force the hand of the Fed even in the face of slowing global growth.
There are some signs of a lack of demand in the economy that will be exacerbated when rates increase, and more importantly, when longer term rate expectations start to increase and the longer end of the curve prices this in. One of the only causes of the rising markets could be the decline in the dollar whose strength has become a concern with investors recently. This trend should be watched.