"If All Goes According To Plan": What Global Central Bank Normalization Would Look Like, In One Chart

Tyler Durden's picture

AS a result of countless failures by central banks to normalize monetary policy over the past 7 years, the market - especially bonds and rates - has become openly cynical and outright skeptical regarding the possibility of a successful renormalization of policy by global central banks. After all, Japan has been trying to do that for over 30 years and has yet to succeed; the ECB hiked in 2011 resulting in near collapse of the Eurozone. Ironically, the recent Trumpflation trade - which few expected as a result of the "shocking" Trump election victory - has emerged as the most credible catalyst to prompt inflation not only in the US but around the globe, resulting in two Fed rate hikes in rapid succession.

Still, now that Obamacare repeal has failed, and questions are rising whether Trump will be able to implement his proposed Tax reform, the market has aggressively faded not only the broader Trumpflation trade, but also all of the recent dollar strength since the US election: in short, bets on a "bening" global reflation are rapidly fading, suggesting that the latest push to normalize monetary policy will once again result in failure.

And yet, "what if it goes according to plan" this time? That's the question posed by Barclays' Christian Keller who notes that, at least for the time being, "The synchronized upswing in the global economy continues, supporting sentiment, which thus far has ignored elevated policy uncertainties. Headline inflation is increasing due to stable oil prices, while core inflation rates are mixed." And, assuming nothing ahcnes, this sets the backdrop for monetary policy normalization, albeit at different speeds and modes.

Taking this thought experiment one step further, what would happen if indeed this time central banks are successful to renormalize monetary policy without leading to a market crash. In that case, Barclays expects three Fed hikes in 2017 and 2018, respectively. The ECB is likely to taper further in 2018 and to start increasing depo rates in parallel (in 2018).

Conveniently, Barclays has created the following chart which lays out what "coordinated global renormalization" would look like. It can serve as a benchmark to those keeping tabs on where various central banks are in the current attempt to restore monetary normalcy.

For those curious, here are some further thoughts from Barclays:

Policy normallization at different speeds

With growth improving across regions and deflationary threats fading, the monetary policy cycle has started to turn. Market interest rates have been suggesting this for several months. Recently, central bank communication has also become decidedly more confident about the outlook. While the activity upswing is synchronized, the pace of expansion remains diverse and economies are at very different positions in the cycle. Thus, despite the signals are clearly for policy normalisation, we think such changes are likely to occur at quite different speeds.

Fed: A more confident FOMC leads the way

In contrast to 2015 and 2016, when economic developments at home and abroad thwarted the Fed’s plans for a four-hike pace in the coming year, 2017 has started out differently: the Fed now faces decent US growth, supported by buoyant sentiment, easier financial market conditions and no complications from ‘international developments’. This has given the FOMC more confidence to finally implement its game plan of a gradual hiking cycle; we now expect it to hike two more times in 2017 (Sep and Dec) and three times in 2018 at a pace of 25bp each time. A hike this June – not our baseline – would suggest a faster pace of four hikes per year, in our view.

Along with this firmer tightening cycle, we also expect the Fed to begin earnest discussions over when and in what manner to reduce the size of its balance sheet. Even so, we continue to believe that the Fed is far from taking any concrete action and we expect its balance sheet to remain substantively unchanged through at least the end of 2018.

ECB: complicated normalization ahead

Better growth and the rebound in inflation has significantly improved the balance of risks for the ECB by reducing the threat of a deflationary ‘Japan’ scenario for the euro area. However, the euro area is still far away from comfortable self-sustaining inflationary dynamics, and it still faces the looming risks associated with fragile public debt dynamics. The latter is particularly sensitive with regard to the euro area’s third largest economy and world’s third largest debt market, Italy, where there still appears a lack of political resolve for reform and uncertainty about the political outlook remains high. While this calls for caution, abovetarget headline inflation in Germany and the adverse effects of negative deposit rates on financial institutions are creating pressure on the ECB to start normalizing monetary policy.

In an attempt to balance these factors, we expect the ECB to implement a mixed strategy:

  • We first expect in June (after the French presidential election) a change towards less dovish forward guidance that would open the door for deposit rate hikes in 2018, even before QE ends.
  • We then expect a reduction in QE to EUR35-40bn per month in H1 18 and EUR15-20bn H2 18 as well as two 10bp hikes in the deposit rate in Q2 18 and Q4 18. We assign low probability to rate hikes in 2017 and PSPP purchases to stop in early 2018. In other words, we expect both QE and negative deposit rates to remain in place until at least H2 2018, even if at less-accommodative levels than in 2017.

This would clearly be a significant shift from earlier communication that suggested rate hikes would only follow once the asset purchase program had been terminated – which was the sequence the Fed and BoE used. Of course, neither the Fed nor BoE ventured into negative policy rates or had to implement QE across a diverse sovereign debt market. Such a multipronged exit strategy by the ECB would present a delicate communications act, as markets would have to decipher the net effects of a simultaneous tightening via deposit rate hikes and continuing expansion via asset purchases, even if at a reduced pace. Given the risk of adverse shocks (on inflation or debt dynamics) and memories of past episodes of premature tightening, we expect the ECB to move cautiously.

BoJ: ready to follow

The BoJ stood pat in March, as widely expected, and did not provide any hints of a future move or change in related communications. However, as the global environment remains supportive, we expect the BoJ to:

  • raise its YCC target for long-term yields (+0%) by 10-20bp in Q3 17, assuming y/y core CPI inflation is accelerating at that stage, and
  • hike a further 20bp each in Q1 18 (prior to the end of BoJ Governor Kuroda’s term in April 2018) and in Q3 18, due in part to a tailwind from expected continuing rate hikes by the Fed and, indeed, the start of an exit strategy by the ECB (hike in the deposit facility rate/reduction in asset purchases).

This will leave the BoJ in a reactive position as its yield-targeting policy since September has allowed it to ‘import’ passively the tightening in the US and other core markets. Overall, our inflation forecasts suggest that while the BoJ may have overcome deflation, the 2% target – which it promises to overshoot – is still not on the horizon.

BoE: still sitting on the fence

Surprisingly resilient data have made the BoE more confident about the economic outlook. March meeting minutes reported some members moving closer to supporting a hike, with MPC Forbes (outgoing in June) even voting for an immediate hike. However, we expect the rest of the MPC, in particular Governor Carney, to move more cautiously, waiting for data to crystallize before considering adjusting its  monetary policy stance. Given our expectation for a slowing economy and only a temporary FX-driven boost in inflation, the MPC will most likely remain on hold over the forecast horizon, while markets have started to price some probability of a hike in 2018.

PBoC: Focused on stability

The PBoC continues to balance multiple objectives: supporting the growth target, while containing the build-up of financial vulnerabilities and the outflow of capital. Its recent increases of short- (OMOs) and medium-term (MLF) policy rates seem targeted to the latter goals and we expect the PBoC to follow up with more 10bp hikes in OMO and MLF rates in the coming months, especially if the domestic housing market continues to perform strongly and the Fed hikes rates further. At the same time, we expect it to leave the benchmark interest rates unchanged through 2017, to support growth, given that the bulk of China’s total financing is still dominated by bank lending (guided by the 1y benchmark lending rate). However, if CPI inflation developments look to exceed the 3% target and/or growth stayed above 6.5% q/q saar, the PBoC could consider benchmark rate hikes as well.

By using the shorter-term policy rates (10bp each time), rather than the traditional  benchmark deposit and lending rates (usually 25bp each), the PBoC’s is attempting to achieve multiple objectives at the same time: guiding banks’ borrowing costs higher to promote financial deleveraging, while keeping benchmark rates unchanged to support growth: the bulk of China’s total financing is still dominated by bank lending (guided by the 1y benchmark lending rate at 4.35%), and the transmission from changes in the costs of the central banks’ liquidity instruments to banks’ lending rates will only be gradual. This strategy likely also serves the PBoC as an experiment, as it explores the transmission process of its various monetary tools with the objective to move its policy framework away from direct quantity-based measures to indirect price-based measures.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Troy Ounce's picture

 

If there is a God, he will let it all burn down.

And on the ashes we built something great.

Tallest Skil's picture

Since there is a God, He has a place in hell reserved for the bankers.

If you want to understand what a word means, you have to go to its etymological origin and to similar words in other languages. One of the consistent things about old world slavery was not that someone owned another person. Rather, the slave was in debt to their debt owner. With very few exceptions, there was an obligation that once the debt was paid the person was to be made free.

Thus, the Latin word for debt bondage is nexum. Let us make this clear. According to this system, in the Roman Republic/Empire slavery was based upon debt. Thus, if you owed any debt to another person, you were compelled to their service. Think about that for a second and let it sink in. In Rome, debt is slavery. Now look at the modern world–all the people who owe money to banks, student loans, mortgages. As far as the people 2 millennia ago were concerned, all these people in the modern world are slaves. Let that sink in for a while as well. You probably know a slave right now–you may, in fact, be one yourself.

This is also why the act of interest, usury, on a debt was considered abhorrent because it put people in perpetual debt. Even if all the debt was paid, you would still owe more than you gave. Yet we allow banks to do this in the modern age, thus perpetuating the slave trade of people through debt. People do not need to own you–ownership of another person is absurd. But ownership of a debt another owns to you? That is a very real problem. This may be one of the more profound realizations of your life when you realize how widespread slavery is today.

VD's picture

getting to "normalization" has to date take this long, therefore, any kind of "normalization" is an absolute impossibility. this is all central planning extend & pretend damage control propaganda.

FriendlyAquaponics's picture

I am so grateful to be out on the periphery of this mess. Seems that when things fall apart, they fall toward the center.

GROW MORE FOOD.

FriendlyAquaponics's picture

Of course, as well as the Au/Pb. But last time I checked, those elements - useful as they are - are not edible.

GRDguy's picture

But they're sure tradable for whatever you need.

FriendlyAquaponics's picture

Yes, for a while. But anecdotal stories from the Weimar Republic's hyperinflation pre-WWII told of the elite driving out into the country to try to buy food with their diamonds and gold. Intrinsic value had changed so greatly that a diamond would buy a small bag of pototoes, and that was only if the farmer was generous and had potatoes to share.

If all I had to fall back upon was Au/Ag/PB, I'd not feel nearly secure. But to each his own.

eforce's picture

Physical assets are good for storing value long term, short term you need essentials, tp/batteries/food/water.

Arnold's picture

Aurum for the rainy day fund.

Oracle of Kypseli's picture

All debtors have only one chance to learn the hard way. Once you get into debt and realize that there is no way out, declare bancruptcy and start over. But this time spend only 80% of what you make and you will eventually become rich. Confucious said that whoever spends less than he/she makes is rich.

GRDguy's picture

If there really is a "god", why are the central banksters allowed

to put the rest of us through hell before putting the central banksters in hell.

brianshell's picture

The only thing I like about islam is they renounce interest.

The solution to slaying this dragon is simple. The one chink in its armor  is debt free money.

1. Issue sovereign United States Notes.

2. Revoke the Fed's charter.

3. Require all banks maintain  100% reserves.

4. Outlaw interest.

Most people have lived under this illusion of debt based money all their lives. But it wasn't always so. King Henry's tally sticks, The American colonies continental script, Andrew Jackson's dollars and Abraham Lincoln's dollars were all debt free monies. Interestingly, the only money in this list that could not be counterfeited were the tally sticks. Once paper money was invented, the bankers could and did counterfeit it. The bank of England had printing presses that printed so much script it become worthless and was done to force the colonists to use English money. The same happened to Jackson and Lincolns dollars. The bankers have fought against debt free money by counterfeiting for eons.

As for interest, it is based on the assumption of time value. But if I pay you an ounce of gold and you bury it in your yard and in a hundred years your ancester digs it up, it is still only the same value, one ounce of gold. There is no time value.

raybies's picture

What's good for man, may not be good for the world. So surely God would want what's good for all his creations.

Patriotico's picture

Surely you are clueless

ds's picture

It is the debt Jubilee that has to take place. This will prevail and as Humankind has the free will. They can choose to cheer, vote, support all Earthly Powers to resist it and be not on the side of 'blessings'. 

ds's picture

It is the debt Jubilee that has to take place. This will prevail and as Humankind has the free will. They can choose to cheer, vote, support all Earthly Powers to resist it and be not on the side of 'blessings'. 

HRH Feant's picture
HRH Feant (not verified) Troy Ounce Mar 25, 2017 4:37 PM

Be careful what you wish for!

SGT Report shows the cover of The Economist with a Phoenix on the front and some type of gold coin.

Here is a link to that cover art: https://www.reddit.com/r/conspiratard/comments/4c2vvs/the_economist_maga...

Oracle of Kypseli's picture

Subliminal booby trap message?

Sudden Debt's picture

Well, that seems to fit in perfectly with what is happening now.

If the economy implodes this summer and they try to print their way out, we're talking months before the Euro and Dollar collapse.

We're heading for a 12 to 20% inflation number this year from what they did in the last year, combined with a rescue mission, those inflation numbers could get horrible by next year.

I don't think they'll replace it that fast but my guess is that they'll start talking about a new currency by next year.

 

Muad'Grumps's picture

This could mean they take the boot of gold's throat. They might use gold as way to increase resrves. The PBoc is already set up for that. ECB too.

fbazzrea's picture

2017 has started out differently: the Fed now faces decent US growth, supported by buoyant sentiment, easier financial market conditions and no complications from ‘international developments’.

lol on which planet from the sun do you reside? 3rd, here.

JTimchenko's picture

Yeah, right... if all goes according to plan... which it won't unless, of course, the "plan" is a lot more nefarious than most people believe.

Let's face it, the central banks are going to implode the world economy to help their owners pick up assets cheap by continuing to raise rates. That will destroy the phony economy they created based on zero interest rates. Then, they will print money again, to inflate asset values yet again.

Or, in the alternative, if they are more honest than I think they are, they are going to unleash heavy inflation right away by failing to raise rates fast enough. I agree with the theories put forward in the various articles, on the blog listed below, including the article I cite.

Bottom line: Gold prices are going to soar over the next few years as the Trump administration refuses to authorize further swap liens against the US gold reserve and, as a result, the availability of gold in London dries up to a trickle.

http://averybgoodman.com/myblog/2017/03/04/president-trump-making-americ...

debtor of last resort's picture

Central bank normalization would be like going back to 500 million people. I get the point.

Consuelo's picture

 

 

 

What's that old Mike Tyson quip about 'having a plan'...?

RozKo's picture

Having one until you get punched in the face.....

Salzburg1756's picture

Mike Tyson's best quip was about what he would do to his next opponent: "I'm going to go through him....(pensive look)... like a knife through hot butter."

Bostonian's picture

What "synchronized upswing in the global economy" are they referring to? The collapse in 1Q US GDP forecast?  There is no "synchronized upswing in the global economy". They just keep repeating this mantra again and again. That does not make it true. More fake news. 

CHX13's picture

Summary and outlook: Contr+P and then some moar.

FreeShitter's picture

Until the banksters are all ridden from this rock, the human race is doomed

Sudden Debt's picture

European retail numbers are a real disaster and so are American numbers.

This will only get worse as we near the summer.

Now, we're a consumption & service economy and almost everything is interconnected.

NO WAY we'll make it into the summer without a crash.

My guess is that starting on monday, shit will start to happen.

FreeShitter's picture

There you go again -Ronnie Raygun.

hotrod's picture

Truly amazing.  Nations can print trillions of dollars/debt creating thousands of billionaires and then magically restore the credibility of money through higher rates and all is well.  Von Mises missed the boat I guess.

Velocitor's picture

That's their plan.  Nothing to say they'll be successful. 

JailBanksters's picture

I've forgotten what normal is ?

The NEW normal is, Fraud, Manipulation, Fake Money, Fake Inflation Reports, Fake Employment Reports, Fake News, Fake Stock Prices, Fake Wars, Fake Terrorist Attacks, and Rigged Sporting Events. And everything else is NOT Normal.

FreeShitter's picture

Fake tits, fake blond hair, fake asses, fake personalities.....right now the devil is winning by prophecy.

falak pema's picture

Hahaha!

Financial Capitalism's death march under Pax Americana model's self evisceration, in the wake of the ongoing 2008 crisis, of a corrupt mindset spawned in the hubris of MIC Nam war "Taqqiya cum Commie Takfiri " Gulf of Tonkin type fake casus belli, in fact a Trojan horse tactic and blatant LBJ's militarist minded lying to justify action against the Commie takeover of Viet domino in free fall post France's Dien Bien Phu colonial debacle-- that got repeated in Algeria-- to its eternal shame as the Algiers counterinsurgency tactics of French death squads got cut and pasted in Nam by the CIA/MIC complex-- and cast an indelible stain on western hold of Africa and S America in similar Pinochet, Operation Condor and Lumumba type recurrent --to this day-- shenanigans.

And, in its toxic wake of Napalm-Agent Orange Nixon's panicky BW revoke; when the pyjama clad resistance to this criminal warmongering made the US go deep into overspend; that then got baked in the heat and dust of the Saud petrodollar handshake to avoid the collapse of the western economies under the ME oil gun; then led as frantic about turn, in the disaster of Iran's theocratic revolution, to a knee jerked capitalist spike into the neo-liberal Reaganomics mantra's launch of the toxic, debt based ramp up of supply sided 1% er "greed is good" world monopoly games-- under the subsequent neo-con ideology's outsource to body shopped Chindia !

"Its the Economy stupid" Clintonista Blue surrender to Goldman Sachs  and Bushist clan's Oil and shock and awe type Clash of Civilization warmongering in Iraq-Aghan-Pak were now both on the SAME PAGE !

Pax Americana had sold out its own soul to making the world a stage for the self creation of its own Frankensteins-- like the Taliban etc.-- to run its hidden agendas of "we are making you an offer you can't refuse" type arm twisting. Welcome to Echelon and five eyes MIIC games ! 

Thats the true timeline of the US hegemony's 'iron fist in velvet glove' hold on the world, especially since Berlin wall collapse made the US the towering colossus all on its own. Now the chickens are coming home to roost on that one nation rule over the world.

In the winter of this model's total collapse under the debt spigot of 2008 crisis's ongoing fallout and resultant deflation asymptote, we have the global CBs playing at never ending fiat printing, and geopolitically at apeing the Chinese central planned model of "crony one party social capitalism" under the new Helmsman of Middle Empire-- who now leads the mindset of a head up ass Western oligarchy which can't tell debt from asset on its public account books; all based on a permanent and chronic balance of trade 40 year delusional economy that feeds itself on the work of others by robbing their RM resources and hiring their workers for a pittance !

Impossible math! 

What a turn around for those scions of WW2 under FDR who proposed to a decolonized world the model of multilateralism under the UN mantra  and access to FREE MARKETS; to save it from the ravages of Nippo-Nazi collusion and totalitarian takeover of world in the ruins of Europe's and Japan's destruction !

The Asian pivot is showing how this western oligarchy is now NAKED like the Emperor of China of Old, whereas Asia rising will define the contours of the coming age!

Goodbye Columbus, goodbye Magellan, the West is now totally zugzwanged and the golden peaked Potus of Pax Americana is playing at Nero in a decadent Empire that has gone a "bridge too far" to save its own corrupt Oligarchy class; whose own CYNICAL values are now the exact opposite of the Jeffersonian Dream of America...

What you sow you now reap.

Its time the Euro continent learned its lessons and starts a new Renaissance age based on a new renewables energy paradigm which checkmates the past paradigm having spawned the Double NOOSE around humanity's neck : of a return to populist OBSCURANTISM based on creationist rigmarole, appearing like Abraham's Bourbon nose on all continents, and its current mad consumerism based on IMPORTED FOSSIL FUEL AND URANIUM (FUku style dystopia) that strip mines the  finite world, destroying in the process the ecosystem on Planet Earth ! 

We are both, metaphysically and real economy speaking, in a major regression of our values that the Enlightenment bequeathed to the West and then to all of humanity.

Huge wake up call ! 

Patriotico's picture

ShepWave 

ShepWave IMPORTANT Updates for Monday Published.
by ShepWave.com
Posted: 3/24/2017 17:26 EST

 

 

Equities, as well as gold and oil, have been extremely profitable and should continue to be. The predictability of these markets is not as difficult as most would have you believe.

It is time to turn off the CNBC.

If you have been following along with ShepWave analysis you are aware of the fact that the markets continue to be predictable and profitable.

The key is to maintain objectivity. These two updates for Monday show the Weekly and Daily time frame analysis for the major US equity indexes as well as Crude Oil, Gold and the VIX. Please read notes and analysis carefully.

Log In at www.shepwave.com for Monday's (Two) Important ShepWave Updates.

shizzledizzle's picture

Central banks - "Everything is under control, all that's left to do is "unwind" 12.9 TRILLION in assets and return interest rates to normal" 

Me - LOL!

Silver Savior's picture

I am slowly watching capitalism devour itself. I believe in a sharing economy. 

gm_general's picture

It seems like the Globalists treat the populace like children - their presentation to the masses is that the economy is hit by random doldrums, like it caught a cold, and at any random point it will just "get better". No systemic debt issues driving us ever more into the ground. So on that ridiculous premise, they can lay any BS they want, like the economy suddenly got better, its running on all cylinders, well, just because! So now we can raise rates. Of course debt is still ramping up, the massive bill of trillions in interest is still due every year, its still sapping the life out of the world, particularly the US. 

So they have this problem with anti-Globalist sentiment, and its really getting traction, we see it with Brexit, Trump, more nationalist movements, what to do to quash this? Well, coordinate together to fake a lot of economic numbers, then under this false premise raise rates. They can claim later that "the numbers told us to". Then when the crash happens, they will blame it on Trump and other nationalist supporters. The truly dumb and gullible will buy it, and problem solved. Globalists "to the rescue"! On with the slave plantation plan!