European Central Bank (ECB) keeps its monetary policy steady and will continue to be more accommodative for a more extended period.
The central bank has committed to purchasing 1.85 trillion euros ($2.2 trillion) of bonds until March 2022, and policymakers voted to keep this stimulus injection into the market going for the time being.
Interest rates were also left unchanged, with that on the primary deposit facility remaining at 0.5%, the benchmark refinancing rate at 0%, and the marginal lending facility at 0.25%.
Additionally, ECB said it wanted to see inflation stabilizing at 2% over the medium terms adding, this may also imply a transitory period where inflation is “moderately above target.”
Prices rose 1.9% this year to June in the 19-member euro bloc, down from 2% this year to May, which has the ECB expecting inflation to drop, forecasting a decrease of 1.5% – 1.4% in 2022 and 2023, respectively.
The central bank had changed its guidance “to underline our commitment to maintain a persistently accommodative monetary policy stance to meet our inflation target,” said ECB President Christine Lagarde.
“There is still a long way to go before the damage to the economy caused by the pandemic is offset.”
On Friday, ECB member Francois Villeroy de Galhau, who is also the governor of the Bank of France, said it was justified to keep an accommodative monetary policy for now.
Villeroy also said that the ECB sees the midpoint of its forecast horizon for a 2% inflation target coming in around 12-18 months in the eurozone.
Fed “Highly Effective”
As for the US, the Federal Reserve has started to talk about tapering, but Chair Jerome Powell has assured that it is “still a ways off,” and President Joe Biden gave the Fed his blessing to “take whatever steps necessary” to support a strong economy.
The International Monetary Fund’s Executive Board also commended the Fed for being “highly effective” at managing the COVID-l9 crisis and supporting recovery with its commitment to overshoot a 2% inflation target in the near term.
While raising concerns about higher interest rates that will drain capital flows from emerging markets, the board also said that the Fed must carefully communicate its thinking to ensure the eventual withdrawal of monetary accommodation. The IMF said this scaling back,
“will require deft communications, under a potentially tight timeline, to avoid market misunderstandings, volatility in market pricing, and/or an unwarranted tightening in financial conditions.”
The Fund’s board also said that the US should prioritize spending towards programs that have the most significant impact on productivity and that more could be done to boost tax revenues.
“Don’t Get Shook.”
In 2021, a total of $4.72 trillion has been created out of thin air, collectively in the US, China, and EU. “If the quantum of money increases, it must go somewhere,” noted Arthur Hayes, former BitMEX CEO, in his latest write-up.
“The Fed has removed $1.4 trillion of the highest quality collateral from the system…Whatever anyone says about a taper in the future, in the present, asset managers must replace this collateral with higher risk stuff.”
The Fed’s balance sheet has expanded at a YoY pace of +22.74% and +13.21% YTD. ECB grew its balance sheet by +25.18% YoY, and YTD +13.34%, and China’s most recent 2Q21 YoY GDP print was +7.9% using an 11% growth in credit.
So, how does one outperform this? Bonds are certainly not the answer.
The US GDP forecast for 2021 is +6.60%, vs. the 10-Year bonds that yield 1.20%, equating to a rough negative real yield of -5.40%. In the “strongest Eurozone economy,” Germany, 2021 GDP is expected to print at 4.5%, with real yields approaching negative 5%.
Here, crypto comes as a clear winner, with Bitcoin up 10% YTD and Ethereum 182% and about 250% and 700% YoY, respectively.
“The data is clear – central banks continue to print money. When / if that changes, the data will show us. There is no need to predict when it stops if you own scarce assets that appreciate in fiat terms at least at the same pace of balance sheet expansion. On the past 6-month horizon, crypto underperformed, but from the onset of the COVID pandemic till today, crypto markedly outperformed as central bankers stepped on the gas. Don’t get shook.”