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‘The Window Has Closed’: One Bank Throws In The Towel On Things Getting Back To ‘Normal’

... it effectively sounded the death knell on normalization.

And now, everyone will pile on when it comes to calling the window for central bank normalization definitively shut in light of the global economic slowdown.

For all the breathless analysis centered around the Fed’s dovish pivot in January, Thursday’s ECB decision and accompanying forecast cuts look set to garner just as much, if not more attention.

While the Fed’s relent was generally pitched as an acknowledgement that double-fisted tightening (via rate hikes and balance sheet runoff) was no longer tenable in light of slowing global growth, moderation in the data stateside and the panic selling that gripped markets in Q4, the ECB’s move to extend date-dependent forward guidance on rates to the end of 2019, move ahead quickly with an announcement on a new round of TLTROs and justify the pivot by reference to a kitchen-sink-ish cut to the 2019 growth outlook, is being interpreted across desks as being potentially more significant.

For our part, we suggested there was nothing at all surprising about what the ECB announced on Thursday. Here are a couple of excerpts from our postmortem:

It’s not clear why anyone would have expected the ECB to sit on its hands even for another couple of months given the fact that the eurozone economy is one of the key stress points for the global outlook. Political risks are mounting ahead of the EU elections, Italy is already in a recession, Germany is close and the threat of a trade spat with Donald Trump still hasn’t really receded.

Throw in the fact that (nearly) everyone else is leaning dovish and this was one of the more predictable outcomes in recent memory.

Finally, it’s entirely consistent with the economic backdrop, even if persisting in NIRP and ultra-accommodative policy isn’t consistent with your own assessment of how things “should” work.

Predictable though it may have been, it still came as something of a surprise to many and as alluded to above, the significance of the ECB effectively saying that negative rates are here to stay and that balance sheet shrinkage isn’t in the cards shouldn’t be understated.

“The market is now pricing in the first 10bp depo rate increase in September/October 2020 compared with June/July 2020 before the March meeting (the intraday downward shift in the Eonia curve was significant)”, Barclays notes, adding that “full normalization (ie. depo rate at 0%) is no longer priced in by the end of 2021.”



One of the key takeaways from Thursday was that risk assets’ reaction to the dovish inflection was decidedly negative. As we put, “Thursday’s ECB proceedings betrayed the extent to which dovish turns by policymakers are only ‘good’ news if they aren’t predicated on overtly dour growth projections, and the Governing Council’s cut to the euro-area’s 2019 growth outlook certainly has a claim on ‘overtly dour’.”


Below, find Goldman recounting the play-by-play, which underscores how the growth “shock” overwhelmed the dovish tilt or, how the post-crisis “bad news is good news if it means dovishness” dynamic prevailed initially (after the statement), but quickly gave way to bad news just being bad news by virtue of just how bad it really was (once the projections crossed):

The timing of information from the ECB offers an interesting controlled experiment into how markets interpreted the news as it came out. The statement, which was released at 13:45 CET, contained two bits of information: 1) forward guidance was extended from “summer 2019” to YE2019, and 2) it proposed a new series of quarterly TLTROs, to start in September 2019 through to March 2021. Some details were provided, including the maturity (2 years), and the borrowing limit (up to 30% of stock of eligible loans as at 28 February 2019) “indexed to” the main refinancing operations (MRO) rate. Further details were left for a future date. Following the statement release, markets reacted in the more typical response to a small dovish surprise. Equity markets and bank stocks were up modestly, and Bund yields and the Euro declined. Peripheral, and in particular Italian, spreads began to compress. However, the more interesting part of market reaction occurred following the release of the economic projections. Growth and inflation projections for 2019 were revised from 1.7% and 1.6% to 1.1% and 1.2% respectively. Projections for 2020 and 2021 were revised lower by a tenth or two-tenths as well. As these decidedly sharp downward revisions hit the tapes, equity markets began to sell off, and BTP spreads actually reversed some of their gains, even as Bund yields and the Euro continued to trend lower. That is, the negative growth revisions began to outweigh the modest dovish turn in the statement.


Again, this is significant because it effectively sounds the death knell on normalization and as it happens, that’s one of the key points from BNP’s Q2 global outlook, released on Friday.

The bank cites recent news flow as arguing for an upbeat take on things in light of progress towards a trade deal, the turnaround in market sentiment catalyzed by dovish central banks and the first signs that stimulus in China is starting to work its way through to the real economy.

But all of that aside, BNP warns everyone to “not get overly excited” given that the outlook for global growth remains “bearish” based on the following factors, all of which will be familiar to regular readers and to anyone who has been paying attention lately:

A US–China deal should free some pent-up demand, but it would not necessarily signal the end of trade tensions. While a swift agreement with Japan is likely, the spectre of an escalation in US–EU trade disputes remains a key risk.

The negative demand shock from China, combined with persistent uncertainty globally, has already hurt domestic demand in most advanced economies, particularly capital investment, as companies have started to put their investment plans on hold.


High corporate leverage, especially in the US, and firms’ inability to pass on higher input costs into output prices are likely to squeeze profit margins, exacerbating these trends.

Employment will not escape these developments, in our view, with an eventual slowdown hurting consumption.

All of that informs BNP’s contention that the synchronous global slowdown will continue, eventually leading US growth to slow, while growth in the EU and Japan falls below trend.

Now comes the “bad” news (and the scare quotes are there because opinions will differ as to whether it’s “bad” or “good” for policymakers to implicitly acknowledge that higher rates and/or normalization more generally simply aren’t possible).

“Against this backdrop, we think the window of opportunity for monetary policy normalization has closed”, BNP writes, on the way to saying that in their opinion, “both the Fed and the ECB [will] keep rates on hold over 2019–20 [and] in Japan, the US and the eurozone, the next move is more likely to be an easing than a tightening.”

So, there it is. Another bank slams the window shut on normalization essentially before it even got started (yes, the Fed has done a decent job dragging rates kicking and screaming off the lower bound, but things are still so far from “normal” that we can’t even see normal from here).

BNP goes on to say that while they believe an “imminent” global recession will be avoided, the chances are still about a 1/4. The following chart underscores how quickly things are deteriorating.



And so, the bank writes the following about the path for monetary policy going forward:

We no longer predict rate hikes on either side of the Atlantic in 2019 or 2020, given central banks’ dovish shift in response to slowing growth. We expect high excess liquidity to continue, limiting the scope of any balance sheet reduction, and scarcity of eligible assets to limit the scope of balance sheet expansion.

If there is a global recession (not our base case), the playing field looks uneven:  The Fed has more room for maneuver, and its initial response would likely be to cut rates. The reduced weighted average maturity of Fed holdings due to MBS pay-downs into T-bills might also be reversed. The ECB’s most viable sequencing, after the announcement of TLTROs and forward guidance, would be rate tiering, in our view, with further QE a last resort.

That’s not even to mention the BoJ, whose next steps will involve God only knows what. Kuroda recently made it clear that he’s not out of ideas and that the toolbox hasn’t been exhausted, contrary to popular belief.

Read more

Meanwhile, In Monetary Policy Neverland

In any event, the takeaway from all of the above is that the ECB meeting is generally being interpreted as the final nail in the coffin for the nascent normalization push.

We would remind everyone (for the umpteenth time), that this comes just two months after net asset purchases ended across the pond.

1 comment on “‘The Window Has Closed’: One Bank Throws In The Towel On Things Getting Back To ‘Normal’

  1. Harvey Cotton

    Bloomberg has an article about bond markets drooling at the prospect of QE returning by 2020, with $100 billion monthly purchases including corporate bonds.

    The Fed’s balance sheet is 25% or so of U.S. GDP. The Bank of Japan, ever the pacesetter, has a balance sheet that is 101% of Japan’s GDP. Just sayin’.

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