Quantitative easing – if the US tapers and the UK does not what are the economic and investment implications?

3rd July 2013

The US may, possibly, at some point, a long way in the future, start to pare back quantitative easing writes investment journalist Cherry Reynard. Not end it, or reverse it, but just pare it back. And it is this possibility that has got markets in such a lather in recent weeks. For the time being, its impact has been universal, all bond and equity markets have sold off equally, but how will the US’s potential adoption of a different monetary policy to the rest of the world affect its relative economic performance?

Ben Bernanke’s initial comments were relatively mild, simply suggesting that QE would be pared back towards the end of 2013 if the economy continued its current trajectory. After this sent markets into a tail-spin, the Federal Reserve was forced to calm markets by clarifying its position, outlined here on USAToday.

It quotes New York Fed President William Dudley saying: “If labor market conditions and the economy’s growth momentum were to be less favorable than [expected] — and this is what has happened in recent years — I would expect that the asset purchases would continue at a higher pace for longer.”

In other words, the pace at which QE is slowed, or tapered, depends on the data. Bernanke has previously made it clear that the Fed will only end its asset purchases if US unemployment falls below 7%, against a current rate of 7.6%.

For Keith Wade, chief economist at Schroders, Bernanke’s position can be summed up thus: “He expects to start slowing bond purchases before the end of the year and to have ceased by the middle of 2014.” Markets are currently pricing in an interest rate rise at some point in 2014, but Wade believes that this looks ‘a little stretched’ at this point. Jim Leaviss, head of retail fixed income at M&G agrees, saying, “there is no way rates are going up as quickly as the market is pricing in.”

The UK position is a little different. There remains almost no talk of withdrawing QE and many believe that new Bank of England governor Mark Carney may bring in extraordinary policy measures to boost the economy. James Humphreys, Senior Investment Manager at Duncan Lawrie Private Bank says: “Carney is unlikely to turn the QE tap off just yet and in the run up to his arrival he has been championing the idea of an on-going stimulus strategy. He is therefore likely to continue Mervyn King’s stance of trying to encourage other MPC members to vote for an extension of QE… There is a question as to whether QE is enough. Perhaps Carney will launch new initiatives like Funding for Lending to support the recovery.”

Interest rate rises look even further out for the UK than they do in the US – at least two years away according to a consensus of economists quoted by the BBC. Sir Mervyn King said in his last public appearance as Bank of England governor that world economies, the UK included, were nowhere near a normalisation of interest rates.

There is a question of whether the UK might experience de facto monetary tightening as a result of the actions in the US. Over the past month, UK 10-year gilts have seen a stronger hike in yields than that of 10-year treasuries (0.4% versus 0.32%). US 10-year yields remain marginally higher. This is a significant problem with which Carney will have to contend.

However, ultimately, monetary policy for the two countries is diverging for the first time. If the UK continues to employ QE and the US tapers, it will likely prompt a significant strengthening in the US dollar, which will in turn affect the competitive position of some US companies. Robert Royle, co-manager of the Smith & Williamson North American fund, says: “This could be a pretty big negative for US exporters in that scenario. It will be most negative for those companies that have significant international competition, such as the US semi-conductor industry. Anything that makes nuts and bolts-type products is likely to suffer.”

However, he argues that this will take time to happen and will not affect those industries with a powerful competitive position such as Boeing or some of the technology companies. Equally, he argues, many companies already have hedging in place to help them deal with just such a scenario. He adds: “The US consumer is over 70% of the economy. The goods they buy will be so much cheaper and that could help the economy get going in that way.”

The UK is likely to see less of an impact: With much of the rest of the world – and perhaps Europe most importantly – still in monetary easing mode, sterling is only likely to see any meaningful moves against the US dollar rather than any other currencies. It may improve the position of those companies that have significant exports to the US, but again, many companies hedge their exposure or report in dollars.

There are those who believe that any disparity will be relatively short-lived as the UK economy improves. Derek Mitchell, manager of the RLAM UK Mid Cap and UK Opportunities funds, says that there are signs of the beginnings of a US-like recovery taking hold in the UK: “In the UK the latest indicators point to continued steady growth in economic activity in the current quarter. Employment levels have continued to rise, albeit at a slower rate than in 2012, and the drag on overall growth from the industrial sector is starting to diminish.  With the cashflow position of the household sector set to improve significantly as a result of lower taxes and lower mortgage rates, and inflation set to fall beyond the near-term, economic forecasters expect the pace of overall real GDP growth to pick up over the next 12-18 months.”

In this scenario Carney may have to contemplate his own tapering of quantitative easing, but at least the US will have been there first to show us what the effects may be.


16 thoughts on “Quantitative easing – if the US tapers and the UK does not what are the economic and investment implications?”

  1. Paul C says:

    Hi Shaun,
    Talking of Abenomics and their attempt to encourage inflation I saw a stunning figure yesterday. A 7% fall in consumer spending after the artificially created rush because of TVA/VAT tax increase. Consumers brought forward their spending which sounded fabulous for Japan when it happened but only a few months later the consequential falls are shocking.
    A great advertisment for QE and “administered” price increases?

    1. Anonymous says:

      Hi Paul C

      I agree that quite a brake has been applied to domestic demand and it is one we are familiar with in many respects after the rises in VAT in the UK and Europe. Also the latest consumer confidence figures are not exactly inspirational and do not fit the claims of Deputy Governor Iwata’s speech well at all.

      “The Consumer Confidence Index (seasonally adjusted series) in August 2014 was 41.2, down 0.3 points from the previous month.”

  2. baldand says:

    “[T]here is some sort of real wage fairy who will soon sprinkle gold dust.” Shaun, you are priceless!

    The residential property price index for Japan fell by 2.6% in May 2014, as opposed to a 3.3% decline in April. This was due partly to a 0.7% monthly decline for May 2013 falling out of the inflation rate, partly to a 0.8% increase in May 2014. The condo apartment components was up by 7.1% in May 2014, after a 5.6% increase in April. The May 2013 monthly increase for condos was 0.6%, while May 2014’s was 1.9%. If Abenomics has done nothing else it at least seems to be creating a bubble in condo prices, which troughed in December 2012 and have been rising ever since.

    It is a pity these data are so untimely. The June estimates won’t be available until the end of this month.

    1. Anonymous says:

      Hi Andrew

      There is rather a gap between ordinary house price behaviour and condominium’s. Are the condos in Tokyo and we are seeing a by now familiar split between the rest of a country and its capital?

      When you consider how extraordinarily expansionary monetary policy is then it is in many respects a surprise that they cannot get the overall residential index to rise. I remember writing a month or so ago about record lows for mortgage rates in Japan and variable rates can be as low as 0.8%. The UK market would explode if we got anything like that…

      1. baldand says:

        Shaun, it seems that strong condo price increases were not limited to Tokyo. The inflation rates are published for three metropolitan areas: Tokyo (8.0%), Koyoto-Osaka-Kobe (4.5%) and Nagoya (3.8%). There is a separate listing for Tokyo including suburbs (7.4%) There is also a separate listing for regions Only one of these, Shikoku, doesn’t show an increase of 3½% or more. Shikoku shows a decrease of 1.3%, but its index is based on a small sample of quotes.

  3. dutch says:

    The more they print,the more carefully people save and spend.

    Negative rates reduce velocity further…….Who’d have thought it? This doesn’t happen in the text books they read studying for their jobs in ivory tower CB’s.

    At least they didn’t have to pay £30,000 to be badly taught.

    1. Fraser Bailey says:

      ‘The more they print, the more carefully people save and spend’.

      Exactly. Something that economists and politicians, who have no knowledge of real people in the real world, always fail to understand.

      They should get Sandy Shaw to re-record ‘Puppet On A String’ as ‘Pushing On A String’ and enter it into the Eurozone Song Contest.

      1. dutch says:

        I should add Fraser,that it strikes me that the more they reduce interest rates the more people take care.

  4. zummerzetman says:

    I have long been of the opinion that wages in the ‘developed’ world are partly on a downard tragectory because we are competing with emerging economies where costs are dramatically lower. Poor wages and much lower standards of Health and Safety etc mean that they can churn out manufactured goods for next to nothing, and many service sector companies have outsourced work to the more highly educated workers in these countries.
    The only way to ‘add value’ and justify a higher wage ecomony now is to move towards high-tech and innovative industries. I can’t see that happening quickly enough for many. As an example, you now have countries like South Korea doing the things that Japan used to do so well. I am thinking about consumer electronics and vehicle production in particular.

    1. Anonymous says:

      Hi Zummerzetman

      I agree that many jobs in the western world are facing competition and downwards pressure on wages. This is happening also as societies age. Not every job is affected so we also see a rise in in equality.

      Japan has lost its ability to be fleet footed and there in many ways is the essence of its problem,

  5. forbin says:

    Hello Shaun,

    My black box of things to increase inflation and thereby the economic growth- two things QE anywhere seems to have dismally failed at

    would be to increase peoples wages – not just the top 0.1% who apparently when given more money keep it (!)

    and to directly put QE into people’s back pockets – would you fancy a ” stimulus check” for $10,000 / or pounds or yen

    ( there’s a third – tell China that they will receive 100% tax import duties if they don’t drop dictatorship and go full Swiss style democracy (( can we have some too please? ))

    Of course inflation has been seen, QE has pushed up asset prices , that I posit was its main purpose after the historical records showed the 1930’s depression was mainly ( or ended up as ) a asset bust.

    Never happen – the economy is the Banks and they run the show , so go back to you TV soaps and fast food ….. yes pull up a chair and eat your popcorn !!


  6. forbin says:

    Hello Shaun,

    you’ve seen this :- ” Santander appoints Ana Botin as chairwoman”

    So the major Banks are now hereditary ?

    Doesn’t that make our masters the new Kings and Queens?


    Munching that “royal ” food , popcorn……

    1. Anonymous says:

      Hi Forbin

      I had wondered that too, how did that work out in Spain’s neighbour Portugal with Banco Espirito Santo?

  7. forbin says:

    Hello Shaun,

    Perhaps the ECB and Japan should look here….

    Venezuela’s inflation rises to 63.4%

    Mind you if they calculated with the ONS method it would be 3.4% ?


  8. Anonymous says:

    Hi Forbin

    There are ever more rumours and hints that Japan will restart its nuclear reactors. For example there was this in Japan Today earlier

    “TOKYO —

    Japan’s nuclear regulator gave final safety approval to restart two reactors at Kyushu Electric Power Co Inc’s Sendai plant on Wednesday, the regulator’s first major ruling since it was formed in the aftermath of the 2011 Fukushima disaster.”

    I tend to agree about the ECB.

  9. Noo 2 Economics says:

    Abenomics has never been fully implemented – structural changes, the “third arrow” haven’t even been attempted, so we see what is achieved with money printing and fiscal expenditure.

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