“We Were Inverted” “We Were Inverted”

As you may have already heard, I’m going to be leaving M&G later this year, after over 27 years here, most recently as the Chief Investment Officer for Fixed Income.  I’m off to do a Master’s in the History of Art, and so I’ll be back in full-time education, studying modernism in Germany between the two World Wars.

Over the last few years, discussions around bank consolidation felt like ‘Waiting for Godot’. This was especially true in Europe, where some banks were still restructuring, cleaning up their balance sheets and rebuilding their capital position. Outside of some sparse domestic M&A, distressed acquisitions (UBS/CS, SAN/Popular) and small bolt-on transactions, there was little of note.

We have written many times on QE (Quantitative Easing) and QT (Quantitative Tightening); however, we have never talked about QN. QN is the ultimate goal for central banks – but what exactly is it?

The ‘N’ in QN stands for Neutral. In a steady state of economic growth, money must be printed to facilitate inflation in the economy. In this steady state, there is a simple requirement to have enough money tokens in the system to achieve the desired growth in the nominal GDP of the country, which is defined as the combination of real growth and inflation.

Last month, BFF, a small Italian bank with €12 billion in total assets revealed that its regulator, the Bank of Italy, has requested it to “temporarily suspend profit distributions”, causing its stock to plunge by over 30%. Fortunately for bond investors, the limitation does not apply to interest payments on BFF’s AT1 instruments.

Consumption spending accounts for approximately two-thirds of the US economy. It is vital that we understand the dynamics of the consumer because if the consumer falters, so does the US economy, which has far-reaching consequences. The surprising resilience of the US consumer in the face of a pandemic and then rising interest rates has surprised many.

With the exception of the US, the rate-cutting cycle is still alive and well. Switzerland and Sweden have recently kicked off the easing cycle with their first rate cuts. Last week, the Bank of England sounded more dovish than expected, suggesting they are also close to cutting rates, and that rate cuts might be sharper than expected. The European Central Bank is also signalling rate cuts this year.

The disinflationary process appears to be back on track. After some higher-than-expected reports, US inflation has finally come in slightly lower than expected. Headline inflation has decreased to 3.4% YoY compared to the previous reading of 3.5%, while core inflation stands at 3.6%, the lowest level in the past three years.

Few commodities wield as much influence in the intricate web of global economics as oil. Oil is pivotal in driving economic growth and development as the primary energy source for transportation, manufacturing, and countless other sectors.

A couple of weeks ago, the International Monetary Fund (IMF) released its usual semi-annual World Economic Outlook update. While the whole process of forecasting has seemingly become increasingly difficult in recent years (partly due to inherently unpredictable crisis events), the IMF’s views retain their gravitas of authority.