A global central bank easing cycle is starting
There’s another reason why Wall Street had such a big day on Thursday besides some solid economic data. Investors are realizing we are in the middle of a massive, synchronized global central bank easing cycle and the Federal Reserve is about to join the party. In the past, such massive monetary easing has given a boost to equities, especially when the practice is not occurring during recessions. Rate cuts are beginning to pick up steam around the world in recent weeks, according to Citi global chief economist Nathan Sheets, with the Bank of Canada and the Bank of Mexico among some of the central banks slashing interest rates. Sheets points out in a note to clients that the last few months, there’s been the most easing among the 33 major central banks — outside of periods with major recessions — in two decades. “We believe central banks are just getting started, and that this global easing cycle will expand and pick up steam in the months ahead,” Sheets wrote on Thursday. This comes as stocks continued their run on Thursday after better-than-expected retail sales data further extended gains in recent days. The S & P 500 notched its sixth straight winning session and has advanced about 8% from the lows seen on Aug. 5. Investors also cheered a fall in jobless claims on the week, with both reports serving as a much desired slate of favorable economic data following a weak nonfarm payrolls report earlier in August that helped spark the sell-off a week ago Monday. With the Fed set to cut rates next month, the market is anticipating it will get friendlier monetary policy, while keeping a strong economy. To be sure, the full benefits of rate cuts globally for investors will depend on how far the Fed is behind the curve, according to R.J. O’Brien and Associate managing director Tom Fitzpatrick. Judging by history, he said, the Fed needs to catch up. Plus, with the latest comeback rally, the S & P 500 is up 16% year to date — and near all-time highs. “Generally, they overstay their welcome on both sides in terms of easing and tightening, but time will be a better judge of that,” Fitzpatrick told CNBC. “As we sit here today, it’s too hard for me to embrace that there’s some tail wind coming from central banks.” Futures pricing data indicates traders see a more than 75% chance of a quarter-point move by policymakers at the Sept. 17-18 Federal Open Market Committee meeting, per CME Group calculations based on trading. “The global central bank trend in monetary policy really turned dovish late last year/early this year,” said Shaun Osbourne, chief FX strategist at Scotiabank. “The Fed is lagging the global easing cycle (because inflation has been stickier in North America) and will need to catch up at some point.”
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