Global economic data is showing strength from China to the Eurozone. The strength is reflected in trade numbers, PMI (Purchasing Managers Index), unemployment rate and consumer confidence. Inflation too is on an upward trajectory. Tables 1 to 4 gives you a snapshot of global economic data.
The strength of the global economy has given rise to talks of central banks from the ECB to the BOJ tapering accommodative monetary policy. Talks of tapering have taken up bond yields globally, though yields have softened from highs over the last one month on geopolitical concerns.
Will Central Banks remove accomodative policy? The Fed is already in the process of rising interest rates to neutral levels with 3 rate hikes of 25bps each done over the last 16 months. Fed stopped asset purchases in December 2014. Fed has indicated for more rate hikes this year and next and is also talking about shrinking its balance sheet.
ECB has tapered asset purchases from Euro 80 billion a month to Euro 60 billion a month from April 2017 and will continue with asset purchases till December 2017. ECB has kept rates at all time lows and is more likely to normalize rates once it stops asset purchases. All this would depend on the strength of the Eurozone economy.
Bank of Japan is targeting the 10 year Japanese Government Bond at a yield of around 0%. BOJ inflation target is 2% and it will stick to its bond yield target until inflation is seen sustainable at 2% levels.
People’s Bank of China (PBOC) is using money markets to regulate flow of funds to the banking sector. Overheated property markets and rising bank loans have forced the PBOC to tighten money markets. China’s fx reserves too have dropped ever since the Yuan started to fall and that has naturally lead to liquidity tightening in the system.