Central Banks in View After China Growth Surprise Fails to Lift Markets

Earlier today China released the official Gross Domestic Product for the third quarter. It came in at 7.3% a slight improvement over the expected 7.2% but still the lowest print since 2009. The gain was not enough to dissuade the market about the China slowdown story as facts continue to accumulate against the Asian economy. The positives from the GDP numbers are the fact that the subdued stimulus by the Bank of China and housing rule relaxation seem to have paid off. The Fourth Plenum ended its second day of a four day meeting that is focused on the rule law. Chinese leaders are expected to introduce reforms that fight corruption and modernize the justice system which in turn will open up China for more foreign investment.

The EUR/USD continues to drive towards 1.29. Disappointing US Retail sales and global economic malaise have the market convinced that the Federal Reserve will push their first rate hike further down 2015. Based on Chair Yellen’s first post FOMC press conference the market was expecting the first rate hike to come as early as Spring 2015. The Fed has tried to dissuade the market to not think of a schedule, but rather the hikes will come when the economy is ready. That is what has the market so jittery. Economic recovery hit an uncertainty patch that has now stretched the first rate hike maybe beyond 2015 and it will be up to the Fed to address those fears or as some of the Fed members have chosen to in the past weeks, just not discuss monetary policy.

The EUR/USD continued its upward rally today before reports emerged that the the European Central Bank was considering buying corporate bonds in the secondary market. The EUR weakened but the ECB dismissed them as surfers with an official spokesman. This comes after the central bank has started buying covered bonds this week. The current price of the EUR further pressures the ECB to take action as the EU is battling deflation which will not be aided by a strong currency limiting its competitiveness.

The Bank of England’s Monetary Policy Committee met on October 9 and the statement announced there would be no change in the benchmark rate of 0.5% and the size of the bond purchase program of 375 billion pounds. The minutes from that meeting will be released on October 22. Last time the minutes were released they shed light on the dissent from two members who were in favour of raising rates by 25 basis points, but where outvoted by the rest of the Committee. If the minutes released this week show similar dissent it would be the third time that the board has not been unanimous in their vote.

Economic conditions have not improved and in fact it has worsened in some parts of the world so it came at no surprise that the BOE did not change its monetary policy. The majority of the MPC is concerned with European growth and comments from the BOE’s Chief Economist last week are probably telling of the more downbeat reading of the UK Economy. Andrew Haldane said last week that he was “gloomier” with the direct implication that rates would remain lower for longer.

In the low for longer environment that major central banks are caught in, it will be no surprise that the Bank of Canada holds rates at 1.00% as it has done since September, 2010. This has been the longest period without a rate changes since the 1950s as it has been 32 meetings with no change. Canadian fundamentals have strengthened but so far do not justify a rate hike and the central bank has been vocal about this fact.

The release of the Bank of Canada’s rate decision will be accompanied by the release of the quarterly Monetary Policy Report. This document will update the projections of the BOC on the Canadian economy and other major economic trends. The current environment poses major risks for Canadian growth. Oversupply of oil and a slowdown in major markets has brought the price of crude down punishing all major exporters.

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