WASHINGTON (Reuters) – Federal Reserve Chair Jerome Powell has taken a glass-half-full view of the U.S. economy but the trouble may be that the glass has gotten smaller and has a few cracks.

 

 

“Over the next week it risks losing a few drops as deadlines approach for the United States to impose new tariffs on China, British voters decide what has been called a “nightmare” election between far-left and far-right candidates, and other central banks take stock of what seems an increasingly turgid global economy[…]

The global economy is slowing. The International Monetary Fund at its semi-annual meeting in October cut its world growth forecasts for this year and next and said the outlook remained precarious…”

Read the full article and BNP Paribas Chief Economist Daniel Ahn’s remarks.

 

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Market pessimism is here to stay. Whether over global economic health or the power of central banks to improve it, the gloom is understandable.

About a third of government bonds globally and just over half of those in Europe are yielding negative rates. Looking at the shape of government bond yield curves, you would think we were in a recession – and a deep and prolonged one at that.

Some central bankers in the US and eurozone question the consensus view that they need to do more, urging caution instead. Regional presidents in the US Federal Reserve system have voiced their reluctance to cut rates further. Likewise, some influential members of the European Central Bank have expressed reservations on the urgency of resuming the quantitative easing program.

Things are not as bad as markets suggest, one argument goes, and it is worth keeping some ammunition dry. After all, labor markets are generally tight and household confidence resilient. And there are no big imbalances with the potential to trigger a significant correction.

However, there is more to market pricing than just pessimism about the short-term economic outlook. There is outright doubt among market participants that central banks and the broader policy framework have what it takes to respond to shocks.

Two key problems lie at the core of investors’ concern.

First, a scarcity of policy instruments. When the next recession comes – a matter of time after 10 years of economic recovery, if history is any guide – central banks in a low-interest rate world might not have the tools to fix to it.

Central banks’ failure to meet their inflation targets supports this point. The lack of inflation might be due to unusually long lags, cyclical factors or more structural issues. Much of it can be attributed to price expectations – which tend to reflect experience – trending lower, an unusual occurrence at this advanced stage of the economic cycle.

Whatever the reason, inflation remains stubbornly low. That is despite unprecedented monetary policy stimulus, including sizeable QE programs and exceptionally low or even negative interest rates. It is the case even in economies that are operating close to full potential, such as the US.

Persistently low inflation leaves central banks with scope for additional easing, and we believe they will use it, despite some policymakers’ reluctance.

But if that easing has not worked so far, why should it work now? The Fed cuts rates by about five percentage points in a typical recession. In the last cycle, it resorted to unconventional monetary policy, but it does not seem to have had the hoped-for result.

In many economies, growth is being hobbled by structural factors or uncertainty, not by credit supply constraints. Policymakers might find their emergency response channels stymied, as neither low interest rates nor expectations are easily moved when a large portion of the G10 nations’ government bond market attracts a negative yield.

Combine some policymakers’ doubts about the need for action with doubts about the potential impact of such action and it’s questionable whether central bankers have what it takes to jolt the economy out of its lethargy.

Second, and more fundamentally, there is a scarcity of ideas. Conventional macroeconomic models have not kept up with reality. Central bankers’ caution about further monetary easing is built on economic models that failed to predict and understand the global financial crisis and are failing to explain why inflation remains subdued after a decade of uninterrupted growth.

The challenges to mainstream economics posed by the Depression of the 1930s and the inflationary shocks of the 1970s sparked intellectual revolutions. The former gave birth to Keynesian interventionism. The latter bolstered the monetarist theories that came to form the basis of the current framework of central bank independence and inflation targeting.

Today’s challenge is on a similar scale. What is needed is humility and ambition. Humility in acknowledging the shortcomings of the current intellectual framework and ambition in putting aside the caution about action and using all available means to mount an aggressive policy response.

While we wait for the new academic underpinnings to emerge, the answer to the global economy’s quandary lies in bold, co-ordinated monetary policy in concert with fiscal measures, adding up to something close to debt monetization. That is where governments issue debt to finance spending and the central bank purchases the debt on secondary markets, thereby increasing the money supply.

This may not work, either, but the worst-case outcome would be too much inflation, and inflation is an enemy we know and, crucially, know how to fight with the trusty, traditional arsenal.

The sort of policy response that might lead to a normalization of the rate environment requires political will and time. Meanwhile, we expect markets to remain skeptical and yields downcast.

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Marcelo Carvalho, Head of Emerging Market Research, Latam at BNP Paribas, wrote an informative article explaining the correlation between the U.S. dollar and emerging markets for CNBC.

The article, “As US stocks get slammed, these markets are primed for growth” describes 3 factors:

• Political turmoil and high stock valuations in the U.S. are creating an uncertain market for investors
• Global growth, low inflation and interest rates are creating a sweet spot for developing nations
• Emerging markets are taking off, with Latin America and Brazil in particular, leading the way

Click here to read the article

     

BNP Paribas has underwritten the Association for Financial Professionals’ (AFP) Executive Guide on Global Transaction Banking, which examines the issues impacting the decision-making process for treasurers in an uncertain business environment worldwide, including appointing new banks and managing existing relationships.

The below article from Craig Martin, director, executive programs and treasury practice lead for AFP, introduces and summarizes the guide.

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By Craig Martin

Given the populist movements across the globe, in particular the Brexit vote in the UK, the Trump victory in the United States and the looming elections in France, conducting business around the world is becoming much more complex. Add to that potential trade sanctions and it gets even more difficult. So when a company operates globally, it is incumbent on its treasury group to provide adequate access to liquidity, and that requires maintaining sound banking relationships.

Managing relationships with transaction banks is a central part of a treasury executive’s role. Of all external partnerships, a successful set of bank relationships can have the most positive impact on the effectiveness of a company’s treasury department. Good bank relationships take time to build and nurture, but the investment in time will pay dividends.

The new AFP Executive Guide on Global Transaction Banking, underwritten by BNP Paribas, aims to help treasury practitioners navigate the process of initiating and managing a good set of bank relationships. The guide is structured in three parts. The first part reviews the current global banking environment. It outlines the pressures facing banks and explains why many of them have been reviewing their strategies over recent years. The second part has been designed to support the treasurer’s decision-making process when appointing new banks and managing existing relationships. It assesses the role banks play in supporting a global payments strategy and helps treasurers to identify and manage the counterparty risk associated with a set of global bank relationships. The final part of the guide assesses some of the factors that are already having an impact on the future of global banking. It addresses developments such as blockchain and identifies some of the ways these developments may affect bank relationships in the future.

As with other treasury activities, there is no single correct way to develop bank relationships and no ideal number of core relationships to have. The goal is to have an appropriate number of relationships, in which both the company and the banks achieve their own objectives through strong and collaborative partnerships.

Although there is general agreement that we face an unprec­edented global banking environment, it is less clear whether this represents a “new normal” or whether we are simply experiencing an extended period of market upheaval. The first scenario suggests that the banking environment will be in a state of flux for some time to come. The second promises that the current period of uncertainty will come to an end at some point, although precisely when remains difficult to determine.

In a sense, though, it should not matter too much to trea­sury practitioners which analysis proves to be more accurate. The reality is that the wider global banking industry remains under pressure to reform and restructure their businesses. This will, in turn, continue to have implications for the way individual banks choose to develop their propositions for their corporate clients. For treasury practitio­ners, this produces a fluid banking environment in which it continues to be difficult to manage bank relationships, with the consequent uncertainty about both the range of products and geographic footprint of each bank.

Given this as a backdrop, managing bank relationships is a highly complex, while vitally important, task. There is no single template or formula to determine the appropriate number of bank relationships. However, it is possible to identify the key factors to help make good decisions.

• The first step is to evaluate your current relationships.
• Next would be to establish your overall banking requirements.
• Then try to standardize the processes as best as possible. This may be difficult as, for example, services common in one market are simply not available in other markets. This can be a result of regulation so that, for example, the availability of different cash pooling techniques can vary significantly between countries.
• And finally, try to identify a target number of key relationships.

In summary, the more the bank knows about a corporation, the better the relationship will be for both parties. Also, treasury needs to be strategically involved. The more the treasurer is focused on establishing good communications with the banks, the better their ability to react in the current rapidly-changing environment.

Download a complimentary copy of the AFP Executive Guide on Global Transaction Banking here.

BNP Paribas and Treasury Today will host an exclusive webinar “Managing the Almighty Greenback – Optimizing your US Dollar Cash Flows Globally” on Wednesday, January 18 at 11:00 a.m. EST.

The US dollar continues to be the most dominant currency for global trade, and as a result multinationals are forced to manage significant US dollar flows. But how can treasury teams do this effectively across different regions, time zones and regulatory environments?

In this webinar, BNP Paribas will discuss key considerations for corporates when determining how to effectively manage US dollar flows and, by leveraging best-in-class case studies, explore what models might best suit your organization.

Facilitated by John Nicholas, Research Director at Treasury Today, the webinar will feature:

• Jan Rottiers, Head of Liquidity Management Products & Projects, BNP Paribas Fortis

• James Santoro, Head of Liquidity & Investment Advisory Americas, BNP Paribas Corporate & Institutional Banking

• Walid Shuman, Head of Cash Management Americas, BNP Paribas Corporate & Institutional Banking

Click here for more details and to register.

If you have any questions, please contact trade.treasury.solutions@us.bnpparibas.com.