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Easing is more complex than markets think

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  • China cut its key benchmark lending rate by 0.40%, provoking an "interest rates down, good" Pavlovian reaction in financial markets. However, the reality is more complicated than that, with interest rate liberalisation measures also part of the process.
  • We believe that the aim of the easing it to improve cashflow for the indebted, and not necessarily to stimulate demand through a credit expansion. Credit demand is constrained by excess capacity, and credit supply is subject to quantitative limits that were not significantly eased.
  • ECB president Draghi's comments have reinforced his dovish intentions, although as Euro area inflation is likely to increase his comments were not perhaps as dovish as they appeared. Ifo business confidence from Germany is due, subject to the normal caveats of confidence data.
  • The US has the Dallas Fed business sentiment survey, which is not a major focus for markets as a rule. A report in the UK is suggesting that Christmas retail sales could rise 4% on last year - a reflection of better incomes and some increase in credit for the consumer sector.

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