Deflation, deflation, deflation….
Plus ça change, plus c’est la même chose – the more things change, the more they stay the same. There’s a change in ECB rhetoric, but we’re effectively looking at the same solutions. Markets are happy as long as someone is hinting at money printing – doesn’t matter whom or why. The disparity between the Eurozone and UK/US monetary policy looks larger than ever on paper, but a few nonconformist votes and adjective changes don’t amount to a hill of beans just yet.
Super Mario to the rescue?
As Mario Draghi stood to speak at Jackson Hole, the ECB’s preferred measure of inflation expectations – the 5-year forward 5-year swap – was around 185 basis points. To claim that inflation expectations remained anchored to the ECB’s 2% target would be denial on a Norwegian Blue scale and he rightly promised to use ‘available tools’ in stronger terms than before. More suprising was the call for government reform on both the supply AND the demand side and the comments on pushing fiscal boundaries. Suggesting that governments apply the flexibility pact and co-ordinate fiscal stances is just a roundabout way of admitting France and Italy are right to demand more budget flexibility and a more polite way of commanding Germany to spend more.
(This is pretty much what France’s now ex-Economy Minister said; but it’s the way you tell ‘em)
The contrast between Mario Draghi’s dovish tone and Janet Yellen’s hint of hawk sent investors scurrying to buy. This at a time when France is cobbling together a government and the German IFO business confidence indicator is at its lowest since July 2013. The power of a QE hint! That’s all that we have – a hint. A speech that didn’t actually mention QE, but made many people think QE is coming. All very 2012, when “whatever it takes” caused bond yields to drop without any real ECB action. This time, the ECB needs to deliver – markets don’t like central banks who cry ‘print’. However, the central bank has other measures on the table it must assess first– like TLTROs (due next month) and ABS purchases, which now sound imminent. The ECB may also decide to trim rates first. Therefore QE may not come until 2015 – assuming there is any agreement to implement.
But isn’t this just more of the same? As we’ve argued before here, the Eurozone’s problem isn’t the availability or price of credit; it’s the amount of debt the remains on the region’s balance sheet. Companies and households simply do not have the appetite for more, so US and UK style QE can do little to improve demand. There’s no denying that reform on the supply and demand side is vital. It’s also vital that Germany does its bit to spend within its limits. However, getting agreement in place to allow or ‘encourage’ this change won’t be easy and the debt elephant remains in the room. There is the capacity to lower debts through recapitalising banks or, going one-step further through debt forgiveness – why not focus efforts there? The elephant will be more obvious when the Asset Quality Review (AQR) results come in this autumn.
It only takes a minute
After months of trying to decipher ‘a range of views’, we finally have something quantifiable on the views of the Bank of England’s MPC – a 7-2 split. The minutes show two hawks focused on the tightness of the labour market and wanting to pre-empt inflation risks. If wages are lagging, they reason, monetary policy might lag too. They know central banks often act too late. Meanwhile seven other members are ostensibly waiting for more signs of wage/labour recovery to act. They’re mindful that central banks can also act too soon.
Interest rate votes aren’t a one-way street. MPC voting splits in 2011 amounted to naught and the minutes suggest the two ‘hawks’ are ‘outliers’ not ‘bellwethers’. Of course, it’s a different economic environment to 2011 and we’re certainly on the path to the first increase in interest rates. However, at the same time, there doesn’t appear to be any data imperative to push any of the seve towards voting for a rise – at least not on the immediate horizon. Recent inflation and wage figures have been subdued. Strong sterling should continue to hold down import prices.
Therefore, whilst these two votes do make the an upcoming rise in interest rates feel a bit more real – as per the market reaction – they do little to change the likely timetable, which we still suggest is 2015.
Reinventing our world?
The confounding recovery is part of the ongoing debate over the direction of interest rates. No one expected a smooth and linear recovery, but this one defies current economic reason. This week the OECD picked the UK and US as global leaders in terms of GDP expansion. However, it’s hard to exult when productivity is low and wages are slipping in real terms – despite low levels of inflation.
There’s much to ponder when trying to fathom the ‘new economy’. Changing work patterns look a fertile area to explore and, linked into that, the way technology is revolutionising industries and the business-consumer relationship. It’s this all-pervasive change – along with supportive market conditions – that’s driving a blockbuster year in technology M&A. According to EY’s latest Global Technology M&A Update, Q2 14 aggregate deal value rose to US$52.4b, a 57% increase on the same period of 2013. In addition, H1 14 saw US$119b in disclosed value – that’s 70% higher than H1 13. Just to underline the ubiquity of technological change, in 63% of deals where a technology company was the asset, a non-technology company was the acquirer.*
“A technology-induced reinvention of all industries has begun, moving toward ‘sense and respond’ relationships between businesses and their customers and driven by the five transformational technology megatrends: smart mobility, cloud computing, social networking, big data analytics and accelerated technology adaptation” – Jeff Liu, EY Global Technology Industry Transaction Advisory Services Leader.
In total, 2014 disclosed deal value could top all years except 2000, when the dotcom bubble drove technology M&A to heights not seen before or since. However, even if values moderate, levels will easily top the previous seven years for which we have combined corporate and PE data.
*Including PE and PE portfolio companies