Worries of negative interest rates are overblown
TORONTO, March 3, 2016 /CNW/ - Global investors need to take a chill
pill as economic prospects are not as bleak as many fear, finds a new
report from Avery Shenfeld, Chief Economist at CIBC.
Mr. Shenfeld notes that even though he's been steadily downgrading his
Canadian and global growth outlook since the second half of 2014,
market chatter has left him feeling like a rosy-glassed optimist. "The
wall of worry isn't that high in consensus economic forecasts," he
says. "Instead, it's been heard in the talk on the trading floors of
Wall Street and Bay Street, and whatever street the Shanghai market
sits on, among the newly cautious Federal Open Market Committee voters,
and in the resulting flight to safety rally in U.S. Treasuries.
"Prospects aren't as bleak as some now fear, and rates aren't going
negative everywhere. Investors, need to be scanning for signs that the
news ahead might be better rather than worse, and there are indeed some
forces that might pave the way for at least less-bad news."
He notes that while emerging market recessions, or in China's case,
growth disappointments, have been front and centre in the global
economic slowdown of the past year, there are some positive signs.
"The analogies that the bond market was relying on to price away almost
all U. S. rate hikes in the next two years, and take 10-year rates
below 2 per cent, simply ignore too many of the facts on the ground. In
recent days, we're seeing what could be the early signs of a reversal
of that trend."
He adds that worries of negative interest rates in the U.S. are
overblown. "Only weeks after the Fed hiked in December, we were being
asked to assess the odds that America's central bank will eventually be
pushed into negative rates. Increasingly, the analogy is being drawn to
Japan, which had its own real estate and financial market shock way
back in the early 1990s, from which it ended up being stuck in a zero
rate policy, and now negative policy rates, for what seems like
"We long ago projected that U.S. rates will track much lower than in
past cycles but America isn't turning Japanese, not by a long shot. Nor
is it sitting with a massive output gap like the one still festering in
Europe, wounded by the Eurozone's failure to use fiscal stimulus during
the Great Recession."
He does add that the market's assessment of Canada is rightly one of
concern for near-term growth prospects. Just as fiscal policy
differentiated the Eurozone's post-recession fate from that of the
U.S., it will hold the cards for getting the Canadian economy back in
"Monetary policy is a spent force here, given an indebted household
sector and an aging housing boom. Look for the federal budget to
deliver a larger fiscal boost than was talked about during the campaign
as a way to avoid Canada having to turn Japanese in monetary policy
"Take a chill pill, as things aren't as bad as you're hearing on the
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eimar16.pdf
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SOURCE Canadian Imperial Bank of Commerce
For further information:
Avery Shenfeld, Chief Economist, CIBC World Markets Inc. at 416-594-7356, firstname.lastname@example.org or Olga Petrycki, Director, External Communications, 416-306-9760, email@example.com