Central bankers to confer on recovery plans

Bloomberg

Listen at the doors of two major
gatherings of the world’s central bankers in Switzerland and Portugal next week, and one might hear little but the sound of forecasts being shredded.
The world’s monetary guardians will gather at the Bank for International Settlements’ annual meeting in Basel over the weekend, and at the European Central Bank’s yearly policy forum in Portugal from on Monday. At each event they may consider how, after years of striving to heal their economies, and with nascent signs of success in the halting normalization of US monetary policy and a gradual pickup of European credit, they’ve been set back by UK’s vote to leave the European Union.
Policy makers who acted promptly on Friday to help quell market turmoil are likely to turn to assessing the impact of the British decision on growth and inflation prospects for the EU and beyond. In calibrating a response, they’ll be mindful that monetary policy is already severely stretched after almost a decade of financial turbulence.
Central bankers “will instinctively understand that Brexit is a negative for the global economic outlook,” Marchel Alexandrovich, senior European economist at Jefferies International Ltd in London, said by phone. “Now it becomes a European issue, for banks and insurance companies. Two months ago we were hoping that the US Federal Reserve would raise rates, and there’d be higher yields at the end of the year.
We’re in for a very long and
uncertain road.”
Sentiment Reversals
Investors and policy makers will have to wait for the UK’s decision to filter through into economic data — first through sentiment indicators and then hard output figures. The European Commission’s confidence gauge for the euro area on June 29 will likely be too soon to capture any changes. Smaller indicators, such as the Sentix index due on July 4, have a short-enough lag to reflect some of the impact.
There is potential for significant reversals. Indicators including the ZEW investor expectations surveys for the euro area and Germany’s influential Ifo Index of business confidence rose in the run up to the vote.
The BIS — an institution that has warned repeatedly about the dangers of overburdening monetary policy — may find itself hosting officials concerned that their initial pledges of liquidity need to be followed up with stronger action.

No Getaway
Analysts including Gilles Moec, chief European economist at Bank of America Merrill Lynch, now expect the BOE to cut its key interest rate to zero in July from the current record-low 0.5 percent, and expand its quantitative easing program by 50 billion pounds from August.
For the US, the Brexit saga has explicitly impacted the Fed’s plans to move interest rates from crisis-era lows. Chair Janet Yellen said this month that the impending vote played a role in the decision not to tighten.
Life at the ECB will scarcely be easier in coming days. Its annual forum in the Portuguese resort of Sintra is intended as an academic getaway, far from the pressures of markets, but there’s likely to be no escape from Brexit. Bond spreads between euro-area nations widened as investors shunned higher yielding debt such as Spain’s in favor of havens such as Germany.

Fundamental Doubt
The ECB this month forecast euro-area economic growth of 1.6 percent in 2016 and 1.7 percent in each of the following two years. It sees inflation — at minus 0.1 percent in May — rising to 1.6 percent by 2018. Updated calculations to be published in September might not look so rosy. The Governing Council is due to hold its next non-monetary policy meeting on July 6, and a rate-setting session is scheduled for July 21.

According to Jefferies’ Alexandrovich, the Frankfurt-based central bank may be able to contain any bond-market turmoil in Europe simply by picking up the pace of its asset-buying program, currently 80 billion euros ($89 billion) a month. Beyond that, it may have little room left to ease policy.
Moreover, the U.K.’s jettisoning of the EU might engender a fundamental doubt about the future of the bloc, and by extension the euro, according to Megan Greene, chief economist at Manulife Asset Management LLC in Boston. In that case, central bankers can do little to address what is a political problem.
“This will provide a real confidence-channel headwind in the EU, and over the medium term the threat is much bigger,” Greene said in a phone interview. “There will be some soul searching about what the EU needs to change.”

Bank chiefs seek to allay staff concerns 

Bloomberg

Bank bosses from JPMorgan Chase & Co’s Jamie Dimon to Credit Suisse Group AG’s Tidjane Thiam sought to allay the concerns of their UK workforce that the firms had plans — for now — to ship their jobs overseas after Britain voted to quit the European Union.
They said they would wait and see how the UK’s negotiations with the EU over fresh terms of trade panned out, before making any decisions on how many employees they planned to relocate and to where. The worry is that Britain may lose its ‘passporting’ rights, which allow banks to reside in the UK and sell their products and services throughout the EU.
Today’s memos to staff struck a softer tone than bankers’ comments in the lead up to Thursday’s vote, when several of them said a Brexit could trigger economic calamity and prompt them to relocate thousands of staff abroad.
JPMorgan Chase CEO Jamie Dimon told his 16,000 UK staff that the bank’s operating model in the UK would remain the same for the time being. “In the months ahead, however, we may need to make changes to our European legal entity structure and the location ofsome roles,” he wrote in a memo. Citigroup Inc CEO Mike Corbat said there will be “no change in the way Citi is able to conduct its business” for at least two years. Morgan Stanley’s James Gorman said, “Despite inaccurate media reports, we have no plans in place to move staff out of the UK and will only consider adjustments to our operating model,” in Europe, the Middle East and Africa “as the full impact of the referendum outcome becomes more clear over the course of the next two years.”
Credit Suisse’s Thiam predicted choppy trading conditions, but “no immediate legal implications” for its British clients or employees.
Barclays Plc CEO Jes Staley said the bank’s strategy he announced on March 1, “was not conditional on the UK remaining in the EU” and that it remains “a transatlantic consumer, corporate and investment bank, anchored in the UK and the USA.”
Goldman Sachs Group Inc. chief Lloyd Blankfein said the bank has a “long history of adapting to change” and has planned for either outcome “for many months.” Royal Bank of Scotland Group Plc said it was “business as usual,” and that it had no plans to change where or how it operates. HSBC Holdings Plc Chairman Douglas Flint said “our commitment to British businesses, customers and staff in the U.K. remains undiminished.” Bank of America Corp.’s Alex Wilmot-Sitwell, president of the bank’s EMEA business, said the company will get a clearer understanding of the “implications” in the coming months.