The European Central Bank (ECB) on Thursday surprised markets when its President Mario Draghi downgraded inflation forecast and pledged more quantitative easing (QE) if needed. Micheal Every of Rabobank believes this will have a near-term impact on equities and the markets will rally as long as some central bank or the other continues to pump in money.
He expects the United States non-farm payroll data, which is expected to come out later in the day, to come in at 217,000 in August versus 215,000 In July. He says if the data is strong, then the US Federal Reserve may increase interest rates on September 18.
Also, he adds that if the Fed hikes it rates, there will be further downside to emerging markets (EMs).
On the Chinese economy, he says in the near-term there may be some pickup in certain pockets, but from a structural point of view, the Chinese economy will remain weak. "The economy will continue to slow until there are reforms and or the currency weakens. And at the moment it is easier to let the currency weaken than undertake reforms," he told CNBC-TV18.
Below is the verbatim transcript of Michael Every's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: What have you made of Draghi's statement and how should global financial markets including emerging market investors take from it?
A: I think the most interesting thing about Mr Draghi\\'s statement is just how different it is from the message that was being sent from Jackson Hole just over a week ago where the European Central Banks (ECB) was saying that it could see inflation on the horizon and it seem to be all is well and we are going to be a little bit hawkish if anything message. Certainly we have Mr Draghi saying I see deflation and reducing the growth prospects and reducing the inflation forecast too and yes hinting at the fact that while they are not going to pull the trigger now that they are going to reaching in to their pockets for a few more bullets in the future. That doesn’t surprise me. I have long been arguing that we are stuck in a world where we do shift from one country doing quantitative easing (QE) to another and though we try and having devalue it recently the impetus is going to swing back to the ECB but unfortunately it is not a healthy indicator for what the underlying fundamentals in the global economy are showing us. Even this stock market like the near-term because the stock market dislikes rate hikes, even more than it dislikes economic weakness.
Latha: So, would we expect this quantitative easing hint to lead to more liquidity and therefore a little more of risk buying?
A: I think, near-term you can see the impact they had on equities. Everything went up and provided there is a central bank somewhere saying we will keep throwing money at the problem, you will have markets continuing to rally at least near-term. The only issue becomes how much money can they throw at it until we see that that does not solve the problem. And I think Japan are actually much further ahead down that particular path. When there is news today that the Bank of Japan are running out of things to buy with their quantitative easing (QE) because they have been buying so much of everything that there is not much in the market left for them to buy into.
Now, in the future, we may be chuckling at that, but that is the problem we can be all b facing and we do need to be addressing underlying structural issues in order to make sure we do not fall into that trap. But, at the moment, I do not see any governments pushing ahead with any kind of structural reforms and so it is over to the central banks.
Sonia: What is the expectation from the non-farm payroll number later tonight and if we do get a strong jobs number, you reckon the Fed could move on rates in the September policy?
A: For the actual market expectation, the latest consensus that we had this morning is that it is going be around 217,000 versus 215,000 last month. August does sometimes see surprise downside. Having said that, this really is always throwing a dart at a board with payrolls. It is incredibly volatile. It is one of the reasons why the market likes it because it gives the markets something to trade off of.
If we do get a strong number, yes, I think the hawks may actually say why not in September. Because, the Fed, at the moment, seems to be very much in the mood where it wants to show it can hike rates once. After that it may not do it for a very long period of time, but it wants to show that it can do it at least once.
If we get a weak number today, I do not think it is going to be happening till December and there will be more and more voices saying at once, might not be until 2016.
Latha: What have you made of the markets sell-off in the past several weeks? Both flogging the Chinese data as well as fears of a Fed rate hike. Have they flogged both these enough and do we enter a period of calm? Or are we going to roil more? Is there more to discount in Chinese slowdown?
A: Unfortunately, we may get a near-term pick-up in some sectors of the economy, because it appears that the credit taps are being turned on once again in China. But overall, from a structural perspective, China will continue to slow. What it really needs is deep rooted reform. And these are not my words, these are the government’s words themselves. But doing that of course, has near-term negative consequences which is one of the reasons why the can keeps being kicked down the road. So, unfortunately, the economy will continue to slow until we see either reforms and/or more downwards movement on the exchange rate. And personally, I think it is easier to move the exchange rate than to press ahead with those reforms and that is one of the reasons why I have been making it a cause for weaker renminbi going forward.
Latha: I am asking you a very direct question. When China opens on Monday are we going to see more roiling?
A: I think that is given. The only issue is how much roiling shall we say the People's Bank of China (PBOC) is prepared to stand for because they keep saying they are not going to do any more buying and then indirectly or directly they do. We saw that on Wednesday the markets opened down 4.6-4.8 percent and then managed to close almost in the green. My expectation is we will see a repeat of that action. People trying to go out and the authorities trying to push the market back up again. However, ultimately there is a broad consensus that isn't going to work in the long-run. So, eventually the movement would be down rather than up.
Sonia: If we do get a strong jobs data and the Fed does go ahead and hike rates, do you expect to see risk aversion in global equities especially in emerging markets?
A: Yes
Sonia: Is it priced in or can we see more?
A: We will see more because at the moment it is only around 32 percent chance priced in with Fed going in September and strong number would see that edge up towards 50 which at point emerging markets are going to find that there is more downside.
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