Everyone on a Different Page

The inflation forecast for Europe continues to languish going into the ECB meeting. As the Fed inches back toward a neutral low rate stance, the ECB will be debating several easier calibrations. Halting the sterilization of SMP is a possibility. Another, one with more international consequences, would be moving the deposit rate negative. This could alter the projected FG path in dollar deposits and often proves tricky to return to normal.

China has struggled in 2014 and key money rates have fallen harshly from the spike at 2013 end. The 7 day repo dropped 100bp recently bringing back draining operations, which could pick up by mid-march. The yuan has been falling along with this adjustment.

The US, Europe, and China end up on different pages of the inflation handbook. The domestic focus, though needed, shows the consequence of money that flows around the world in milliseconds. When CB policies diverge, already weak medicine loses even more efficacy. The US stock market becomes a repository while turbulence is low and things get sorted out. Any bumps, like January, and participants quickly hide. If Draghi goes negative, Yellen's job will become more difficult.

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