Who is Winning the Monetary Stimulus Race?

Hint: it's not Canada.

April 16, 2012

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1080965_turtleOne of the functions of monetary stimulus is kick-starting a lacklustre economy.  Since the crisis in 2008, the path taken by monetary stimulus differs by region.  In the United States and United Kingdom, overnight rates dropped steeply and stayed there. In contrast, Canada slashed its overnight rate to near-zero but brought it back to 1% in 2010. Australia’s overnight rate hit a low of 3% in 2009, returned to 4.75% by November 2010, and then subsequently edged down in late 2011. Below, we show a graph of overnight rates by region (click graph to enlarge):

Jacob-Chart-1

Source: Bloomberg

Along with interest rate adjustments, other tools come into play. For example, the US Fed’s quantitative easing decreased 10 year bond yields to below 2% — a historic low – from above 4%.

It’s logical to ask how one can quantify how effective the stimulus has (or hasn’t) been.  One straightforward method is to look at how consumer discretionary equities have performed. If one purpose of monetary stimulus is to encourage consumer spending, the discretionary sector should directly benefit from central bank easing.  In other words, easier and cheaper access to credit allows households to spend more on non-essential items, resulting in a performance boost to the consumer discretionary sector relative to the rest of the stock market.

The chart below tracks the effects of stimulus on consumer discretionary stocks.  It suggests that regions with the most sustained stimulus efforts (e.g. the US and the UK) had the best relative results, while those which manipulated interest rate policy more frequently (e.g. Canada and Australia) fell considerably short (click image to enlarge):

Jonathan-Jacob-Chart-2

Source: MSCI

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