If inflation starts to undershoot, which is what the governing council expects, the stronger euro would reduce the amount of imported inflation," Menuet says in an interview to CNBC-TV18. Mario Draghi, president, ECB last week itself hinted at a rate cut if the eurozone economy weakened further.
Also read: Europe in dire straits, Germany last hope says Coopercity
Meanwhile, Menuet is bullish on emerging markets (EMs) despite their disappointing first quarter of the calendar year.
"When one combines the modest or loose monetary policy framework with a fiscal situation which is not as stressed as one sees in the euro zone, then the prospects for profits are looking pretty positive for me," adds Menuet.
Below is the edited transcript of Manuet's interview to CNBC-TV18.
Q: What is the sense you are getting generally of developed markets. We had about six weeks of fairly tepid data, even bad data coming out of the US- the ISM numbers, the jobs data, the Purchasing Managers Index (PMI) numbers from Europe were nothing to write home about. Do you think the markets have discounted that bad news and now they are preparing for the next upmove?
A: Generally, the investor sentiment is related to what is happening in Asia and in particular Japan. We saw in the last two or three trading days a significant spread compression within the peripheral bond markets in Europe. We have had a very strong buying appetite for the semi-core countries- France, Belgium, Austria. So, investors are looking for yield and there is a lot of buying going on.
Q: How would you approach some of these emerging markets (EMs) if you look at them because the first quarter has been very disappointing of the calendar year? How do you see summer pan out for EMs? Do you think the love has receded with respect to EM equities?
A: I do not particularly follow emerging market equities, but there is still a bit of an easing left within central banks. Within some key emerging market economies, there is still a situation whereby inflation pressures are moderate and therefore, there is still an expectation of a significant loose monetary policy setting being maintained for quite a while. So, when one combines the modest or loose monetary policy framework with a fiscal situation which is not as stressed as one sees in the euro zone, then the prospects for profits are looking pretty positive for me.
Q: How have you interpreted the news around Bank of Japan (BoJ) and the beginning of what is probably a might bond purchase. Are you going to see the yen fall much further and the Nikkei itself rise more whether or not it makes a macroeconomic difference to that economy?
A: The administration in Japan, the new prime minister and the newly appointed Bank of Japan governor are all trying to change expectations of inflation in Japan over a two year period. They are moving away from deflation onto a more normal functioning economy where the general level of prices should be more positive. To do that the governor will have to combat the entrenched complacency about the deflation. If one looks at various surveys of what people think about deflation or inflation, the general public in Japan is very happy with the fact that prices are falling. So, expecting the Bank of Japan to be very successful immediately is not the right view.
If they want to be credible about this two percent inflation target in two years' time, then they have to perhaps do an awful lot more and remain open-ended. So, the yen will fall a little bit further.
Q: As the persistent weakness in the euro area perhaps threatens those markets, do you think that the European Central Bank (ECB) president may show a greater willingness now to perhaps cut rates further in the coming months?
A: They have told this repeatedly that there are many ECB governing council members. There are 17 national central bank governors and six executive ECB members - 23 of them meet every month to take a decision. Some of them argue against the fact that cutting interest rates will not deliver anything in terms of economic impetus. The rates are very low, market rates are close to zero, but one will have to remember the ECB has an inflation target, which is symmetric. Therefore, if inflation starts to undershoot, which is what the governing council expects, the stronger euro would reduce the amount of imported inflation. The margin should open the door to 25 basis point rate cut possibly next month.
Q: We began by asking you about the weak data that's bedeviling the US economy for the past four to six weeks. Does that continue?
A: This is the consequence of the sequester and the abrupt fiscal policy adjustment in the US economy. It is a transitory phenomenon and as early as the second half of this year the US economy should be back on trend for 2.3-3 percent growth.
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