Thursday, 19 July 2018

Over to you, Fed

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The week ahead in a nutshell: The ECB has spoken, the PBoC has acted, whither the Federal Reserve?

The PBoC’s rate move, once again a twin cut in both the lending and deposit rates of 25bp and in the RRR, the Reserve Requirement Ratio, of 50bp, is a bit of a curate’s egg. The cut in itself signals the government’s determination to keep the economy rolling and to engineer, if any landing is to be permitted to take place, a soft one, but it is clearly not as aggressive a move as many might have hoped for, given the economic struggles. This was the sixth easing move within the last 12 months and the fourth one, year-to-date.

Personally, I don’t believe that the PBoC will have had more than a casual eye on Wednesday’s FOMC meeting but it if did, the message would be quite clear: “We’ve now done our bit, over to you….”.

The FOMC, seemingly still as split as it has been all year, is now in an even greater quandary. Does it tighten and show its ability to rise above the white noise or does it do what most expect it to do and leave everything unchanged when at risk of later being accused of having its decision influenced by the Chinese.

Markets are always very good at finding data which support the mood of the day. The more data they look at, the more likely they are to extract something which is the perfect fit. Thus, both hawks and doves have plenty of ammunition. But that aside, October has never figured very highly in anybody’s agenda as a possible date for a shift in policy and, to be frank, not much has changed.

The FOMC has had more than enough opportunities over the past 12 months to get on which normalising the interest rate structure, none of which it has taken. Thus I can’t really see why this week should be any different although Jeff Lacker of the Richmond Fed’s dissenting vote at the last meeting might embolden the hawk community to follow suit this time.

Conversely, having had one member step out of line might have been enough to motivate Madame Yellen to take a tighter control of matters. Loose talk costs lives. In the three and a half decades I have been hanging around street corners in the City, I have never experienced such shabby verbal discipline by our central bankers. There seems to be no party line and how business is expected to take long cycle investment decisions with the Fed shilly-shallying around escapes me. The bon mot tells us that if you don’t know where you’re going, you don’t know when you’re lost. That, to me, defines the space the monetary authorities are in and, by osmosis, so are we.

The UK is in a slightly different position. It doesn’t need the MPC members to contradict each other as the governor, Mark “The Magician” Carney is doing a perfectly good job of contradicting himself. Mind you, for once I have sympathy with him.

On one hand he is cognisant of the general uncertainty which is stalking the global economic scene while on the other hand he is trying to warn Kevin and Tracy SixPack from getting themselves overexposed on the buy-now, pay-later front… or should that maybe read even more overexposed? Retail sales, having knocked forecasts into a cocked hat, are running well ahead of overall GDP growth and we all know what that means, in terms of credit cards….

The rule we old dogs had hammered into us – and sometimes with a jolly good clip around the ears from the desk head – was “If in doubt, get out”. That seems to have been replaced by the new mantra: “If in doubt, the central banks will take care of things so close your eyes and buy the living daylights out of risk assets”.

The Dax followed through on the back of last week’s ECB meeting with a 2.88% rally, chased closely by the CAC at 2.53%. Amazing what the prospect of a weaker euro can do for the strongest economies in the Union. That put the Dax back to a gain of over 10%, year to date.

The PBoC move pushed Chinese markets higher but not by anything like the gains seen in Europe. How could they? Europe and not China is experiencing negative inflation and zero growth….

High-yield funds are, so I read, seeing record inflows so I suppose it won’t be long before yield hungry investors forget all their reservations about poor commodity prices and begin to buy it again, simply because it’s there. Oil fell back again on Friday with WTI closing at US$44.66, its lowest in 5 weeks.


Elsewhere, the EU is still trying to work out what to do with all the migrants without finding itself accused of being racist, islamophobic, heartless, soulless and doing what it is paid to do, namely to look after its own tax-paying citizens ahead of anybody else.

Polish voters have made their voice heard with a sharp shift to the right in this weekend’s elections. I test I don’t need to repeat the figures which are splashed all over the headlines this morning. Since losing practically all of its 10% Jewish population, Poland sports a fairly homogeneous Catholic monoculture which obviously isn’t particularly enamoured of the idea of being diluted again.

The “Old East” takes a very different view of things than more open West with its history of colonialism and the concomitant immigrant communities. European unity is under severe stress; there is no moral equivalent to the ECB’s financial “Whatever it takes….” I don’t, however, foresee any immediate breakups but there is very clearly a creeping divergence taking place. In case you’re wondering, that’s not today’s trade.

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