Thank God for the steady hand of the ECB in the middle of the maelstrom.
In the post-governing council press briefing Mario Draghi was, as ever, as cool as a cucumber and, as ever, told us nothing we didn’t already either suspect or know but in a way that made it appear as though it was world-changing news. Yes, he said, there is recovery in the eurozone economy, although he would neither confirm nor deny that this is cyclical rather than a result of the bank’s ultra-loose monetary policy. Yes, he said, the fear of deflation has well and truly evaporated. Yes, he said, one day that monetary policy will have to change but, fear not, it’s not yet. In the mean time, it’s “steady as she goes”.
Markets could think of nothing better than to sell the long end of the curve, which saw 10-year Bund yields rise to 37bp from 32bp and pressure continues with them at 42.6bp at the time of writing. Before running screaming for the hills, let’s just remind ourselves that that represents interest income of €4,260 per year on a capital amount of €1m as a reward for having lent that to the German government for 10 years while, according to the German Federal Statistical Office, CPI is running at 2.2%.
I was this week challenged on my recent assertion that the long end the curve looks like a safe place to be. How can that be true when the global interest rate environment is pointing north in line with rising inflation and re-emerging growth? The answer lies in the presence of crippling debt at all levels of society, and I’m happy to find my views are supported in an article in The Economist, which questioned the underlying health of the global eceonomy.
Central banks can tinker with the front end of the curve but they cannot afford to let the longer end take its natural course. Front end rates will rise while the back end will continue to be manipulated at will; a sharp increase in the cost of long money could blow up the whole system.
FRENCH, POLISH
Jean-François SixPack was out on the streets in 1789 when it had become clear that the construction of the palace of Versailles and eternal festivities there had more or less bankrupted France but how will his successor deal with the fact that the building of autoroutes, TGV lines, universities, hospitals and a generous social security system has basically done the same all over again? Panem et circenses can only be maintained as long as long rates remain well corralled.
Until 10 years ago, it was believed that leveraged money could whip and drive markets at will and that central banks were condemned to be powerless spectators. The post-crisis decade has shown the monetary authorities that they can, barring too much push-back from government, not only take on the hedgies but beat them at their own game. That that has been done by simply out-leveraging the leveraged guys is the scary bit and now that Pandora’s box has been opened, it can’t realistically be closed again. Oh, and push back from government? Why would turkeys vote for Christmas?
Thus, going forward, central banks will make sure that long rates remain capped. Exactly how they do it after the end of QE is still open to question but do it they will, as sure as eggs are eggs.
On to Poland and after many decades of watching members of the European project, it is staggering to see the government there lead the protests against the election of Donald Tusk to a second term as president of the European Council.
This says more about Poland than it does about Brussels but it also points towards some of the stresses within the system that have nothing to do with Brexit.
Poland, the home of Solidarnosc, was the poster child of the collapse of Soviet communism, and with its history of having been overrun from both the west and the east, it enjoys a rather romantic position in the hearts of many Europeans. The flip side, the backwardness of the country away from the bright lights of Warsaw and the parochial introspection have often been forgotten. It is one of the largest, if not the largest, net recipient of EU funds and we all know that spoilt children can often be the most truculent.
Onward and upward – today brings US nonfarm payrolls. After this week’s ADT release, the risk is again to the upside and should the figure not oblige, the argument will be that it’s a statistical aberration that will be washed out in next month’s revision. It seems to me that the pundits are getting progressively worse at forecasting the outcome and that the revisions are getting more extreme so the consensus of 200,000 for February can be little more than a shot in the dark. The punch will be in the revision to the 227,000 jobs created and reported for January. Sadly, I don’t think the Street is smart enough to have worked that out so the knee-jerk reaction will be to the February headline number. Serious investors won’t care and will go out for a long lunch or, if in New York, a long breakfast.
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. Wales vs Ireland in front of the TV tonight and off to Twickenham for England vs Scotland in the Calcutta Cup tomorrow.
Good weekend all!