The Federal Open Market Committee made another set of largely dovish comments on Wednesday night, seemingly in response to the poor GDP numbers put out earlier in the day. The trouble is they have gone to such lengths to tread carefully and emphasise they will be ‘patient’ that it is starting to look like they are protesting too much.
Janet Yellen, Mark Carney, Mario Draghi and their teams point to the importance of ‘the data’ at every opportunity. However with the economic data coming out of the world’s major economies being very mixed the central bankers are showing more than a passing resemblance to traders switching positions one day to the next.
By many experts’ reckonings, the big miss on the US GDP numbers was mainly due to a particularly long and harsh winter snow season. When the world’s economic fortunes rest on the weather, we are in dangerous territory.
Perhaps it is time to bite the bullet and stop trying so hard to walk a tight rope of not ever saying anything which may spook the markets. The longer the central banks keep doing that, the bigger the reaction will be when they inevitable have to raise interest rates, or cut off QE in Draghi’s case.
“Central banks, who should be the guardians of stability, are playing a disruptive role in financial markets that could spark a prolonged period of volatility,” said Miles Geldard co-manager of the Jupiter Strategic Reserve Fund. “Volatility can spell opportunity, especially in an already choppy currency market, but can also prove challenging; limiting the risk of capital loss is always our key objective as we look to generate long-term positive returns for our investors,” Geldard noted.
He added that central bankers are taking a ‘more and more aggressive approach’ to support growth and encourage investment in risk assets, and this is likely to have ‘significant consequences’.
Geldard pointed to the recent fallout from the Swiss National Bank uncoupling the Swiss franc from the euro as a prime example of central banking decisions causing trouble in the markets.
Geldard’s co-manager Lee Manzi added that currency swings resulting from unpredictable monetary policy can presage volatility in other asset classes.
“Sharp movements in an exchange rate can create adjustments in other markets. Asian companies with dollar-denominated debt, for instance, can face repayment pressures from a rising dollar,” Manzi said. “A stronger dollar also increases the risk of an unwinding of the massive carry trade in credit markets that has been stoked by six years of zero short-term rates in the main reserve currency.”
According to Philip Lawlor, chief strategist at Smith & Williamson, another consequence of this new age of central banking is a fundamental change in sovereign bond markets being set in motion, with UK gilts, US treasuries and German bunds becoming increasingly dislocated. “
“Major sovereign bonds have traditionally tracked each other closely, particularly gilts and US treasuries, with the UK bonds tightly following the US counterparts,” Lawlor said. “Now however these relationships that were once relied on by investors are changing.”
The central bankers are of course well aware of the power they wield and their importance to the health of the global economy. They could however do a better job of convincing markets that behind the changing monthly rhetoric there is a master plan they are confident in.
