Today’s market action is brought to you by – once again – central bankers. In what has apparently come as a shock to the market, overnight the European Central Bank (ECB) and The Bank of England (BOE) have come out and said they will keep rates on hold for a long time. Can you believe it?
This astounding piece of news was seemingly so unexpected that equity markets in Europe surged around 3%. Talk about Pavlov’s Dog…
Removing some of the sarcasm from our tone, let’s try and work out just what’s going on in the minds of our esteemed, wealth creating global central bankers.
The Federal Reserve, for years the paragon of easy money and market jawboning, has in recent months got the market thinking about an end to QE and ultra-loose money. As a result, a little speculative air has come out of the markets, which is a very good thing.
But this change in policy rhetoric by the Federal Reserve has reversed speculative capital flows. And at the same time, a drop in confidence about the impact of Japan’s grand monetary experiment saw speculative capital flow out of Europe’s peripheral bonds markets, which saw yields begin to rise again and threaten the region’s austerity drive.
Enter the ECB and the BOE, providing assurance to nervous speculators that easy money will be here for a long time to come. The flip side of this is that savers in these regions will also be screwed for years to come. Which is not good for the long term.
Sustainable economic growth relies on the accumulation of real savings. These savings provide the capital for investment, made by entrepreneurs harnessing and devising new technologies. Without real savings, then, the economy will constantly rely on debt funded growth, which will ensure the economy ‘recovery’ limps along for years to come.
Getting back to the ECB and BOE, their overnight jawboning antics put the pressure back on the Fed. If the Federal Reserve is guiding the market towards an eventual end to easy money, and Europe and the UK is telling global capital to come and party in their region, it does two things…
It strengthens the US dollar relative to the euro and the pound, which counts as a minor victory in the currency wars and encourages capital to leave US equity markets in favour of markets in the UK and Europe, on the assumption that their companies will benefit from a weaker currency. Which, if successful, adds another form of monetary tightening on the US economy should capital leave the US bond market (sending rates higher) for looser climes.
But like most things written about markets these days, this analysis will be pretty much useless in a few hours’ time. That’s because we get the monthly non-farm payrolls release in the US, which provides an indication of employment growth and therefore gives clues about the Federal Reserve’s ‘tapering’ thinking. (We’re sure the Fed is also desperate for clues about its thinking too).
And don’t forget, the US is pretty much on holiday at the moment, so the rally in Europe overnight was not (yet) confirmed by the US market.
So tonight around 10.30 pm Australian Eastern Time (or probably a few minutes before for those who pay for the privilege) we’ll get the employment numbers out of the US. The expectation is for employment growth of around 160,000. If the number is weak, expect a rally as the threat of ‘tapering’ recedes. Even gold might rally in such a scenario. (But we wouldn’t bet on it…gold usually cops a beating at the time of the release).
If the number is strong, we could get a sell-off…and if the number is around expectations, we’ll get more confusion.
Such is life when the central banker is in the drivers’ seat.
Can’t this debt edifice just collapse and discredit them all, so we can wipe the slate clean and start again? Do we have to wade through years of central bank tinkering, hope, lies and false recovery first? Because it’s all going to fall apart anyway. We should just get it over and done with and spare everyone the wasted time and boredom.
But all things happen in time. And until they ruin it completely, we remain on central banker watch.
Which brings us to our own central banker/comedian, Glenn Stevens. The Australian Financial Review reports today that Stevens’ wants the government to restore the budget to surplus as soon as possible. That the man controlling the monetary policy lever is dispensing advice to the man controlling the fiscal policy lever tells you that inflation is becoming a concern for Australia’s emerging comedic talent.
Well, Stevens reckons he’s got the economy under control by manning the interest rate lever. Lower interest rates will drag the dollar down, but only as much as the economy needs to absorb the effect of a slowing China and end of the mining boom.
Stevens doesn’t want the dollar to fall too fast though as it could import inflation into the economy. Coupled with persistent domestic inflation, if import prices start to rise too much then Stevens won’t be able to control his interest rate lever in the way he would like.
So we’re pretty sure he’s looking at Rudd and thinking, ‘don’t go and hit the spend button just before the election mate, because I don’t want to deal with a pickup in domestic inflation at the same time as imported inflation is on the rise. If you do, I may not be able to lower interest rates further, and the Western Sydney mortgage belt that you so desperately need to vote for you to have any change of retaining your grip on power will not be happy about that. Capiche?’
And then Rudd would say, ‘I don’t care about inflation picking up in the future, I care about getting voted in now. I can deal with the future when it comes, and blame any economic woes on what’s happening overseas, especially Europe…it always seems to work. No, I need to hand out some cash now, especially to the battlers, make people feel good and have them think the government is looking after them. Sorry Glenn, nothing personal mate, it’s just politics. Now leave my lever alone.’
Which is quite a depressing conversation to end the week on. So to cheer you up a bit, here’s a chart (h/t Alphaville) showing the rise of Australia’s exports to China over the past decade (a topic we discussed yesterday).
As you can see, the rise in exports to China is greater in magnitude than the rise in exports to Japan during its industrialisation phase. That parabolic move higher you see after 2000 relates to China’s historic credit boom from 2009, which saw a surge in price and volume exports of the bulk commodities iron ore and coal.
But we reckon that boom is now in the process of ending. Which means China may not continue to suck in 35% of our exports for much longer. Which means both levers – monetary and fiscal – will probably come into use in the years ahead…and damn the consequences.
Enjoy your weekend!
for Markets and Money
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