The End of Monetary Policy Part 3

So the ECB denies that they have already discussed tapering their QE programme, just as every about-to-be-sacked football manager announces they have the full confidence of the board. A Bloomberg article released yesterday afternoon casually reported that ‘The European Central Bank will probably gradually wind down bond purchases before the conclusion of quantitative easing, and may do so in steps of 10 billion euros a month, according to euro-zone central-bank officials’. The ECB have habitually prepared the path for rate decisions with these kinds of leaks, so it’s interesting to note that the market reaction this time has been to believe the denial rather than the leak. Partly this is because there are few fast-money positions in the Euro or European rates that were predicated entirely on “QE Forever”. Partly it’s psychology, with many speculators burnt to a crisp by trying to follow Draghi’s announcements and pre-announcements. But more importantly its symptomatic of the current market hiatus: “Rates will be lower-for-longer; inflation is dead; curves are flat; buy yield wherever you can get it”. This story just doesn’t have enough vigour to shake that – not yet anyway. It’s rebuffed as madness: Blondemoney wouldn’t have written pieces such as “Put Your Hands Up if You’re Easing, Part Infinity”, if we weren’t now schooled in the lower-forever construct.

But it’s not madness. QE cannot go on forever. Yield curves cannot be manipulated forever, despite the BOJ’s Spanx-like devotion to Yield Curve Control. The very fact that a central bank, at its wits’ end, would announce a policy that is specifically called “Yield Curve Control” is a sign that the jig is up. The Jedi Central Banking is reaching its Han Solo crossing the bridge to Kylo Ren moment.

Monetary Policy is dead. Even if the ECB were not going to taper eventually, the market should teach them that they need to. They will have to at some point. Curves cannot be flat forever, and now we are starting to see some steepening emerge once again:

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Now, eventually fiscal policy will take over. But as we’ve already seen in the volatility of Sterling during the Conservative Party Conference, the adjustment to understanding the prognostications of politicians who may not even be talking to YOU the investor, but actually YOU the voter, is going to create a bit of a blow up as the realisation filters through.

So yes we are still in a carry-happy hiatus. But as the curve steepening continues it will be a sign that the cracks are starting to show.

2 Comments

Philip

Makes EURJPY look v intersting and other Euro Xs – especially those where the carry monkeys have been living

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