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Jedi Central Banking from Mr Draghi, although at least he’s announced some policies that should take rates lower, rather than the Fed and BOE’s recent trick of just telling us not to worry about rates going up any time soon, or even to a very high level… The “lower for longer” mantra is still very much alive and well. This from Draghi’s Q&A yesterday:
‘First of all, the first part, namely ease the stance of monetary policy. There we lowered the corridor and we reinforced our forward guidance. The reinforcement of our forward guidance was based on two facts. First of all, the extension of the fixed-rate full allotment until the end of 2016, and second, the fixed rate on the TLTRO. So this will say that interest rates will stay low for long, possibly longer than previously foreseen. And this will feed into the money market conditions via the yield curves and the exchange rate.’
Negative depo rates! A fixed rate 4yr LTRO with 10bp spread and few conditions attached that could be worth 1.2trillion Euros! Extending fixed allotment! Extending collateral eligibility! Suspending (the supposed shibboleth) of sterilisation of SMP!
And… The Euro ends the day where it started. The Bund and Eurostoxx just about rally. Vols sell off.
Remember those fund managers who said they were kicking themselves for missing the “lower for longer” hints dropped by Bernanke over $250k dinners? [http://reut.rs/TkXoy1 if you don’t…]
Even Bernanke is supposed to have expressed surprise afterwards that anyone listened to him, given they didn’t always bother to afford him the same interest when he was actually in charge.
Within this anecdote is a key point about the market right now. Markets are supposed to move ahead of central banks. Just because they tell us something, doesn’t mean it is so. A promise is not a forecast. Even their promises change. Didn’t Mark Carney just drop forward guidance? Haven’t the Fed moved to watching a ‘range of indicators for the labour market’? In fact, central banks are enthusiastic subscribers to Keynes’ dictum: When the facts change, sir, I change my mind.
The problem has been the data. An unusually cold winter wiped out a quarter in the US – which suggests a rebound in Q2 (that we’re already seeing) but what of Q3 and beyond? Keep your eyes focused on wage inflation. That’s the key part of the puzzle. The trouble is, it’s a lagging indicator. Once we’ve got there, the central banks will be far behind the curve. But we know they want to be, so why isn’t the market moving ahead of them?
Beware those droids you think you’re looking for.