The battle between these two ancient disciplines is hotting up. Well, I say ancient, it’s hardly Latin v Greek, but in terms of what is driving the market there’s certainly a face off emerging between old-school central-bank economics and fresh-eyed-newcomer politics. Viz.:
Central banks are taking away the punchbowl
…it’s just they’re trying to do it very very quietly, so as not to disrupt the party too much.
- The ECB have already tied themselves into explicatory knots as they battle a stronger currency, telling us that it’s OK as long as its caused by ‘exogenous’ factors, because then its impact of bearing down on inflation can kinda be ignored.
- Then last night we have the Deputy Governor of the Bank of Canada telling us that “each decision is a live decision” but also that “as the Canadian dollar is strengthening, we’re certainly watching that closely and we’ll be taking that into account pretty strongly in making our decisions“.
- And the RBA Minutes revealed again that while they’re happy with good jobs growth, and aware that super-low rates may contribute to excessive household debt, a strong AUD ‘was weighing on domestic growth and contributing to subdued inflationary pressure. A further appreciation of the Australian dollar would be expected to result in a slower pick-up in growth and inflation’.
- Meanwhile Mark Carney lived up to his politician reputation with his speech last night, where he attempted to refine last week’s hawkish comments from his BOE. He appears to have taken a leaf out of the ECB’s songbook, by attempting to re-frame the argument using economic terminology. Rather than ‘exogenous’, he gropes instead for the trendy concept of “r*”, or ‘the natural rate of interest’ arguing that ‘The case for a modest monetary tightening is reinforced by the possibility that global r* may be rising, meaning that monetary policy has to move in order to stand still‘. This is classic Carney, using the language of the doves to turn hawkish… hey, we’ve got to raise rates otherwise they won’t stay low, yeah? All else being equal?
Thanks guys. Deliberate obfuscation is never helpful, even though you think you’re doing it so as not to frighten the market’s horses into another taper tantrum. Falling over yourselves not to worry people just means there’s not enough clear information for those people to make decisions. Hence both GBP and CAD sold off after those comments, only to rebound hours later. The long-term upshot is understood though: interest rates are turning.
- The Fed could put the kibosh on this in their meeting tomorrow, of course. Just how worried are they about inflation? Did last week’s stronger than expected reading give them an opportunity to exhale? Or are they just marking time while Trump appoints their new leader (and around half of the rest of the Governing Board)?
Politicians are preparing for a punch-up
….or at least they are doing so more openly.
- The power vacuum since Theresa May’s shock election miscalculation is now blowing up into open warfare. The only surprise is why it took so long. She is Leader of the country in name alone, fatally wounded but propped up by a team of warring puppet-masters who are merely biding their time before plunging their knives into one another to emerge as her successor. This Caesarian tragedy has only just begun. Ken Clarke popped up this morning as the wise narrator, with a telling off for Boris Johnson’s weekend article on his vision for Brexit: ‘Sounding off personally in this way is totally unhelpful and he shouldn’t exploit the fact she hasn’t got a majority in Parliament. He knows perfectly well that normally the foreign secretary would be sacked for doing that’. And while the Tory Party squabbles, the clock ticks down. The next round of Brexit negotiations with the EU has been pushed back, due to ‘Britain’s political calendar’, or rather, we are heading into the Conservative Party Conference, they’re all back from the summer recess, and now they’ve got to decide on a common direction. This, 6 months after Article 50 was triggered, and 3 round of ‘negotiations’ have already taken place. Forgive Blondemoney’s scepticism that this isn’t going anything other than badly.
- –> The upshot is that, despite the about-turn from the BOE, the politics of Brexit and its potential impact on the currency is about to get ugly. Could it be a sign of a top in GBP/USD that HSBC have just thrown in the towel on their forecast of it heading to 1.2000?
- On the other side of the globe, Japan’s Prime Minister is looking to shake things up by potentially calling a snap election. This news has been greeted with a fresh round of Yen selling, with an expectation of a renewed focus on Abenomics, which was basically a policy of depreciating their currency, but making it look nice by describing the use of Arrows. Or something. It would indeed be a good opportunity for Abe to call the election now, with the opposition on their knees, and before a new party can be formed by Tokyo Governor Koike after his recent shock win in Tokyo. And the North Korea missile launches have seen approval for the PM rebound. Oh that pacifist constitution could be ripped up very soon indeed.
- –> It’s all very well that the market thinks “more Abe” means “more Abenomics” means “more selling of the Yen”. But what if his priorities have changed? What if there’s a reassessment of what Abenomics actually achieved? What if Kuroda doesn’t get reappointed as BOJ Governor when his term ends next April?
- And then in the US, just as Trump had to turn to the Democrats to get the debt ceiling raised, he also says his “ears are open” to find the “right conditions” to stay in the Paris Climate Agreement. The Republicans fire back with a leak that they’re open to putting together a $1.5trillion tax cut which may not have to be exactly revenue neutral. In other words, all sides are becoming clear on the new reality. Consensus has to be brokered for each grouping to gain power – including DJT himself.
- –> Does this break the deadlock in the US and mean that reflationary policies are back on the agenda? Or is the realisation dawning on DJT only very slowly?
The market has followed central bank meetings religiously for the past 10 years – after all, they’re the guys who brought the post-financial crisis madness to an end. They spoon fed us a calmer outlook. They mandated us to take risk, and compress volatility in the process. So it’s no surprise that all the focus is on them. Their unclear language can be frustrating, but at least we understand that they’re trying to turn the low rates supertanker around, even as they try to prevent an excessively speedy appreciation in their currency. Usual stuff then.
But the politics? No, that’s messy. One minute Trump can’t get anything done, the next he gets the debt ceiling raised. One minute the UK are progressing nicely through Brexit negotiations, the next their government is self-immolating. One minute Japan can’t reflate for love nor QQE money, the next its leader calls a snap election to reinvigorate his economic programme.
This back and forth is common in the political world, but entirely unclear to the financial world. In the battle of economics v politics, it’s 1-1 going into half time. Fresh oranges please!