The ECB and BOJ
Told markets (their fears to allay)
Our policy ease
Has no guarantees
But promised that its here to stay
Strong US data yesterday, with both House Prices and Consumer Confidence printing at multi-year highs was enough to get the equity markets rallying and the dollar following suit. Simultaneously, the bond market behaved as it should, falling, with US 10 year yields rising to their highest level in more than a year. But that was yesterday. The overnight story has been a bit less clear, with the dollar giving back some of yesterday’s gains, although bond prices continue to decline, and equity markets around the world having a mixed performance. The OECD concluded a number of reviews of world economies and the results have not been that encouraging. In a nutshell, they cut their 2013 forecast for growth in China to 7.75% from 8.0%; they cut their forecast for France, Greece, Italy and Portugal and they called out the ECB to do more to help the Eurozone. They largely left the US expectations unchanged and commended the Fed for its aggressive policy and had encouraging words for Japan.
With regard to central bank policy, however, there seems to be a different tone in the markets. Yesterday we heard from both BOJ and ECB members that the current policy stance was to remain in place as long as necessary. This is quite a contrast to market concerns that the Fed is getting ready to taper its $85 billion monthly bond buying spree. While I don’t believe the Fed is that close to stopping, it has been called the rationale for both recent USD strength and any equity market weakness that we see anywhere in the world. And there is no doubt in my mind that as soon as they do indicate even a slower pace of purchases, bond prices will fall sharply and the dollar will rally. So it is truly crucial data for the FX market. Next Friday we will see the US employment situation for May and that will give us a great deal of information as to how things are likely to proceed. A strong report should cause a great deal of angst amongst the easy money set, and could well see both bonds and stocks decline. But we will address that more fully next week.
For today, there is no US data to drive things, but tomorrow we will see the usual Initial Claims data as well as the first revision of Q1 GDP. Friday could be a bit more interesting with Personal Income, Spending and Chicago PMI all to be released.
Today’s USD weakness seems excessive at this point, and I expect that some of it will reverse before the day ends. Ultimately, we remain on a very slow dollar trend higher as the problems elsewhere in the world seem to dwarf those in the US. That pace is highly dependent on the relative monetary policy stances of the key central banks. So to me, since the Japanese have been quite clear that they are just beginning their aggressive tactics, little is likely to change there. But both the Fed and the ECB are now the prime movers of markets, with any hint of policy changes from either one almost certain to have an outsized impact. Watch for clues of further ECB ease or initial Fed tightening. While neither is on the cards for today, they could be sooner than you, or I, think.