Mario’s Turn

Inflation was kind of a flop

As core prices didn’t much pop

Then Janet regaled

Investors but failed

To sell the idea stocks could drop


The Old Lady’s next to report

Excitement, though’s, sure to fall short

She’s clearly on hold

Til Brexit unfolds

While Carney just holds down the fort


Then lastly it’s Mario’s turn

Where euro bulls, to a man, yearn

For hints that QE

Will end more quickly

Else they’ll all wind up with heartburn!


Starting with the Fed yesterday afternoon, markets have been convulsed by central bank activities in both G10 and emerging markets. And the fun will continue until Signor Draghi finishes his press conference later this morning. So let’s recap what we have learned so far:

FOMC – raised rates 25bps, as expected, and continued to describe economic growth as moderate and risks as roughly balanced. The dot plot indicated median expectations for Fed Funds in 2020 rose to 3.25%, up from the previous reading of 2.875%, but there were two dissents on the vote compared to a unanimous decision in September. Net, it appears that when Jay Powell takes over, he will be following the same course for now, although certainly if the data starts to change, specifically the inflation data, we are likely to see an altered path.

PBOC – raised several rates by 0.05% overnight in an attempt to maintain the balance between their efforts to deleverage the economy further while still encouraging growth. They also added substantial liquidity to the market to prevent any squeeze in short term funding. It seems clear that the Chinese are going to continue to take their lead from the Fed as they navigate their own internal issues. There was virtually no impact on the currency.

SNB – the Swiss left rates unchanged as they continue to call the franc overvalued despite its 7% decline vs. the euro thus far this year. Inflation remains below target, although it is finally climbing slightly. There was no indication that they will be changing the policy rate until well after the ECB starts to raise rates, which, as of now, seems unlikely before 2019. The Swiss franc weakened slightly after the announcement as any hope of a rate change from the current -0.75% was dashed for a longer than expected period.

Norgesbank – while the Norwegians left rates on hold, as expected, they raised their forecast rates starting in Q4 2018 and beyond as they now foresee global growth continuing and driving up the global rate structure. This adjustment surprised the market and NOK has rallied by 1% this morning on the news, by far the biggest mover in the G10 bloc. This is especially in contrast to the Riksbank, who gave no indication that policy rates in Sweden would be moving any time soon.

Central Bank of Turkey – the Turks raised the Lending rate by just 50bps, half the 100bps expected by the market heading into the meeting. It seems that the Central bank is feeling the pressure from President Erdogan who has been calling for lower rates to tame rising Turkish inflation. The lira took the news poorly, tumbling 1.6% within minutes of the announcement and has remained at this new, lower level since then.

ECB – This is the last major central bank meeting of the year. Expectations are for no policy changes, with rates remaining on hold while QE continues, but there are high hopes by euro bulls that Signor Draghi will hint at QE ending completely next September, or that there might be a change in the timing of when rates start to rise. While the Eurozone economy has clearly improved significantly during the past year, the inflation conundrum there is even stronger than here in the US, with core inflation still below 1.0%, far lower than its target of ‘close to, but below 2.0%.’ As I wrote yesterday, inflation has become the key metric for virtually all central banks at this point, and until those readings start to pick up, I find it extremely difficult to believe that the ECB is going to change its stance.

Yesterday, the US core inflation data disappointed, printing at 0.1%, which served to keep alive the debate about why inflation doesn’t seem to respond to the robust employment data. Yellen had no answers at her press conference other than to say that they expect it will eventually occur. However, the soft inflation data yesterday did undermine the dollar, which was consistently weaker all session.

Interestingly, in the time I have been writing my note this morning, early further weakness in the dollar has largely abated, and except for the above mentioned central bank impacts on CHF, NOK and TRY, the dollar is virtually unchanged. This morning also brings some US data to add to the mix with Initial Claims (exp 236K) unlikely to move markets, although Retail Sales (exp 0.3%, 0.6% -ex autos) could have a bigger impact. My sense here is that stronger than expected data will be taken in stride by the markets with little impact, however weakness might be reflected in the dollar losing some additional ground. Of course, it all depends on what the ECB does. They release their policy statement at 7:45 EST and then Draghi faces the press at 8:30. I expect that until we hear from Draghi, markets will remain little changed, but then all bets are off. After all, he has been known to surprise us all.

With the last of the central bank decisions out of the way by day’s end, this will be the last poetry until January 3rd. In that spirit, and in the spirit of the season, may you all have a wonderful holiday and a happy and healthy New Year.


Until 2018…