This week, central banks, numb’ring three
Released information that we
Interpreted as
A lack of pizzazz
So, don’t look for tight policy

Yesterday’s release of the ECB Minutes from their January meeting didn’t garner nearly as much press as the FOMC Minutes on Wednesday. However, they are still important. The topic du jour was the analysis necessary to help them determine if rolling over the TLTRO’s was the appropriate policy going forward. Not surprisingly, the hawks on the committee, like Austria’s Ewald Nowotny, said there is no hurry and a decision doesn’t need to be taken until June when the first of these loans fall below twelve months in their remaining term. I am pretty sure that he is against adding any more stimulus at all. At the same time, given the recession in Italy and slowing growth picture throughout Germany and France, and given that Italian and French banks had been the first and third most active users of the financing, in the end, the ECB cannot afford to let them lapse. I remain 100% convinced that these loans will be rolled over in an effort to ‘avoid tightening financial conditions’, not in order to ease them further. However, the market impact of the Minutes was muted at best, as has been this morning’s data releases; one confirming that German GDP was flat in Q4, and more importantly, the decline in the Ifo Business Climate indicator to 98.5, its lowest level in four years. Meanwhile, Eurozone inflation remains absent from the discussion with January’s data confirmed to have declined to a 1.4% Y/Y rise. Nothing in this data indicates the ECB will tighten policy in 2019, and quite frankly, I would be shocked to see them move in 2020 as well.

The other central bank information of note was the Bank of Canada, where Governor Poloz spoke in Montreal and explained that while the current policy setting (base rates are 1.75%) remain below their range of estimates of the neutral rate (2.5%-3.5%), current conditions dictate that there is no hurry to tighten further, especially with the ongoing uncertainty emanating from the US and the overall global trade situation. So here is another central bank that had been talking up the tightening process and has now backed away.

In virtually every case, the central banks continue to hang their hats on the employment market’s strength, and the idea that a tight jobs market will lead to higher wages, and thus higher inflation. The thing is, this Phillips Curve model has two flaws; first it only relates lower unemployment to higher wages, not higher general inflation; and second, it is based on an analysis of the UK from 1861-1957, which may not actually be a relevant timeline compared to the global economy in 2019. And one other thing to remember is that employment is a lagging indicator with respect to economic signals. This means that it is backward looking and has been demonstrated to have limited predictive power. My point is that despite a clearly strong employment situation, it is still entirely possible that global growth can slow much further and much more quickly than policymakers would have you believe.

Back to the currency markets, the upshot of all the new information was that traders have essentially left both the euro and the Loonie unchanged for the past two days. In fact, they have left most currencies that way. This morning’s largest G10 mover is the pound, which just recently has extended its losses to -0.40% after it became clear that the EU was NOT going to make any concessions regarding the backstop issue as had been believed just yesterday. The latest story is that the UK is going to ask for a three-month extension, which is likely to be granted. The thing is, the problem is not going to get any easier to solve in three months’ time than it is now. This will simply extend the time of uncertainty.

Of course, the other story is the trade talks and the positive spin that we continue to hear despite the information that there remain wide differences on key issues like enforcement of any deals as well as the speed with which the Chinese are willing to open up their markets. It is all well and good for the Chinese to say they will buy more corn, or more soybeans or more oil, but while nice, those pledges don’t address the question of IP protection and state subsidies. I remain concerned that any deal, if it is brokered, will be much less impactful than is claimed. And it is quite possible that the US will not remove any of the current tariffs until they have validation that the Chinese have upheld their side of any deal. I feel like the market is far too optimistic on this subject, but then again, I am a cynic.

While FX markets have been slow to respond to these stories, we continue to see equity markets wholeheartedly embrace the idea that a deal is coming soon and there is no reason to worry. Last night, Chinese equity markets rallied sharply (Shanghai +1.9%), although the Nikkei actually slipped -0.2%. European markets this morning are higher by around 0.4%-0.5%, as they, too, seem bullish on the trade picture. Certainly, it is not based on the economic picture in the Eurozone.

But as we have seen for the past several weeks, central banks, Brexit and trade are the only stories that matter. Right now, investors and traders are giving mixed signals, with the equity markets feeling positive, but currency and bond markets much less so. My money is on the bond market vs. the stock market as having correctly analyzed the situation.

Good luck and good weekend
Adf