While prices worldwide keep on rising
Most central banks are still devising
Their latest excuse
For why money, loose,
Is still the least unappetizing
On Wednesday Chair Powell explained
That QE would slowly be drained
Then Thursday the Bank
Of England helped sank
Gilt yields, leaving traders bloodstained
Now Friday’s arrived and we’re all
Concerned that a Payrolls curveball
Could quickly defuse
The new dovish views
With hawks back for their curtain call
If you sell stuff in the UK, or hold assets there, I sure hope you’ve hedged your currency exposure. In what can only be described as shocking, the Bank of England left policy on hold yesterday after numerous hints from members, including several explicitly from Governor Andrew Bailey, that something needed to be done about rising inflation. The combination of rising inflation prints, rising inflation forecasts and comments from BOE members had the market highly convinced that a 0.15% base rate hike was coming yesterday, with the idea it would then allow the central bank to hike further in 25 basis point increments with futures pointing to the base rate at 1.00% come next December. But it was not to be. Instead, in a 7-2 vote, the BOE left policy rates unchanged and will continue its current QE program which has £20 billion left to buy to reach their target.
The result was a massive repricing of markets as interest rates tumbled across the entire curve and the pound tumbled along side them. In what is perhaps the most
brazen lie audacious statement from a major central banker lately, Bailey explained in a Bloomberg TV interview that it was “not our job to steer markets.” Seriously? That is all every central banker ever tries to do. If financial stability is one of the goals enumerated for central banks, the BOE failed dismally yesterday. Tallying up the impact shows that 10-year Gilt yields fell 13 basis points (and another 4.1 this morning), OIS markets saw the 1-year interest rate decline 20 basis points and the pound fell 1.4% yesterday and a further 0.5% this morning. It was ugly.
Perhaps the lesson to learn here is that as central banks around the world try to adjust monetary policy going forward, there are going to be a lot more bumps along the way, with market expectations being left unfulfilled and severe market reactions accordingly. Forward guidance, which has become a critical tool for central banks over the past decade plus is no longer going to be as effective. When Ben Bernanke highlighted the idea in 2009, it was thought to be a great addition to the central bank toolkit, the ability to adjust markets without adjusting policy. And while that may have been true when monetary policy was being eased for years, it turns out that forward guidance is a bit more difficult to handle in the other direction. Market volatility, across all markets, is likely to increase over the next couple of years as the coordinated central bank activities we have become used to seeing disappear. Consider that while the Fed, ECB, BOJ and BOE have all pushed back on raising rates soon, the Norgesbank, BOC, RBNZ, RBA and a host of emerging market central banks are starting the process or already well along the way.
Turning to this morning’s data, if you recall, the last two NFP numbers were quite disappointing, with both coming in well below expectations. The only thing we know about the labor market is that we don’t really know what is going on there anymore. Clearly, based simply on the JOLTS data we know there are more than 10 million job openings in the country. (That is also made obvious whenever you leave your home and see all the help wanted signs in store windows.) But despite clearly rising wages, it has thus far not been enough to entice many people back into the labor force. So, the Unemployment Rate remains far higher than it was pre-pandemic, but there are plenty of jobs available. In this situation I feel for the Fed, as there is no clarity available with conflicting data rampant. At any rate, here are the forecasts heading into the release:
|Average Hourly Earnings||0.4% (4.9% Y/Y)|
|Average Weekly Hours||34.8|
One interesting thing is that excluding the pandemic stimulus checks, the current Y/Y Earnings data is the highest since the series began in 2006. And worse still, it is lagging CPI by at least a half-point. My sense is that we are likely to see another weaker than expected number as the kinks in the labor market have not yet been worked out.
Ok, a quick look at markets shows that Asia had a rough go of it last night (Nikkei -0.6%, Hang Seng -1.4%, Shanghai -1.0%) as continued concerns over the Chinese property market weigh on the economy there while Japan looks more like position adjustment ahead of the weekend. Europe, on the other hand, is doing much better (DAX +0.15%, CAC +0.6%, FTSE 100 +0.55%) despite much weaker than expected IP data from both Germany (-1.1%) and France (-1.3%) in September. Too, Eurozone Retail Sales (-0.3%) badly missed expectations in September, but revisions helped ameliorate some of those losses. Regardless, I would argue that the weak data has encouraged investors and traders to believe that all the talk of tightening to address inflation is ebbing. Meanwhile, US futures, which had spent the bulk of the evening essentially unchanged are now higher by about 0.25%.
Bond yields are generally lower again this morning with most European sovereigns seeing declines of around 1 basis point except for Gilts, pushing 4bps. Treasuries, which had seen softer yields earlier in the session have now turned around and edged lower (higher yields) but are still less than a basis point different from yesterday’s close.
Commodity prices also had a wild session yesterday with oil initially rallying $2/bbl before abruptly reversing and falling $5/bbl to close back below $80 for the first time in a month. Given that backdrop, this morning’s 0.6% rise seems less interesting and it is still below $80. NatGas (-0.5%) has slipped this morning, while the rest of the commodity complex is showing no trends whatsoever, with both gainers and losers. Like every other market, traders are trying to come to grips with the new central bank situation.
The one consistency has been the dollar, which rallied yesterday and is continuing today. In the G10, the pound (-0.5%) is the worst performer but we are seeing weakness in AUD (-0.4%), CHF (-0.4%) and NOK (-0.35%) as well with the entire bloc under pressure. NOK is clearly still being impacted by yesterday’s oil moves while the others seem to be feeling the heat from suddenly more dovish thoughts regarding policy. In the EMG space, PHP (+0.55%) is the outlier, rallying on comments from the central bank that it will continue to support the economy and news that the Covid infection rate has been falling. Otherwise, the bulk of the bloc is in the red led by ZAR (-0.45%), PLN (-0.4%) and MXN (-0.35%). Of these, the most noteworthy is PLN, where the central bank, which had just been touting its hawkish bona fides, has completely reversed and indicated that further rate hikes may not be necessary. This seems odd given inflation is running at 6.8%, and forecast to top 8.0% next year, while the base rate was just raised to 1.25%. It feels to me like PLN could fall further.
So, for now, we all await the payroll data and then get to reevaluate our views and expectations of Fed actions. Nothing has changed my view that inflation will continue higher and nothing has changed my view that growth is going to slow. So, while the Fed may begin to taper, I still believe they will stop before the end. However, for now, the Fed is the most hawkish dove out there, so the dollar can continue to rally.
Good luck, good weekend and stay safe