E Markets: Stupid Decisions

The age of civility in politics died many years ago and as any American knows in the time of fake news and Trump, shock value and video drive viewers but not voters. Perhaps the UK will learn the same as the Labour leader Corbyn mouthing of “stupid, woman” assaults the credibility of British civility and perhaps superiority to US political debates. This is the sideshow to the larger issue of central bankers losing their credibility as the fixers of markets and economic confidence as they try vainly to normalize. Yesterday it was the FOMC, today it’s the Riksbank, and next year we see the BOE, the SNB and the ECB all in tow.

Some argue that the central bank decisions over the last 24 hours (with more to come still today from Mexico) are “stupid” as well but at least not sexist. Rate hikes are blunt tools and the paradox of the Fed hiking overnight rates to 2.25-2.50% has driven down rates elsewhere, with the 10-year yield break of 2.80% technically important. The market is still betting on a Fed policy mistake leading to a recession and lower rates in the next 5-years. The shape of the US curve and its effect on stocks and FX matters more than usual but the sharp divergence of correlation away from commodities particularly oil is the anomaly. The oil market is reflecting supply overhang and demand collapse.

The drop in forward growth data is being reflected first in oil prices. The risk for today is that any modest bounce back in risk post FOMC and into the holiday trading week will fizzle on growth data. Overnight, other central bankers also cut growth forecasts. The fears about policy mistakes aren’t just a US thing – as the UK can see. The GBP rally back from 1.25 opens up some 1.2875 risks but the larger downtrend remains. This is the bigger picture story about how politics and policy clash with markets today regardless of stupid decisions. 

Question for the Day: Do other central bank decisions matter? The market volatility around the FOMC decision and Powell press conference suggests that the actions matter less than the words for central banks – as forward guidance as a tool has an unintended splash-back when rates rise. The FOMC cut its growth projections and its rate hike pace plans from 3 to 2 and that isn’t helping risk-taking anywhere. The FOMC was damned as they hiked (increasing fears of a recession or policy mistake). They were also going to be damned if they cut as it merely confirms fears of a recession – and so the hope for a rate pause will continue to be seen as a key for balancing bond yields against equity appreciation into 2019. 

Overnight there were 4 other central bank decisions, with the Swedish Riksbank half-surprising the market with a 25bps hike to -0.25%. Despite GDP and inflation being weaker than expected and forecast being cut, the Swedish central bank justified the hike arguing:“As inflation and inflation expectations have become established at around 2 per cent, the need for a highly expansionary monetary policy has decreased slightly.”

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William K. 10 months ago Member's comment

I have never thought of the central bank or the central bankers, as fixers or as the basis of confidence in the government or the economy. They have always been a bunch of rich men determined to get more at the expense of the rest of us. Worse yet, they lack integrity while they speak so well about how they are saving us from disaster. Shades of "Boss Hogg" but far more sophisticated and much more corrupt.