26 June to 2 July: Damned if You Do, Damned if You Don’t

Despite continued momentum in global growth over the past 6 months, government bonds have rallied alongside equities. Last week, hawkish soundbites from central bankers prompted a spike in bond yields, a surge in the EUR and GBP and pushed most equites lower.

  • In the US, 3 key members of the FED commented on financial market valuations:
    • Chair Janet Yellen “(asset prices are) somewhat rich if you use some traditional metrics like price earnings ratios”.
    • Vice-Chair Stanley Fischer “high-risk appetite has not led to increased leverage across the financial system, but close monitoring is warranted”.
    • San Francisco FED Chief John Williams “the stock market seems to be running pretty much on fumes.”
  • In the UK, (not for the first time) Mark Carney appeared to change his tone by stating the current inflation overshot “can only be temporary in nature and limited in scope” and “some removal of monetary stimulus is likely to become necessary”.
  • In the Eurozone, Mario Draghi also stressed the state-dependency of policy, saying “as the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instrument”. Moreover, this weekend, Bundesbank President Jens Weidmann commented “at the moment we see that the economic situation is rather positive…if this sustainably passes on to inflation rates then monetary policy needs to be more taut, and it’s not about putting full brakes on monetary policy, but to lift one’s foot off the gas a little”.

It’s important to give some context to last week’s comments and market moves. First, there is surely a case for over-interpretation; policymakers were mostly offering “what-if” analysis, rather than committing to more aggressive tightening. Second, there is still little/no concurrent evidence of a pickup in core inflation. Third, yields remain within their range of the last few months – there has been no breakout move higher.

Overall, we judge that the short-term path for global rates is unlikely to be synchronised. We still believe the US is most likely to tighten further, that Europe (in aggregate) has a lot of remaining spare capacity, which should keep rate hikes on the back foot and removal of QE gradual. Last, we don’t think incoming UK data will be sufficiently resilient to support tightening.

Longer term, we still see monetary policy makers as “damned if they do and damned if they don’t”, unable to manage asset price bubbles and the secular growth slowdown at the same time.

Separately, oil prices have now managed 7 consecutive daily gains, WTI posting an over 8% rise from recent lows after a decline in weekly US crude production.


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