If you were following along on Sunday, you already knew what SocGen’s Kit Juckes was going to be writing about on Monday morning.
Yesterday, in “It’s The Politics Stupid! BIS Flags A ‘Scary’ Change In The Market’s Mindset,” we talked a little bit about a set of charts that showed up in the BIS’s annual report. Here are those charts:
So that’s basically an illustration of the market’s heightened sensitivity to political shocks relative to monetary policy meetings and it didn’t sit well with Kit, who tweeted this:
Our assessment was a little different. To wit:
But I’m not entirely sure it’s apples-to-apples.
I mean, of course it’s not apples-to-apples, that’s the whole point (it’s monetary policy versus political events). But what I mean is that there’s something absurd on its face about comparing the election of Donald Trump and/or the UK Brexit referendum to anything else. Those events represented epochal shifts in the way we think about Western democracies. They will be enshrined in history texts. So I’m not sure it makes any sense to say “look! markets don’t care about monetary policy as much as they do political events.” It’s not “political events” in general, it’s those political events.
Still, a big part of the Heisenberg raison d’être revolves around the interplay between politics and markets, so it’s nice to see this type of thing acknowledged and discussed.
Further, this reinforces the idea that the rise of populism has created all manner of uncertainty and is more likely than not a destabilizing force, despite the inexorable rally in risk assets we’ve seen over the past year.
In other words: those BIS charts are “scary” if they are a sign of things to come in terms of the extent to which populism transforms stable political systems into unstable ones, thereby magnifying the impact of DM political events.
Later, we flagged a couple of other notable takeaways from the BIS report including the bank’s warnings about an impending financial bust in economies where credit expansion has run wild, the risk that EMs have accumulated too much USD debt (that’s a mainstay in BIS rhetoric), and the potential for deglobalization to destabilize markets and the global economy.
Well, Kit slept on all of this, and below you can read what he came up with this morning. Do note what’s implicit in the bolded and underlined bit: thanks to populism, developed markets are devolving into EMs.
There’s a lot of angst in financial market reporting this morning, largely stemming from the release of the BIS Annual report yesterday. The global economy’s sensitivity to higher interest rates after such a long period of extraordinary monetary policy is, inevitably, the source of fragility, Fed tightening and the effect on dollar liquidity the likeliest flashpoint. The report’s here and on the other side of a paywall, the Ambrose Evans-Pritchard fright-night take is here.
Yet, the chart which struck me as most relevant in the whole thing showed how market response to either Fed or ECB meetings has become calmer and calmer, whereas the response to the three major G7 political events of the last year (and a bit) has been so dramatic. It used to be that politics trumped economics in emerging markets, but not in developed markets. That is no longer the case.
The calm response to monetary policy reflects the snail-like pace of normalisation and the care that central banks are taking not to alarm markets. The Fed won’t hike unless the market has thoroughly discounted a move, and won’t even get the market to discount a move if there’s anything on the horizon to scare them – last year’s list of reasons not to act before December includes the China-inspired market turmoil, the Brexit referendum and the US election. The danger with that approach is that rather than avoiding catastrophe, the global economy merely creeps slowly up to the edge of the cliff before falling over it anyway
The BIS’ warnings are supposed to be shrill, in order that they be heeded by policy-makers. But it’s not clear that crisis is just around the corner. Indeed, for now, I’m looking for political catalysts for market movement, more than economic ones. European CPI and the US PCE deflator data at the end of the week look like the most market-sensitive economic releases on the calendar, and I’m not sure that a likely dip in the core US PCE deflator to 1.4% from 1.56% is the missing ingredient for faster monetary policy normalisation. More likely, in a week that is starting with oil prices back up slightly and Asian equities moving up, the focus will be firmly on yield-hunting for a while longer.