One thing you almost undoubtedly missed overnight was the Norges Bank.
Simply put, they were hawkish – or whatever counts as “hawkish” in the current environment. While they of course left rates unchanged on Thursday, they lifted their rate path – if modestly. “The changes in the outlook and the balance of risks imply a somewhat earlier increase in the key policy rate than projected in the June MPR” the bank noted, adding that “the key policy rate is forecast to be 0.5 percent over the coming year, rising gradually thereafter.”
That may not sound all that exciting, but have a look at the reaction in EURNOK:
“The path now indicates a 50% probability that rate will be raised in January 2019,” DNB’s Kyrre Aamdal wrote in a note following the meeting, adding that “lifting of the rate path was a surprise to the market.”
Seemingly realizing (after the fact) that even small tweaks have an outsized impact in a world where FX markets are keen to jump on any perceived policy divergence no matter how trivial, Norges Bank Governor Oystein Olsen tried to talk things back as follows:
I want to underscore that the rate path is little changed from earlier. Rates will most probably remain at today’s level for the time ahead. We can also put it differently: a good while ahead. Given that things develop like we predict we will be well into 2019 before the first rate increase comes.
That underscores the dilemma for policymakers. You have to figure out how to use forward guidance in such a way that the market takes it seriously enough to consider adopting a more prudent approach to risk taking, but not seriously enough to immediately pile into your currency.
The reason I bring that up is that in combination with the BoC hike, the Fed staying the course on a December hike, and the BoE getting more hawkish, the world is shifting here and you’d be naive not to take note.
That’s the subject of the latest missive from former trader Richard Breslow, which you can (and should) read in full below…
The world of global markets feels like it just might be getting interesting again. Maybe it’s the back to school thing or the brisker air or, maybe, something as simple as the sudden and suddenly believable shift in global monetary-policy sentiment that’s the cause. It’s one thing to dismiss the lone banker talking of normalization. It’s going to prove very difficult indeed to claim they are all misreading the latest set of private economic forecasts and their attendant conviction trades.
- Chair Yellen certainly got everyone’s attention yesterday. Not only is the balance sheet firmly on the pre-commitment list (even though we will agree to agree that they never pre-commit) but the possibility of a December hike continues to be repriced in the futures market. Wasn’t it only as recently as the last non-farm payroll that we had to endure pontifications about how a hike would utterly undermine Fed credibility?
- I suspect all central bank speak will for the time being be filtered through a prism of when, not if, rates will be raised. And the dovish dissenter at today’s BOJ meeting seemed curiously anachronistic. But he’s new at the job
- The market’s reaction to RBA Governor Lowe’s comments was telling. The currency sold off and yields tried to fall because he wasn’t sufficiently hawkish to satisfy the mood of the moment. I’m not sure who they thought had written the speech but warning that, while rates may not rise for some time, (undefined) investors “should prepare for higher rates” is pretty plain and not dovish. Nor was his concern about the ongoing complacency of traders who continue to buy yield at any price
- It’s worth considering and taking as significant that the number of bankers talking higher rates is growing on a seemingly daily basis. Norway’s Norges Bank just raised its expected future rate path and pointed out that traders may be misjudging how soon a hike could happen
- What you want to guard against is the possibility that the world has changed and you don’t know it. It may not have–but this is assumption questioning time. Lower for longer can change into a currency war slogan rather than a desperate search for a better inflation print without an explicit warning. Just ask SNB President Jordan
- Currencies will be the noisiest price action to read, so beware of reading causality into every move. Bond yields, on the other hand, have so many easily identifiable parameters that sentiment won’t be hard to track. Gold is trying to show the way. Don’t be distracted by equities hanging around near their all-time highs. Truth is, a lot of things are in play, and you have to start thinking about it before you’re forced to chase it