Do you know what SocGen has?
Well, for one thing, they’ve got an Albert Edwards – something no one else has because there’s only one Albert. But contrary to what you might have heard, that’s not all they have. One other thing they’ve got over there are a set of “proprietary newsflow indicators.” We’ve mentioned these before, but for those in need of a refresher, here’s what they are:
Our proprietary newsflow indicators are a “Big Data” approach to a variety of relevant market themes such as economic momentum, monetary and fiscal policy, inflation and risk. They regularly lead financial markets by up to a few months.
Awesome, right?
No, but seriously, one interesting thing to watch with these indicators – if for no other reason than to marvel at the extent to which no one appears to believe that the “coordinated” hawkish lean which began over the summer in Sintra is any semblance of “coordinated” – is how market participants perceive monetary policy on a country-by-country basis.
Remember, the idea here is that the exit from accommodation will be coordinated – or at least semi-coordinated. But that can’t possibly work in practice. Why? Well, allow us to quote ourselves (from a piece we did on the latest Riksbank meeting):
This is the policymakers’ paradox in a world where everyone is engaged in the same easing effort. Unless everyone involved sees their economies move in the same direction at the same time and at the same pace, any “success” you have is going to immediately make you the “winner” in the eyes of FX markets which will promptly “reward” you for your efforts by driving your currency higher.
That, in turn, is a double pain in the ass. Because in the short-term it puts policymakers in the position of having to pretend like things aren’t actually as good as they appear (in order to “explain” why a slower pace of normalization is warranted), and in the long-term, if nothing is done (i.e. if you don’t push back with dovish jawboning), currency appreciation ends up negating the very economic benefits that served as the rationale for FX markets to choose you as the “winner” in the first place.
In short: everyone can’t normalize at once unless there’s a similarly coordinated upturn in inflation and growth. Because if you start normalizing when your economy is doing better than everyone else’s, well then the very act of normalizing is going to supercharge any currency appreciation occasioned by the very same economic strength that caused you to think about normalizing in the first place. As we put it: “good luck with that.”
So expectations become a function of the incoming data and how markets believe policymakers are likely to interpret that data in the context of what other policymakers elsewhere in the world are doing. Making things all the more complicated is the fact that thanks to the communication loop between central banks and markets, policymakers are watching what markets do and incorporating that into their reaction functions.
That brings us to this question: what are people thinking when it comes to monetary policy? (“People” there being market participants). Here’s a summary bar chart:
And here’s how the country-by-country breakdown has evolved over time (another great thing about these is that they have annotations for governance changes):
Simply put: if the idea is to communicate that the hawkish shift is going to be “coordinated”, market participants aren’t getting the message.
