Ok, well what better way to start your Friday than with some survey data?
No, but sarcasm aside, I was just scanning some things this morning and the latest iteration of BofAML’s European credit investor survey betrays something interesting re: how market participants (or at least the banks, insurance players, pensions, hedge funds, and managers the bank usually polls for these things) are thinking about central bank communication.
For months, the worry has been that an upturn in inflation pressures would force central banks to lean aggressively hawkish in response to those price pressures in order to avoid falling too far behind the curve (where “curve” could be taken both figuratively and literally there).
Of course if what we’ve seen this week in the U.S. is any indication, equity investors are more than willing to go out on a limb and bet that the chances of the Fed adopting an overly aggressive posture and breaking with the customary gradualism are slim.
But European credit investors don’t seem so sure. In fact, the survey mentioned above seems to suggest that people are starting to get worried that central banks will turn preemptively hawkish (as opposed to simply responding to the incoming data) in an apparent effort to start carefully pricking asset bubbles.
“February sees a big change in the Wall of Worry [as] high-grade investors’ biggest concern is now ‘Inflation’ (25%), with the fear being that it prompts a less predictable message from central banks,” BofAML’s Barnaby Martin writes, before going on to say the following: “But note, in addition, the jump in those concerned that central bank speak has purposely become more hawkish in order to engineer volatility and stop asset bubbles accumulating.”
That is notable. To be sure, it probably represents some investors keying on the ECB’s efforts to telegraph an end to APP in September, but given how they’ve been forced to walk that back in light of recent FX developments (where that means Steve Mnuchin throwing a monkey wrench in Draghi’s normalization plans by jawboning the dollar lower), it’s somewhat surprising to see “CBs speak less dovish” storm up that left-hand chart.
This also comes at a time when some folks were taken aback by central banks’ apparent disinterest in jawboning markets in the wake of the short vol. blow up and the mini-bond tantrum that plunged global equities into correction territory earlier this month. In short, what the above suggests is that investors now believe central banks may be in the business of actually trying to engineer volatility as a way of facilitating a return to two-way markets.
Meanwhile, credit markets have been watched closely of late for signs that the fleeting equity turmoil was spilling over. Here’s what credit investors think would most imperil spreads:
Finally, here’s the evolution of the top risk for high grade investors (i.e. the evolution of the number one slot in Chart 5 above):
The bottom line: for credit investors, the risk of central banks becoming more hawkish is now a two-headed beast: 1) inflation could force hawkish communication; 2) CBs could become more hawkish on purpose in an effort to start letting the air out of asset bubbles.
Incidentally, it makes sense that this particular group of investors would think that – after all, there’s nothing more bubbly than € credit (thanks CSPP!).