From Frankfurt To Tokyo To Sydney, Doves On Parade

Suffice to say the dovish pivot from global central banks appears to have wings.

In the weeks since the Fed effectively institutionalized/formalized January’s accommodative rhetoric in a capitulatory set of policy statements and an equally dovish press conference from Jerome Powell, policymakers in other locales have signed on for the shift in one fashion or another.

The RBA’s Lowe shifted to a neutral stance on forward guidance in a speech delivered just a day after a policy statement, the RBI cut rates and the ECB seems increasingly likely to announce another round of TLTROs (assuming they can figure out how to make the monetary policy case) and/or postpone the first rate hike amid worsening data across the euro-area and the threat of US tariffs on autos.

“When the most important central bank in the world changes tack, others must follow or risk unwanted currency appreciation”, BofAML wrote earlier this month, adding that “true to form, the number of global central bank rate cuts over the last 6m is now greater than the number of central bank rate hikes.”

(BofAML)

With that as the backdrop, there were a number of notables on Tuesday, starting with the RBA minutes, which were clearly dovish and suggested that Lowe’s speech was closer to the central bank’s actual policy stance than the statement itself. Here’s the passage that matters most:

From a longer-run perspective, members assessed that, following such large increases in housing prices, the effect of the recent price falls on overall economic activity was expected to be relatively small. However, members observed that if prices were to fall much further, consumption could be weaker than forecast, which would result in lower GDP growth, higher unemployment and lower inflation than forecast.

That essentially confirms the shift to neutral. “In the minutes, the board toned down its rhetoric of ‘glass half full’ materially and flagged significant uncertainties around its downgraded economic forecasts”, Barclays wrote Tuesday, adding that while the RBA “continued to note that the low level of policy rates had helped support the economy and that the current stance of monetary policy should allow for further progress in achieving stronger activity, members noted significant uncertainties around their baseline forecasts, with some scenarios pointing to potential cuts in policy rate, if a slowdown in growth spills over into the labour market.”

That assessment was echoed across desks. “The February Board Minutes reiterated the RBA’s recent shift to a more neutral policy stance, with the removal of the final paragraph’s prior hawkish bias [and while] we continue to view the most likely next move in rates as up, we acknowledge that the near-term risks are firmly tilted to policy easing if spillovers from the cooling housing market prove larger than expected”, Goldman said.

Meanwhile, UBS actually has a proprietary RBA sentiment index that “confirms” all of the above. “After turning negative in December for the first time since Lowe became Governor, the UBS RBA Sentiment Index (our proprietary tracker of hawkishness/dovishness in the RBA minutes) became significantly more dovish in February”, the bank mused on Tuesday, before noting “the index is now at its lowest level since September 2014, which flagged the start of the next leg of RBA easing in February 2015.”

(UBS)

So, that’s the RBA.

Meanwhile, Kuroda on Tuesday signaled more easing from the BoJ might be in the cards. As a reminder, here’s what we said on Sunday about the situation in Japan:

There’s a ton of data on deck in Japan, including CPI, PMI, core machine orders, trade balance, all industry activity index and machine tool orders, but at this point, it’s by no means clear that anything matters. The recent dovish turn by the BoJ’s global counterparts likely means any effort to normalize policy has been pushed out even further. Throw in the usual bit about the yen being the beneficiary of safe haven flows tied to any acute bouts of risk-off sentiment, and you’re left with the same inevitable conclusion: there is no end to accommodation in Japan.

The overarching point there is that while the BoJ is clearly the most accommodative central bank on the planet, any dovish shift by the bank’s global counterparts reduces that policy divergence (i.e., brings the rest of the world closer in dovishness to the BoJ). That’s JPY+. Given that JPY will also appreciate on any bouts of risk-off sentiment, the potential exists for currency strength to undermine the already hopeless inflation mandate.

“While the window of opportunity for BoJ normalization could reopen in Q2 20 after VAT effects run their course, the uncertainty on global fundamental backdrop is cloudier further down the road, suggesting a risk of prolonged period of NIRP”, Barclays warned Sunday, on the way to describing what is essentially a Sisyphus-esque scenario:

While the delay of BoJ normalization itself reduces JPY appreciation pressures, the drivers of that change (ie, weaker global growth and lower global rates) indicate a greater risk of JPY appreciation from a safe-haven perspective.

Sure enough, Kuroda told parliament on Tuesday that if the yen ends up impacting the economy and inflation, the BoJ might have to “consider additional easing” in order to hit its price target. As usual, he insisted that the BoJ isn’t out of options. He cited “various additional policy measures” that could conceivably be rolled out including lowering yields and buying more assets.

He acknowledged that BoJ ETF buying has indeed “impacted markets”, but reiterated that he “has no intention of stopping ETF purchases at this moment.” Nobody doubts him on that, trust me.

The reaction in the yen was immediate and it underscores the notion that once the Fed tips the first domino, it’s effectively a race to out-dove (if you will) the last guy in order to avoid unwanted currency appreciation.

Finally, rumblings are getting louder at the ECB since the January meeting during which downside risks were acknowledged. Bloomberg ran an entire story documenting the growing case for “action” amid a recession in Italy, a near-recession in Germany and myriad political risks including upcoming elections.

After citing comments from de Guindos published in Le Monde on Tuesday, Bloomberg provides the following handy summary of recent rhetoric:

“If the euro-area economy were to slow more sharply, we could adapt our forward guidance on interest rates and this could be complemented by other measures” — Chief Economist Peter Praet. (Boersen-Zeitung)

“I can see that there is a big discussion in the market of adding a new, as we call it, TLTRO, targeted long-term refinancing operation. It is possible. We are discussing it” — Executive Board member Benoit Coeure. (Speech in New York)

For the interest-rate outlook, “the key question will be if the slowdown is temporary, with a bounce-back during this year, or more durable” — Francois Villeroy de Galhau. (El Pais)

This was inevitable. It was clear that the window for normalization had closed by the time the ECB made it official on the end of net asset purchases. As we documented on a number of occasions in December and January, € credit markets had essentially retraced CSPP-inspired tightening and given back inflows by January (see here, for instance). Meanwhile, bund yields have a date with zero again, underscoring worsening expectations for the bloc’s economy.

So, here we are, right back to asking the same question everyone has been asking for at least two years, only with a bit more urgency now: With rates still near the lower bound (and in many cases still negative) and with balance sheets bloated, do monetary policymakers have sufficient ammo to deploy in the event of a downturn?

If recent rhetoric is any indication, we’re about to find out.

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