Risk appetite was tepid Friday, as markets continued to assess the path forward after a week of central bank guidance, tweaks and, in a few cases, rate hikes.
Traders had more than enough to parse, so The Bank of Japan’s predictably staid meeting was welcome. As expected, the BoJ offered no surprises Friday. “I don’t see us moving toward monetary policy normalization in the way the US and Europe are,” Haruhiko Kuroda said, after extending a program aimed at channeling credit to smaller businesses for six months and announcing a plan to gradually lower the bank’s holdings of corporate bonds and commercial paper starting next year.
Don’t forget: The BoJ has tapered and tweaked on countless occasions. There’s a perception that Kuroda is always on hold. In some respects, that’s certainly true, but the bank’s asset purchase programs are flexible and somewhat dynamic. That’s a separate discussion, though. The point Friday was just that Japan has no inflation to speak of. There’s no urgency to change the course of policy.
Meanwhile, US tech was poised to remain under pressure after Thursday’s rout reversed counterintuitive gains logged in the hours following Wednesday’s FOMC reveal. But given expiry dynamics, it’d be foolish to make too much of the price action. More broadly, manifestations of “froth” are “trading like death,” BofA’s Michael Hartnett wrote, in his latest, citing tech, crypto, leverage and commodities, while noting that Robinhood is down some 80% from its post-IPO peak.
“Rate hikes do not end bull markets, but reversal of central banks’ liquidity means less speculative froth and more volatility,” Barclays’ Emmanuel Cau remarked.
“The reign of QE is ending,” Hartnett went on to say, in the course of suggesting that “the epicenter of the epic 13-year QE bull market” may soon get a test. He employed the familiar visual (below) and warned that “little cracks are appearing even before tightening begins.”
In an interview with CNBC, BoE chief economist Huw Pill said inflation “needs to be addressed.” He spoke a day after the bank surprised markets by delivering the rate hike traders expected last month. Some assumed the Omicron variant (and particularly the acute situation in the UK) would compel policymakers to wait. “The time has come to take away emergency stimulus,” Pill went on to say, fretting that current levels of inflation make him “feel uncomfortable.”
In a blog post, ECB Governing Council member Madis Muller said the bank is “prepared to react to the possibility that the pace of inflation in the euro area may not slow back down to 2% fast enough.” On Thursday, the ECB detailed a hodgepodge of tweaks aimed at smoothing the transition away from emergency bond-buying, although, as discussed at length here, they’ll still be buying plenty of assets in virtual perpetuity. “We are ready to tighten monetary policy faster” should inflation fail to recede, Muller added.
In Germany, Ifo business confidence dropped to 94.7 in December, below consensus (figure below). “Sentiment at German companies has clouded over for Christmas,” Ifo president Clemens Fuest lamented. “The deteriorating pandemic situation is hitting consumer-related service providers and retailers hard.”
That’s just one more piece of evidence to suggest Germany may be headed for a shallow recession.
“Today’s Ifo index gives a first impression of how the current fourth wave of the pandemic could hurt the German economy, and this impression is not very promising,” ING’s Carsten Brzeski said. “The fourth wave… could now actually push [Germany] to the brink of stagnation, or even into a technical recession, even if, admittedly, the adaptability of the economy to lockdowns, supported by government and central bank measures, has clearly increased since March 2020,” Brzeski added.
Fuest was more blunt: “The German economy isn’t getting any presents this year.”
Commenting further on markets and central banks’ newfound zeal for fighting inflation, Barclays’ Cau said that while “policy angst may be here to stay,” the silver lining is that “following months of unclear guidance and conflicting signals, the direction of travel is clear now.”
As clear as mud.
NYC has that March 2020 feel to it (at a modified level- panic is less extreme but still there).
I’m in NYC, it’s a mild day (before more seasonal weather moves in), and things are kind of jumping: lots of people out and about (all with masks on or near their nose/mouth), restaurants seating lots of people (in and out), and retailers feeling pretty good. (Spoke to a few who said they were seeing good traffic after a slow week.) Heard the phrase “We have to learn to live it” more than a few times, and the most recent data out of SA suggests those who are vaxed and boosted should be able to.
Is it just me or has the fed seemingly lost their control? All of the normal knob, controls, and outcomes from those actions are not logical today.
We are still dealing with supply chain problems and covid. I think that those 2 problems are taking longer to resolve than anyone expected- but human ingenuity, time and money will solve these problems. A step up in prices followed by a significant leveling off. (Nice situation for the Fed, too).
QE is ending but the amount of liquidity that was created in the last 2 years remains. That money has to go somewhere.
Our bigger problem over the rest of the decade will return to the same old issue- AI, robotics and screens will replace the need for entry level and unskilled labor. Although the birth rate is declining, when that problem is big enough in the US, we will solve the immigration issue.
Bonds make no sense.
US equities are the best option. I am tightening my seatbelt and preparing to ride out the turbulence (noise, not signal).