Week End Blog – Central Bank Credibility Issues

· by · in FINANCIAL MARKETS, MACRO. ·

After years of rate cutting and bond-buying central bank policies are now being questioned by financial markets. The euro and yen, targeted casualties of these policies, shot up with a vengeance. Especially the major move in JPY suggests investors are getting doubtful.

And rightly so. Central banks’ only goal, getting inflation to target, is no where in sight. This week the European Commission, again, lowered its Eurozone inflation forecast. For this year we get 0.2%. That’s the wrong order of these two digits, Mr. Draghi!

Even the Swiss could be losing it. The UBS Real Estate Bubble Index, a linear function of Swiss monetary policy, dropped in Q1. It’s pretty rare for this index to go down.

Perhaps the ECB has more luck in keeping interest rates low. Austerity and even more bond-buying mean that Eurozone government bonds will become scarce this year.

Even the Fed seems to have lost the courage to hike rates. Investors remain outspoken. No more hikes this year.

Other central banks have started to ease again. The Reserve Bank of Australia unexpectedly lowered the overnight cash rate. The reason? Lowflation, of course. The depreciation of the AUD, is a pretty convenient side-effect.

If you are looking for inflation, you have to go to more exotic places to find it. Venezuela being the best example, as hyperinflation is killing off the economy. But Kazakhstan is also doing ‘great’ with an inflation level of 16.3%.

Did I mention Venezuela? Right, this country has been in ‘paper default’ for quite some time now. Implied default rate of 99%.

Implied default rates are intriguing statistics and reveal some interesting investor views. For example, China, the world’s second-biggest economy has an 5-year implied default rate of 11%. That odd is not easily overlooked.

China default worries are, of course, related to China’s ever growing debt pile. Hence, my short blog this week showing 13 graphs on the China debt issue.

Over to the US. After disappointing ADP numbers, nonfarm payrolls at 160K also lagged expectations (200K). In addition, the unemployment rate failed to dip below 5%. If Yellen was looking for a way out of a rate hike in June, she has now found it.

Fortunately, the ISM Non-manufacturing index unexpectedly rose to a healthy 55.7. As mentioned before the US likely experienced a manufacturing recession, which is different from a general economic recession.

Goldman Sachs this week made a prediction that property prices in Hong Kong could drop up to 20%. When it comes to asset prices inflation central banks around the world probably did a ‘good’ job, and the graph below ‘proves’ that.

Meanwhile the rally in emerging assets continues, although things got a little nasty towards the end of the week. But still, for emerging currencies and debt, this rally is (or was) the best in years.

Finally, oil is up, but oil production is not down. Rigs have fallen of a cliff, shale companies go bust every week, but the real damage to production has yet to show up in the charts. I guess it will come, but so far oil production around the globe has been pretty resilient.

Enjoy your weekend!

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