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The Morning Track from London: Sticks and Stones
06/27/2017 2:55 am EST
The issue for markets is about sticks and stones in central banking-as forward guidance (i.e. talking) is a policy itself, asserts Bob Savage, CEO of Track Research in Tuesday commentary from London.
Sticks and stones may break my bones, but words will never hurt me-unless they are spoken by central bankers.
The ECB Draghi speech in Portugal flipped markets from an easy summer to a more challenging one. He noted transitory factors holding back inflation-read as oil-and so the EUR has roared higher, bonds have flipped lower and equities are negative.
The Chinese Premier Li speech was also important overnight driving the CNY and CNH stronger as he starts the WEF China Summer Session in Dalian pushing trade and stable policy and vowing to meet the growth targets for the year.
Market talk is that the PBOC helped shove the USD lower as well as big China banks sold aggressively at 6.84. The combination of stable China demand, upbeat ECB outlooks and a dovish Fed Williams has left the USD rally that started ever so quietly last week in tatters today.
The USD reversal is not purely about rates but also the change in perception about politics and growth hopes into 2H2017. The next big driver won't be the US data today but Yellen's speech in a UK Forum. This will be focused on global economic issues and may repeat some of the Harker and Williams points made today.
The issue for markets is about sticks and stones in central banking-as forward guidance (i.e. talking) is a policy itself. The threat of further normalization maybe sufficient to spur a US bond market break out to counter the USD weakness but we will all be waiting to see such and most Fed Watchers recognize that any FOMC Chair would be reluctant to shift markets outside a more formal Fed meeting.
In the meantime, it's about the USD breaking down with 95.50 risks should Yellen sound even slightly dovish.
Question for the day: Is market too complacent?
Before Draghi, the ranges in FX markets were less than 0.3%. The PBOC added some excitement and shoved the CNY 0.4% stronger but the overall story is that calm has been linked across markets whether FX or bonds or equities. That is changed today and so it may matter.
Markets usually link to the real economy and may see equity falls as forecasting recessions. Of course, the market has predicted many more recessions than actually have happened and so it goes.
The mood shift today is all about central bankers sounding upbeat and suggesting some future end to extraordinary easy money.