The ECB, the BoE, and Treasury Bonds ..... What investors thought they knew, and why it may be back
ref :- General No sensible investor should allow themselves to believe that anything is certain in this crazy world, and the last 24hrs are a good example of why they shouldn't. We shouldn't overstate it ...... it's not as though the universe has been turned on its axis. But just a quick glance around the markets this morning is enough to recognize that things may have changed, that certain preconceptions that many investors subscribed to are now looking distinctly less certain. Take the European Central Bank , for example. The ECB left all rates unchanged yesterday, and without undermining our own argument too much you could have been pretty certain about that in advance. You could also have been pretty confident that ECB boss Mario Draghi would stick to the usual script when describing the ECB's continuing approach to monetary as "cautious" -- not a criticism by the way, particularly in the light of recent disappointing data. What might not have been expected was the way that Mr Draghi laid it on with a trowel in his post-meeting comments. Some ECB officials may have been suggesting that a slowing of the impressive Eurozone growth story suggested by recent numbers is just a blip, but it seems obvious that Mr Draghi and his colleagues are at least considering that it might be something more significant than that. Stubbornly low inflation readings despite a strong rally in the price of oil must be particularly concerning. The tone of Mr Draghi's statement begs the question : "What does this do to expectations of when the ECB will finally start to"normalize" monetary policy". True, at its peak the Quantitative Easing process was purchasing bonds at a rate of €80bn per month and is now down to €30bn. That arrangement is only in place until September, but Mr Draghi has always said that the the ECB would continue with such stimulus if required. Many investors and some of the Eurozone's more northerly members (no names, now) have been fervently hoping that September would see an end to it. Today, it seems perfectly possible that QE could be extended into next year. And since Mr Draghi has repeated gone on record as saying that rates will not be adjusted for some time after the finish of QE, that means that we may not see Euro rates pushing back into positive territory until well into 2019. Cue : more selling of the Euro, with EUR / USD making a low of $1.2065. That doesn't chime with the majority view freely expressed so fat this year, and nor does a reading on the US Dollar Index, a trade-weighted measure of the US unit against a basket of currencies, of 91.70 -- a level that means the Dollar is pretty much back to unchanged since the start of the year. And talking of foreign exchange, what of sterling and the Bank of England ? BoE Governor Mark Carney** muddied the waters last week by intimating that a rate rise in May might not be the done deal that many thought. Yesterday , the probability of a hike next month priced by the market was down to 59%. Today ? Less than 25% according to some measures, after Q1 GDP came out this morning at just +0.1%, the lowest reading since 2012. A portion, but far from all, of the blame can be laid at the door of adverse weather -- the French have claimed the same with their number of +0.3%, after all. But while Brits may squirm with embarrassment at the way the UK grinds to a halt under a dose of winter conditions that would barely bother other nations of similar latitude, it would be a mistake not to consider that other, mostly Brexit-inspired issues might be playing an increasingly harmful role. ** Note : Governor Carney's "forward guidance" skills are not considered to be of the highest order, compared say to those of Mario Draghi and ex-Fed Chair Janet Yellen. This sudden change in the level of expectation of a UK rate hike in May will not enhance that reputation -- something sterling traders may want to ponder as they reassess their outlook. Cue : UK£ / USD falling to $1.3760 -- it was trading at $1.4360 little more than a week ago. And finally, since it's all the rage this week ..... as we know well, the talk all week has been about whether the break of 3.00% on the 10yr US Treasury yield signals sharply higher yields. Not so far, as the yield stumbles back to 2.97%. Those positioned for higher yields may also have to reconsider their prognostications if they hold Citigroup's Treasury trading team in high regard. Citi are recommending BUYING the 10yr, with the view that the yield will fall to 2.65%. Prices and yields move in opposite directions, of course. US Q1 GDP will be an important number, due to come in at 2.0% , as will the price deflator, expected at 2.5%. They're out .... well, any minute now !