Bond market one, central banks zero. That’s the headline score after a bruising week in global markets forced a policy change in Australia that’s sent ripples across the globe.
Inizia proprio così l’articolo di Bloomberg del quale presentiamo qui sotto il titolo. Banche Centrali zero, mercati delle obbligazioni uno.
Quello era il punteggio di questo match che è appena iniziato fino a mercoledì 3 novembre. Poi, negli ultimi due giorni della settimana, le Banche Centrali hanno pareggiato.
Prima di concentrarci sul pareggio, leggiamo però insieme in che modo i mercati obbligazionari avevano attaccato e messo in difficoltà le Banche Centrali, portandosi in questo modo in vantaggio per uno a zero.
Tutto parte dal fatto che la Banca Centrale australiana ha rinunciato a una politica che fissava i rendimenti delle obbligazioni a breve termine, una scelta che ha fatto salire questi stessi rendimenti di otto volte, rispetto al “tetto” che la Banca Centrale aveva mantenuto in precedenza.
I mercati hanno mandato così, in Australia ma pure in tutto il Mondo, un segnale chiari e forte: chiedono alle Banche Centrali di agire subito, perché non hanno fiducia nella loro capacità di mantenere la promessa di una “inflazione transitoria”.
E qui, eravamo uno a zero mercoledì 3 a metà giornata. E tutto sarebbe potuto succedere nei due giorni successivi.
Bond market one, central banks zero.
That’s the headline score after a bruising week in global markets forced a policy change in Australia that’s sent ripples across the globe. But market moves in the wake of the decision suggest traders are unsure about just how far they can push the world’s central banks.
Spiraling inflation set the ball rolling for Australia, sparking a selloff in local debt markets that boosted yields more than eight times higher than the central banks’s target. Reserve Bank of Australia Governor Philip Lowe ditched his 0.1% cap on Tuesday, as central bankers worldwide struggle to convince traders and households that they won’t let inflation get out of control.
The RBA’s climb down in the face of the biggest yield spikes since the 1990s shows how policy makers may struggle to stave off investor demands for action. The Federal Reserve, Bank of England and European Central Bank are among those confronting accelerating bets for tighter monetary policy as they battle to unwind unconventional settings while persuading markets that conventional tools -- benchmark borrowing costs -- will remain near the lower bound for as long as necessary.
In a statement accompanying the RBA’s decision to end its 20-month experiment with yield control, Lowe acknowledged he was effectively bowing to the market forces.
“Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished,” Lowe said.
Global Waves
The speed of change in the narrative is remarkable given the RBA just last month reiterated that conditions for a rate increase were unlikely to be met before 2024.
Still, while Lowe conceded that there is now potential for higher rates in 2023, his insistence on remaining patient led Australian markets to pare back some of the most aggressive bets for early hikes, and spurred some global flattening trades to be wound back also.
Money markets pared bets on an ECB deposit rate hike to 13 basis points by the end of next year, compared with 20 basis points previously. Italian debt, which had led Europe’s recent bond declines, rallied to narrow its premium over German peers by eight basis points, the biggest tightening since February. Traders also shaved 10 basis points from their expectations for BOE tightening by the end of 2022.
The Fed is expected on Wednesday to announce plans to roll back its stimulus, while the BOE meets Thursday.
When it comes to the central bank tool kit though, Australia’s scrapping of the yield target means the hurdle is much higher for another central bank to adopt the policy in the future.
‘Important Lessons’
The RBA experience also shows that combining a bond yield target with outcome-based guidance isn’t ideal, because the policy becomes vulnerable to rapid shifts in expectations.
“The RBA was a pioneer in front-end yield targeting, and the apparent demise of this experiment has important lessons for other central banks,” Krishna Guha, head of central bank strategy at Evercore ISI in Washington, wrote in a note to clients before the meeting.
The central bank’s shift has come amid a faster-than-expected vaccination take up in recent weeks, which allowed Australia’s biggest cities to reopen from their rigid coronavirus lockdowns. Meantime, government support stopped unemployment from climbing to levels the RBA had feared, setting the scene for a robust recovery late this year and into 2022.
At the same time, short-end yields have been spiking around the globe over the past month, with investors rushing for the exits after deciding that the acceleration in inflation is going to last. Any hint that central banks might still regard the surge in cost pressures as transitory simply fed the fire by igniting fears that policy makers were going to lose control of their economies.
Benchmark yields at the short end -- those most sensitive to policy rates -- jumped by the most in years for key developed markets. Japan’s were held down as the BOJ maintained its curve control, while Australia’s were the extreme outlier with the biggest increase since 1994 as the RBA’s grip loosened.
The following table shows the moves in key markets in October, using three-year bonds in Australia where that is the key short-dated security, and two-year notes for the others.
The RBA’s ditching of yield control leaves the Bank of Japan alone among major central banks in still using the policy, after others including the Fed considered it and decided it wasn’t for them. The RBA’s abrupt end is perhaps the only way for a YCC exit, given any signal of such a change would see bond markets rapidly price in the departure.
“For other central banks that watched the RBA experiment with interest, the takeaway is not encouraging,” Evercore’s Guha added. “Skeptics will see in the RBA experience proof that a yield target is like an FX peg and will always be vulnerable to breaking when the expected rate path shifts in a way that is not consistent with the stated target.”
— With assistance by James Hirai
Il clima sui mercati è poi cambiato, in modo profondo, tra la sera del mercoledì 3 novembre e la sera del venerdì 5 novembre.
In parte, questo cambiamento è derivato dal tono scelto da Jay Powell dopo la conferenza stampa della Federal Reserve, mercoledì nella serata europea.
A questo si è aggiunta il giorno successivo la decisione della Banca di Inghilterra di NON alzare il costo ufficiale del denaro: una decisione che era stata data quasi per certa dai mercati finanziari (sulla base delle anticipazioni filtrate proprio dall’interno della Banca di Inghilterra).
Questa decisione, questo mancato rialzo, ha suscitato un clamore enorme, in tutto il Mondo, perché è apparsa a molti come una inversione di marcia, come una svolta ad U, e qualcuno ha scritto (immagine qui sotto) persino di un amante infedele. Il mercato in questo caso sarebbe invece l’amante tradito.
Ci appoggiamo a Reuters per ricostruire nel dettaglio queste ore convulse, con l’articolo che segue qui sotto.
LONDON, Nov 4 (Reuters) - The Bank of England kept interest rates on hold on Thursday, wrong-footing investors who had been convinced that it would be the first of the world's big central banks to raise borrowing costs after the COVID-19 pandemic.
The BoE kept alive the prospect of a move soon, saying it would probably have to raise Bank Rate from its all-time low of 0.1% "over coming months" if the economy performed as expected.
But seven of its nine policymakers voted to leave rates unchanged for now - even as they forecast inflation would reach almost 5% in April - so they can see how many people lose their jobs after the recent end of the government's furlough scheme.
The announcement sent shockwaves through markets, sending sterling towards its biggest fall since the early days of the COVID-19 pandemic in March 2020.
The yield on two-year British government bonds fell by the most since the day after the Brexit vote in 2016.
Governor Andrew Bailey rejected a suggestion by a reporter that he was "unreliable boyfriend number two," a nickname first used by a lawmaker to describe former governor Mark Carney, whose signals on rate moves failed to translate into action.
"We are in a situation where the calls are close, they are quite hard but that's just a reflection of the position that we are in," Bailey said. "It's not 'unreliable boyfriend'. We didn't say we were going to act at any particular meeting."
He spoke last month of the need to act to contain inflation expectations.
Bailey said two scheduled labour market data releases between now and the BoE's next rate decision on Dec. 16 could clear up the uncertainty about the labour market but that was not "a strong clue" about when a hike might come.
Investors responded to the BoE's announcement by putting a roughly two-thirds chance on a rate hike in December, much less than the 100% chance they had seen for a hike at November's meeting.
By contrast, a Reuters poll of economists last week showed the average expectation was for the BoE to keep rates on hold.
Only two Monetary Policy Committee members - Deputy Governor Dave Ramsden and Michael Saunders - voted for an immediate 15 basis-point rate hike.
"Pathetic communication from the BoE," Peter Kinsella, head of FX strategy at Swiss bank Union Bancaire Privée, said. "Bailey basically marched us up the hill, and then voted to keep rates steady."
The BoE's cautious approach came a day after the U.S. Federal Reserve said it would start scaling back its bond-buying programme this month, a precursor to its first rate increase which investors expect in mid-2022. read more
The European Central Bank has been more explicit about its determination to keep the stimulus flowing. Its President Christine Lagarde said the ECB was very unlikely to raise rates next year. read more
On Thursday, the BoE said the MPC voted 6-3 to let its government bond-buying programme reach its full size of 875 billion pounds ($1.18 trillion). Catherine Mann joined Ramsden and Saunders to vote to scale back that part of the bank's stimulus programme.
Including its 20 billion pounds of corporate bond holdings - which this month will start to be reinvested in greener debt - the total asset purchase target remained at 895 billion pounds.
"VALUE IN WAITING"
The BoE said most MPC members still thought "there was value in waiting" for data on the labour market.
Earlier on Thursday, survey data showed most furloughed workers had returned to their employers on their regular hours after the government programme ended at the end of September. read more
A recent slowdown in consumer demand also stayed the hand of most MPC members.
The BoE's new forecasts predicted slower economic growth due to continued bottlenecks in global supply chains. Output was seen regaining its pre-pandemic size in the first quarter of 2022, three months later than previously thought.
Growth in 2021 was trimmed to 7% and the forecast for 2022 was cut to 5% from a previous 6% before slowing sharply to 1.5% in 2023 and 1% in 2024.
Inflation was seen jumping to around 5% in April, driven mostly by surging global energy prices, before falling back to just below the BoE's 2% target in three years' time.
That projection was based on the BoE's usual practice of assuming energy prices follow futures for the next six months and then stay unchanged for the rest of its three-year forecast.
However, an alternative scenario, including a drop-off in energy prices in the second half of 2022 which markets expect, showed inflation would be "materially lower" than the BoE's 2% target in 2023 and 2024.
That scenario also factored in previous market expectations that interest rates would hit 1% by the end of next year.
Bailey told investors that the inflation undershoot meant investors should not count on interest rates rising as high as expected if energy prices fell as the futures market predicted.
I mercati finanziari di tutto il Mondo, ed in particolare i mercati delle obbligazioni, hanno subito reagito all’inversione di marcia della BoE, facendo calare i rendimenti delle obbligazioni in tutto il Mondo giovedì 4 e venerdì 5 ottobre.
Nell’immediato, le Borse invece hanno reagito salendo (l’effetto TINA di cui oggi noi di Recce’d scriviamo nel Blog), ma si tratta unicamente di un effetto di brevissimo periodo.
L’inversione ad U della Banca di Inghilterra era forse inevitabile, dato il clima di pre-crisi che si respirava da giorni sui mercati obbligazionari. Ne scriviamo oggi in un altro Post.
Ma questa marcia indietro non risolve il problema, ed al contrario lo rende ancora più grande. Le Banche Centrali non sanno come gestire il rialzo dell’inflazione, che da un lato rallenta le economie (facendo calare il potere di acquisto) e dall’altro lato impone un aumento dei tassi.
La situazione è resa ancora più seria dalla guerra tra mercati e Banche Centrali che è diventata di pubblico dominio proprio in queste settimane. Ne scriviamo oggi anche in un altro Post.
Dichiarazioni come quelle del Capo della Banca di Inghilterra che potete leggere qui sotto non fanno altro che confermare che lo scontro è in corso.
Bank of England Governor Andrew Bailey said it wasn’t his job to guide financial markets on interest rates, hitting back against criticism that he misled investors in the weeks leading to Thursday’s policy decision.
Speaking after officials defied markets’ expectations by keeping borrowing costs unchanged on Thursday, Bailey told Bloomberg TV’s Francine Lacqua that his remarks on the need to curb inflation before the meeting were “conditional.”
“I don’t think it’s our job to steer markets day by day and week by week,” he said.
The comments will do little to ease criticism that Bailey’s decision not to push back against aggressive bets of tightening would undermine the central bank’s credibility.
Traders had expected the BOE to raise borrowing costs from 0.1% to 0.25% on Thursday. Some of the country’s commercial banks including Barclays Plc increased, NatWest Plc and Lloyds Banking Group Plc pulled their cheapest mortgage deals before the decision, hitting households directly.
BOE Pushback
“Communications and policy feed off each other. What the Bank does is very dependent on credibility,” said Andrew Sentance, a former BOE policy maker now at Cambridge Econometrics.
“What senior members of the Bank say can help to build confidence in the broader economy. When markets don’t have confidence in those statements, that can feed through to a lack of confidence in the economy.”
Only two of the nine rate-setters voted for an increase, with the governor himself voting to hold, despite the new forecasts showing inflation will hit 5%, more than double its target.
Traders responded by slashing rate-hike bets, and sent the pound tumbling 1.4% against the dollar. U.K. government bonds advanced, with the yield on five-year debt set for the biggest decline since the Brexit vote.
“Forward misguidance,” was how Rabobank described the BOE’s messaging after the decision, while Bob Stoutjesdik, a fund manager at Robeco Institutional Asset Management in Rotterdam said Bailey “has a serious credibility problem.”
“When look you look at how markets respond today and how they have responded to the hawkish messages you can easily conclude that the BOE have seriously lost credibility which I think is difficult to repair,” he said.
Bailey’s apparent U-turn invited comparisons with an “unreliable boyfriend”, a tag first applied to former Governor Mark Carney after he signalled rate rises and changed his mind later. “It’s not compulsory for a BOE governor to be an unreliable boyfriend,” Bailey said.
He told Bloomberg TV that his pre-meeting comments were prompted by concern that falling bond yields could lead to a rise in inflationary pressures. He said the bets following his remarks were “in the right direction, overdone.”
Jamie Rush, chief European economist at Bloomberg Economics, said it’s “absolutely Governor Bailey’s job to guide markets to a rates path that helps the Bank hit its inflation target.”
“What markets expect interest rates to be in the future affects the cost of borrowing now,” he said.
James Rossiter, head of macro strategy at TD and a former BOE economist, said it will be even harder to gauge the central bank’s future moves.
“We knew that a November hike was a coin toss, but messaging from the BOE up to now suggested that a 2021 hike was a done deal,” he said.
“After today’s communications, I don’t think we can take that for granted anymore.”
Siamo quindi uno ad uno, nel match tra Banche Centrali e mercati delle obbligazioni: i mercati sanno che le Banche Centrali stanno provando … a fregarli, e non vogliono farsi fregare (almeno non più di tanto)
Dopo una settimana convulsa ed emozionante, ne stanno per arrivare altre ancora più emozionanti.
Per collocare le cose nella giusta prospettiva, il nostro suggerimento in questo Post è rileggere l’articolo che segue di Bloomberg: ci ritroverete, raccolti ordinati e sintetizzati, tutti i temi più importanti di questo difficile momento dei mercati finanziari internazionali.
L’articolo è di sette giorni fa: ma dopo questo uno a uno iniziale, la palla torna al centro: proprio dove stava sette giorni fa. Sola differenza la maggiore sfiducia tra le due squadre in campo.
Taper Tantrum 2.0 has arrived just as the Federal Reserve plans to start scaling back its asset purchases. This time is different from the original edition in 2013 in a few important ways — raising the stakes for Chair Jerome Powell and the central bank, which will issue its latest decision at the conclusion of its meeting on Wednesday.
First, unlike eight years ago, traders in the $21.9 trillion U.S. Treasury market clearly understand the playbook: a combination of tapering and a potentially accelerated pace of interest-rate increases means a sharply flatter yield curve. From May 22 through July 3 in 2013, the curve from five to 30 years flattened by about 25 basis points. Last month, in a shorter time frame, the same curve flattened by roughly 40 basis points. Other curves steepened during the previous episode. Regardless of maturity, the flattening trend has been unmistakable this time around.
Taper Tantrum Playbook
Crucially, this latest bout of bond-market upheaval is a distinctly global phenomenon. That’s a problem for the Fed. Even if it’s the world’s most influential central bank, there’s only so much it can do to dictate policy decisions in other large developed nations, which have their own domestic considerations. Here’s a snapshot of what has happened lately across sovereign debt:
Canada: Two-year yields more than doubled in October to 1.04%, including a spike of more than 20 basis points in one day as the Bank of Canada ended its bond-buying program and moved forward the potential timing of future rate increases.
U.K.: Two-year yields have been rising for 10 consecutive weeks, the longest stretch in at least three decades. Markets expect that the Bank of England will increase its benchmark rate to 0.25% from 0.1% the day after the Fed’s decision.
Australia: Two-year yields increased more than 50 basis points in two days, ending Friday at 0.775% from just 0.115% a week earlier. The Reserve Bank of Australia opted not to defend its short-term target level through yield-curve control.
New Zealand, Norway, South Korea: The central banks in these countries have already raised interest rates.
Spain, Portugal, Italy, Greece: Shorter-term rates as well as 10-year yields are surging in these so-called peripheral countries within the euro zone. European Central Bank President Christine Lagarde’s remarks last Thursday were taken to be not-so-dovish, and by Friday, “that caution mushroomed overnight into a mini taper tantrum,” FHN Financial’s Jim Vogel wrote.
Dragged Higher
Taken in its entirety, the global bond market looks like a powder keg, even if stocks and credit are largely shaking it off for now. That raises the all-important question: Does the Fed have the tools to prevent a blowup?
Wall Street strategists aren’t necessarily convinced. Citigroup Inc.’s Matt King sees the Fed and its peers caught between a rock and a hard place. “Expect tantrums in risk if central banks respond to inflation — and tantrums in bonds if they don’t,” he wrote in an Oct. 29 report. At Jefferies, Aneta Markowska and Thomas Simons pondered whether Powell will look to dial back the market’s current bets on two interest-rate increases next year. He “will have to walk a very fine line, since pushing back too hard could unhinge inflation expectations, but not pushing back at all could unsettle the front end of the curve,” they wrote.
Here’s what we know for certain: The Fed doesn’t like to surprise markets. Just about everyone expects the central bank to say it will start scaling back its $120 billion of monthly bond purchases ($80 billion in Treasuries, $40 billion in mortgage-backed securities) by $15 billion a month ($10 billion in Treasuries, $5 billion in MBS) starting in mid-November and ending by June. That’s what should happen come Wednesday. It gives Powell and his colleagues eight months to ever-so-slightly pare back accommodative policy and hope in the meantime that inflation comes down and validates their long-held position that price pressures are transitory.
Ideally, the Fed would have a better strategy than hope. But it has boxed itself into a difficult situation with its new policy framework, which was designed with the post-2008 economy in mind. That period was characterized by a gradually improving labor market without much wage pressure or inflation broadly. It suggested that reaching the nebulous level of “full employment” doesn’t mean price growth will reach or exceed the central bank’s 2% target.
The framework wasn’t meant to address the current situation: persistently elevated inflation when the number of working Americans is still well below its February 2020 levels. Yes, it’s good to see that the employment cost index, a broad gauge of wages and benefits, rose 1.3% in the three months through September from the prior quarter, the biggest jump on record. But if consumer prices are rising more quickly — and especially if individuals and companies expect they’ll only go up faster in the future — then the Fed is violating the price-stability part of its mandate by staying the course, to say nothing of its supposed data dependency.
The best way for Powell to defuse the situation is by first acknowledging that the pace of tapering isn’t on autopilot and that the central bank reserves the right to speed it up or slow it down based on incoming data. It would take a severe shock for that to happen, of course, but just hinting at that optionality would show that it hasn’t abandoned its commitment to keep inflation well-anchored. Second, he would be wise to steer clear of directly trying to influence the market pricing of short-term rates, only saying that officials were split about increasing the fed funds rate in 2022 as of September, and that they will update their forecasts next month based on the latest information. As it stands, I’d expect December’s dot plot to reflect a median expectation of one rate increase within a year, meeting current market pricing halfway.
Suffice it to say, it’s a delicate balancing act. It’s made a bit easier by the fact that the bond market’s tantrum hasn’t yet spilled over into credit spreads or equity prices, and made more difficult because Powell isn’t even sure he’ll be Fed chair in a few months. Will there be a hard policy pivot, or is this just bond traders getting ahead of themselves about inherently uncertain actions months down the line?
It’s up to Powell to navigate this treacherous path. Announcing the start of tapering will be the easy part.
