Ordinarily in the first post we would recap any of the key overnight events, but in this case there was just one event of note ahead of today's non-farm payroll seasonally adjusted "noise": the halting of the Japanese Government Bond complex due to excessive volatility. Now, this is not some zero-liquidity penny stock or an algo fat binary finger: at last check there is one quadrillion yen in Japanese debt, which makes it the second biggest sovereign bond market in the world. Yet one glimpse at what transpired in overnight trading and one can see just why the Japanese regulators decided it is time to close all bond trading. The reason: the JGB's insane decision to literally reflate or bust, and with it the total loss of all signalling to various asset classes, because while the country is targeting 2% inflation, its bond curve is indicating the most epic deflation in history. The good news: the bond market reopened... eventually; the bad news: who knows if it will, the next time there is a 100% swing from low to high in the 10Y JGB bond yield in the span of hours. Which brings us to the point of this post, summarized best by Deutsche Bank's Jim Reid who overnight said it best: "we are now flying blind"... The central banks are now flying a plane that has lost all hydraulics and their only option is to add ever more power to the engines to pretend they are still in control.
From DB's Jim Reid:
The move by the BoJ plays into our 'Journey into the Unknown' thesis and its fair to say that there really is no precedent for what Central Banks are currently doing, or threatening to do, on a global scale. You'll be able to read chapter and verse from strategists trying to explain what's likely to result from such moves but the honest truth is that we are flying blind in terms of historical evidence even if we go back centuries. My guess is that medium-term global inflation is being locked in by these moves but that the first move is likely to be maintaining the low bond yield world for some time even if there are brief selloffs. For riskier assets, our simple models based on variables like the PMIs tell us that we may be due a set back soon. These models survived the liquidity burst of QE1 and QE2 but will they now be overpowered by the combined OMT potential, QE-infinity and the BoJ's new 'Carry-O-QE' (ok I know it won't catch on)? Our base case remains that we will eventually see a set back as we approach the end of H1 on weaker data (especially in Europe) but that outside of a shock, the downside will be perhaps limited by global Central Bank liquidity. Fascinating times and we can't help thinking that these moves are not without consequence. If it really is as easy as printing money then all Central Bank's would have done it a long time ago. That such a period for global CB's is unprecedented should serve as a warning to watch for unintended consequences.