Authored by Richard Breslow via Bloomberg,
It was so very tempting to walk in this morning and conclude that the world is a happier place. US and European equity screens were awash in a pretty shade of green... But that did not last as rates globally suddenly plunged...
On a more dour note, three more Asian central banks cut rates today. All were clearly dovish surprises and aggressive compared to expectations. Those much discussed global headwinds continue to blow. And, despite the fact that the central bankers all want to do things for their economies, there is a big element of equally aggressive currency policy involved.
It’s all the fashion to talk about “insurance cuts.” Let’s hope the insurance being taken out isn’t based on the assumption that the yuan continuing to weaken should be a base case. Because the implications of that go well beyond merely domestic considerations -- and they affect the competitive trade balances across the entire region and beyond. So much so that RBNZ Governor Adrian Orr went so far as to discuss that they were well-down the road of studying unconventional monetary measures. Including negative interest rates and a smorgasbord of other possibilities. That’s extreme, and should be unsettling. Especially if you contemplate more and more countries doing it.
St. Louis Fed President James Bullard quite sensibly pointed out yesterday that they can’t adjust policy based on every twist and turn in the trade war drama. It was a much-welcome, and needed, bit of advice that sometimes everyone just needs to take a few deep breaths. And, coming from someone with his policy predilections, it was actually calming.
Because once central banks start slashing rates in search of market share, it will continue to spread. And, as we’ve seen, once that starts it’s increasingly difficult to stop. And, inevitably, continues way too far.
Eventually, the all too easy to dismiss negative externalities that come from overzealous monetary policies become systemic risks. When you hit reversal rates, you are pretty much stuck. Asset bubbles and rates that are too low for anyone’s good don’t go well together. Think the world is there yet?
Going along with equity green are bond screens even more dramatically so. These rates aren’t normal. And certainly not healthy. More policy makers need to have sticker shock. These yields aren’t an affirmation that what they are doing is working. And they are an unambiguous indictment of their fiscal policy brethren.
How utterly depressing to have to accept that there is a plethora of traders waiting to get ahead of their central bank by buying any back-up in rates. And even more so, that they increasingly have to compete with foreign government entities for the privilege. It’s hard to get meaningful messages from yield curves when the market zeitgeist is just buy everything. Currency wars may be the new norm, but that certainly doesn’t make them pretty.