February Is An “Air Pocket” For Central Bankers

Investors will have to go it alone this month. Despite February being the shortest calendar month of the year it could feel a rather long one with no directional guide from any of the major central bankers (the BoE do meet this Thursday).

The next five weeks lacks a single scheduled opportunity for the Fed, ECB or Bank of Japan to reset monetary policy. With the lack of direction, investors could be exposed to even more volatile moves especially if there is any further slide in commodities and evidence supporting China’s economic slowdown (data overnight indicates that China manufacturing remains in contraction). Even the PBoC does not have any scheduled meetings, but that has never prevented Chinese policy makers from being proactive. Their actions of late have generally tended to hurt the markets.

Despite January being the worst opening month for equities in seven years, global bourses did get a helping hand from the big three central banks. Stocks managed to recover from a deeper sell-off as Ms. Yellen and company hinted that they may be slower to raise interest rates, President Draghi signaled more stimulus is on the way, while BoJ’s Kuroda embraced negative rates.

PBoC, FED and BoJ

On Friday, the Bank of Japan surprised markets by putting interest rates into negative territory for the first time ever, joining the ECB, Sweden, Denmark and Switzerland. The BoJ will now charge a rate of -0.1% for excess reserves parked at the bank by financial institutions. Kuroda said the bank was prepared to do “whatever it takes” to achieve its +2% inflation target, and that the bank would go even deeper into negative territory if needed.

Last Wednesday, the Fed left the door open to a March rate increase despite acknowledging, “economic growth slowed” since December. However, many now believe it will be even harder for Ms. Yellen to gradually take rates higher if other major Central Banks keep pumping their stimulus policies. Rate differentials continue to favor investors coveting the USD – eventually a too strong a dollar will only make things more complicated for the Fed. The FOMC statement abandoned its balanced outlook language (“the committee sees the risks to the outlook for both economic activity and the labor market as balanced”) and said inflation would “remain low in the near term.” The markets is reading this as a more cautious outlook, and sees the Fed requiring more time to assess the global situation. Hence, the “dot” point four hikes are not locked in, nor is a Fed hike in March.

Even the PBoC was active last week. Chinese officials pumped more cash into their economy and continued to strengthen the yuan exchange rate. As of this morning, the PBoC has strengthened the yuan midpoint for 16 consecutive sessions (¥6.5539). Officials continue to use liquidity injections ahead of the lunar New Year holiday to add the most funds to the Chinese financial system in three-years to help stem the seasonal cash crunch. With no meetings scheduled in February, the BoJ’s move will certainly add pressure on China to resume the devaluation of the yuan and hence why China could be a central bank wild card for this month.

Commodities

Central Banks aside, most asset classes will continue to take direction from crude oil prices. Bullish rhetoric and false claims are currently keeping investors on their toes. Russia and OPEC admitted that oil prices have fallen too far and that something must be done to put a floor under the market.

However, what is real and what’s not continues to stoke volatility in energy prices. There were reports last week that OPEC was considering a meeting with major non-OPEC producers to discuss the possibility to get all parties to agree to “equal, coordinated production cuts.”

Already this morning, crude oil prices are trading down nearly -1.5% (WTI $33.12 and Brent $35.66), weighed down both by China’s PMIs and earlier rhetoric from the Middle East – Saudi oil official has denied the Russian Energy Ministers claim from Friday that the two oil giants are in talks to cut output by -5%.

Even with the one extra day, the month of February could feel even longer for many investors trying to navigate through these volatile markets without a helping hand from policy makers.

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