Dovish surprises force yields lower

Stock markets are making small gains as we move towards the end of the week, as investors digest the latest policy decisions from the Fed and BoE and look ahead to tomorrow’s jobs report.

The last 24 hours has highlighted just how challenging the current environment is for central banks, with the Fed and BoE both adopting a surprisingly cautious approach that flies in the face of what markets have been positioning for. This in the same week that the RBA abandoned its rate targeting, days after allowing the 2024 yield to surge.

It would appear policymakers can’t make up their minds, which makes communicating upcoming policy changes to the rest of us difficult, to say the least. Granted, the Fed’s decision to start tapering was as well communicated as it could have been, it was fully priced in and came to the surprise of no one.

But on issues where there isn’t total agreement, central banks appear to be winging it and hoping the rest of us keep up. The tweaks to the Fed’s communication on the transitory nature of inflation appeared to be constructed to appease everyone and tell us very little, like their reassurance that tapering pace can be increased or decreased depending on the economy and inflation.

My reading of the transitory language is that they may be planning to phase it out as everyone has become too hung up on what it actually means. It’s stopped being useful. But to abandon it out of the blue would have been viewed as hawkish and the FOMC probably wanted to avoid a nasty shock. Powell was also able to dodge the interest rate question but won’t be afforded that luxury next month when the new dot plot is released.

Which brings us to the BoE today and the rate hike that never was. Investors were seemingly torn on whether the central bank would take the plunge, as it seems was the MPC, but it was surprising that after all of the comments we’ve had recently, that the vote wasn’t even close.

And while waiting to see what impact the furlough scheme ending had on the labour market is logical, it doesn’t change the fact that they have been preparing us for rate hikes to get to grips with high inflation, not a booming economy. It seems policymakers got cold feet and opted to kick the can down the road, make it December’s problem.

While policymakers, including Governor Bailey, refused to comment on market expectations and how realistic they are, they did suggest that market pricing would bring inflation a little below target over the medium term which perhaps suggests they think it’s a little too high. But maybe I’m just reading too much into it.

In the last few months, we’ve gone from inflation being a little high but transitory, to too high and still kind of transitory, albeit for longer than hoped and necessitating some action, to the Fed and BoE adopting a very cautious approach and getting cold feet. With that in mind, who knows where we’ll be in 12 weeks, let alone 12 months. But with markets and central banks now increasingly not on the same page – whether that be the Fed, BoE, RBA, even the CBRT as a more drastic example – something needs to improve.

Can bitcoin hold on to test the highs?

Bitcoin is slipping again today and could be set to test USD 60,000 once more. It found decent support around here yesterday and recovered strongly and we may see more of the same as it closes in on that level. A move below could see a continuation of the post-ETF correction while another rebound could inspire a move back towards the highs. Some may have been hoping the Fed would deliver, although what exactly that would have been I’m not sure. There isn’t much that isn’t bullish for bitcoin these days, it seems.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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