Central banks send dovish message to markets
Fed Chairman Jerome Powell stayed on message overnight, acknowledging the improvements seen in the economy but highlighting that it was “uneven and far from complete.” Mr Powell saw no signs of “bad inflation”. He committed to keeping monetary policy ultra-easy, emphasising the need for employment to recover to pre-pandemic levels, which is still some way off by any measures.
That followed similar noises by ECB Chairperson Lagarde on Monday, who went further in saying that the ECB would closely monitor the trajectory of longer-term interest rates. A veiled hint that the ECB will step in if it perceives them to be rising at an uncomfortable pace.
Similarly, the Reserve Bank of New Zealand held rates at record lows of 0.25% this morning. The RBNZ reiterated that monetary policy support would be required for a prolonged period. It also stated that the OCR rate could be cut again if things take a turn for the worse.
So broadly, the world’s central banks remain “on message” with ultra-easy monetary policy set to continue and no intentions to change that outlook. Although yield curves across the globe may steepen as the economic recovery gathers pace, a sign of economic health, short-end rates will remain near zero. The picture may be murkier by the time Q4 arrives, but for now, central bank largesse is more than enough to keep the global asset prices on an appreciation track.
Mr Powell saved the US stock market’s blushes, which had endured a torrid session until his speech, with the Nasdaq down 3.50% at one stage intra-day. All of Wall Street’s losses were reversed by the end of the session and notably, both the S&P 500 and the Nasdaq tested longer-term support lines once again, bouncing nicely. The buy-the-dip trade remains alive and well, if perhaps a bit less convincingly than seen in 2020, which is no bad thing in the longer-term.
Elsewhere, gold continued to stage a modest recovery after the Powell speech, even as the US dollar also crept higher, having rallied impressively on risk aversion flows pre-speech, retreating afterwards. Cryptocurrencies had a tough day at the office, with bitcoin falling nearly 13% overnight. However, the fall in cryptos is due to liquidity constraints and speculative mania, rather than anything Mr Powell said. Bitcoin has duly rallied 5.0% this morning as the buy-the-dip mafia return once again.
Australian wage data outperformed this morning, further confirming the lucky country’s rapid recovery domestically. Malaysian inflation data for January is expected to remain firmly in negative territory at -0.80%, highlighting the negative premium not controlling Covid-19 brings. Hong Kong GDP for Q4 QoQ will show an asthmatic 0.20% as domestic demand also remains Covid-crushed. By contrast, Taiwan Exports, Retail Sales and Industrial Production will show impressive gains, benefitting from being the centre of the work-from-home tech boom, and having eliminated the virus domestically.
In a relatively quiet week for tier-1 data as the month-end approaches, attention will now turn to the US Q4 GDP and Personal Consumption Expenditure data tomorrow night. Despite the lockdowns and poor weather, the PCE data should outperform, with Q4 GDP expected to show a further rebound from the darkest pandemic lows. That should support US equities at the fringes, although Mr Powell’s efforts to stop the rot could be undone if US longer-term yields resume their upward trajectory.
