Thursday, June 07, 2007
Macro Man’s bond purchase has not worked so far, despite yesterday’s equity sell-off. One obvious explanation why is that most developed market central banks (other than the Fed and the funding currency CBs) are being dragged into taking a hawkish stance. Perhaps decoupling really is a myth; rather than the rest of the world getting dragged down with the US, however, perhaps the US is simply being dragged up by the rest of the world!
The ECB delivered the expected tightening yesterday, and Jean-Claude Trichet signaled more to come by describing monetary conditions as ‘accommodative’ (clearly he didn’t get the memo about not using code words). While the ECB actually downgraded its 2008 growth forecast and characterized risk to the forecast as being to the downside, any potential dovish implications were blown out of the water by the Bundesbank’s Axel Weber, who characterized policy as being “far, far away” from restrictive. Clearly there’s one monetarist who’s alive and well!
In the Antipodes, meanwhile, the news was equally bad for bonds. The RBNZ delivered a surprise 25 bp hike, taking kiwi rates to a decidedly EM-like 8%. While RBNZ governor Bollard expressed some dismay at the level of the currency, he’s shown little inclination to do anything about it. (Perhaps the RBNZ and SNB should combine to sell NZD/CHF?) In Australia, meanwhile, unemployment reached a record low 4.2% a day after the stonking GDP report. A further rise in RBA rates would appear to be close to a dead cert.
True, the COPOM in Brazil actually cut by 50 bps, but it’s quite clear that growth, rather than inflation, if the primary concern there. In any event, the cut proved beneficial to the BRL, which clawed back most of the day’s losses late in the session.
Today sees policy announcements from the BOE and SARB. The market ascribes little chance of a UK hike today, though a further tightening is virtually written in stone. The SARB, meanwhile, is confronted with an interesting dilemma; inflation is above the target threshold, but largely driven by food and energy prices, something which domestic monetary policy can do little about. Does Mboweni hike 50 and take a hawkish stand to drive down domestic inflation expectations? If so, he risks an undesired currency appreciation. Or does he play softly, softly, thereby risking a perception that he’s fallen behind the curve (and leading to higher bond yields?) ‘Twill be curious to see.
In a world increasingly convinced that growth will persist and that inflation may become a problem, a long bond position may seem perverse. But Macro Man sees the risk/reward opportunity of being long at current levels as representing a cheap put on risky assets; certainly cheaper than one could get on the CME, Eurex, etc.