CB's & OpEx - subdued week ahead
Macro Perspectives: Tue 16 Mar 2021
We have a slew of major central bank meetings this week.
We can expect the performance of global markets this week to hinge on the way central banks (most importantly, the Fed) address (maybe dance around) that subject, whilst OpEx traditionally has a dampening effect on the weeks price action.
The tone from global central banks has been led by the Fed, which has been: an ultra-aggressive stance, yet with little-to-no acknowledgement of the risks of losing control on the bond market and inflation.
The question: Will the Fed say anything this week to change that tone?
Remember, we just heard from Powell two weeks ago, in an interview with the Wall Street Journal. He was given the opportunity to more modestly position the Fed's view on inflation risks. He declined, arrogantly saying that the long period of low inflation won't "change on a dime."
Now, if we've learned anything from the central banks over the past twelve years (post-financial crisis), it's that they are adept at maintaining control and managing market sentiment, even if it means changing the rules. And they can change the narrative (their views) on a dime, with no apologies.
With that, with the $1.9 trillion fiscal package now in deployment, we may get a change of tone from the Fed this week. This could come in the form of a discussion on "options" (to deal with the bond market), which at this point may be talk of another "Operation Twist."
That, in the short term, could apply some breaks on the global asset price boom,to the extent that the Fed would be flattening the yield curve, and NOT expanding the balance sheet.
What they also need, is to slow the rise in inflation expectations. This chart below shows what market participants expect inflation to be in the next five years.
Three observations, here:
1) at 2.51%, it's above the Fed's target (of 2%),
2) it's at the highest level since 2008
3) when this measure reached 2.45% back in 2011, the Fed started putting out trial balloons on a policy action called "Operation Twist" - which they executed a few months later, to tamp down longer term market interest rates.
Yields and inflation expectations went lower.