Closely Coordinated
Stocks in the US finished a choppy session mixed on Wednesday, as the S&P 500 ended muted, the Dow Jones rose 171 points to extend its winning streak to six days, the longest since December.
Meanwhile, Nasdaq edged lower by 0.2%, due to a sell-off in shares of Tesla and Intel.
In corporate news, shares of Uber sank 5.7% after the company missed on earnings.
Tesla also fell 1.7% after reports that U.S.
Prosecutors are examining whether Tesla committed securities or wire fraud by misleading investors and consumers about its electric vehicles’ self-driving capabilities.
Yesterday morning, the Swedish central bank became the second major central bank (a G10 country) to cut rates (-25bps) to 3.75% - marking the first rate cut for 8 years following 10 hikes totaling 450bps.
The Swiss National Bank was the first to kick off the easing cycle in March. And as we discussed yesterday, rate cuts are expected to come in June for both the Bank of England and the European Central Bank.
Keep in mind, the Fed has a tighter policy, measured by the real interest rate (the main policy interest rate minus the inflation rate), than any of these four central banks.
They should be cutting. So, despite the mixed signals the Fed gives, should we expect more and sooner action from the Fed than the market has priced in? There is every reason to expect the closely coordinated policies of the past fifteen years, by major central banks, to continue in this easing cycle.
Remember, the Bank of Japan played the critical role of global liquidity provider the past two years (the liquidity offset to the Western world's liquidity extraction/tightening policies). They made the first step toward exiting that role on March 19th. It’s probably no coincidence, two days later the Swiss National Bank started the easing cycle with a surprise rate cut (adding liquidity).
With that in mind, the Fed has convinced markets that they can patiently sit with high real rates, until they manufacture their desired inflation rate. The actions of their central bank counterparts tell a different story.
They don't have the luxury - they are all a liquidity crunch away from returning to the business of QE.
While I agree there is a great desire by all central banks to run the easiest policy possible, you must admit that virtually every comment we have heard from every Fed speaker is higher for longer. absent a clear economic downturn, which just doesn't seem to be happening, it is hard to see how the Fed can cut.
Is the BoJ more important than the Fed?
The risk is something breaks as BoJ get forced into hiking aggressively to support their ccy. A precursor to the GFC was the BoJ hikes... blowing up the global carry trade.