Draining the Punch Bowl
The markets continue to digest the latest signals from the Federal Reserve Board who are now actively discussing how and when to pare back the balance sheet. But just as significantly investors are now coming to grips with the notion that the perpetual global central bank gravy train may be coming to an end in the wake of policy pivots from both the BoC and BoE and the overly hawkish musings from the Federal Reserve Board
The Central Bank’s money printing machines and bloated balance sheet have not had the inflationary effects anticipated, and perhaps it’s time to err on the side of caution as concerns over possible financial market distortions driven by easy money policy come to the fore. Market distortions ultimately lead to market failures, so perhaps the Federal Reserves and other global CB’s are growing concerned with investors hubris and signalling it’s time to reign in risk.
Not too unexpectedly in the wake of the surprising policy pivots from BoC and BoE, the market is now wondering which central bank will be next to drain the punch bowl. BoJ??
Very aggressive dollar buying across all three sessions yesterday has propelled USDJPY above the 111 level but it was the profusion of strong US economic data released yesterday, that corroborated the Fed’s view and was the primary catalyst. BoJ is not expected to shift policy today, so the markets will focus on whether the bank maintains its JPY 80 trn QE backstop.
The markets remain in FOMC post-mortem as a dovish ECB and Hawkish Fed has Euro longs squirming but with few catalysts and little to glean from cross asset price action, buying EURUSD on dips gave way to paring back risk.