Haruhiko Kuroda’s move to NIRP and Mario Draghi’s implicit promise to ramp up PSPP in March underscore the extent to which Janet Yellen has made a policy mistake by hiking at a time when the US economy (not to mention the global economy) looks to be decelerating and the disinflationary impulse looks to be gathering steam.
January marked a rather inauspicious start to the new year with wild swings in Chinese markets fueling volatility across the globe and crude carnage taking its toll on investors’ collective psyche. Oil managed to ramp but China is still a (big) problem, as we explained this morning in the overnight wrap.
With Beijing set to export its deflation to the rest of the world and with central bankers in panic mode, investors are piling into core paper like there’s no tomorrow. Below, find some insightful commentary from former FX trader Mark Cudmore.
From Bloomberg
For all the January focus on oil and China, and both have certainly provided much of the volatility, the largest asset shift so far in 2016 has been in core sovereign bonds.
Friday’s surprise move to negative rates by Japan may have provided the ceremonial flourish, sending Japanese yields to record lows. But that’s far less noteable than moves elsewhere. Japan’s two-year rate has dropped 14 basis points this year, which is dwarfed by other sovereigns
Mario Draghi’s commitment that the European Central Bank will soon ease further has seen German two-year yields also hit record negative levels; the drop there has been 14 basis points as well
However, both pale in comparison to what is happening in the equivalent paper in the U.S. and U.K. The former has seen a 28 basis point plunge, while U.K. two-year yields are currently trading at the lowest level in over a year after plummeting 32 basis points
A year ago, we were debating whether the U.K. might even raise rates before the U.S. -– now markets are indicating the Bank of England’s next move is more likely to be a cut
Rates are either screaming out that the deflation battle is far from over or they’re implying that investors are so worried about 2016 that they’d prefer to pay the German government 0.5% per year to keep their cash “safe.” In other words they see deflation in financial assets, if not in consumer prices
With that in mind, Brent crude’s rebound of more than 30% from the January 20 intraday low, prompts two thoughts
The first is that the risk of headline consumer-price deflation is much less than it was two weeks ago, which suggests that fear is indeed the dominant driver of rates markets
The second is that when one of the world’s key economic inputs, oil prices, can rally 30% but still be down on the month, then investors may have a valid reason to be scared
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