The moment to get hawkish never materialised globally. Instead, the doves have seemingly right of way. The Fed may have started liftoff last month, but events since then have taken the world rather in a different direction in a matter of weeks. Central banks will first try soothing words (Carney last week, Draghi this week) to calm things down, but could eventually be forced into action.
It has become clear, from minutes and speeches, that quite a number of Fed governors felt iffy about that December liftoff decision. Such doubts may have deepened since then. In similar fashion, the ECB pronouncements yesterday put more light on some of these dilemmas. Are we witnessing a tentative course change being planned by key central banks? Or will it all blow over ere long?
The ECB kept its rates unchanged yesterday. In his prepared remarks, ECB President Draghi started off by explaining how well Europe is doing, how monetary policy measures have been effective and successful. But then he shifted gears forward. At its next board meeting in early March, the ECB will reassess all evidence, to see whether it would be necessary to take additional easing measures.
In Q&A, it became clear that the ECB is (deeply) concerned about events globally, specifically Emerging Market turmoil, financial market unsettledness, and the relentless remarkable decline in global commodity prices, especially oil, and its fallout, specifically slower inflation (and possibly evidence of lower growth trajectories).
American inflation this year will barely be 1%, now only rising to 2% next year (while core inflation is comfortably topping 2% throughout), with such softness entirely energy-related. Europe is undershooting inflation in similar fashion, and Draghi clearly feels this is going on for much too long. Inflation needs to get back to 2% as soon as is feasible.
If these disturbing global events were to turn out more than just short-term deviations (indeed, does one dare suggest whiffs of market panic deepening and becoming self-sustaining, though this still rejected in the main by cooler minds?), such longer lasting turmoil would be most worrying as it serves to tighten market (liquidity) conditions globally. This would affect everyone.
Draghi went out of his way (saying it had been mentioned as well at board that morning) to repeat his sentiments made in New York last December following a less-than-satisfactory market reception of policy comments the day before. The ECB has unlimited means at its disposal to do whatever is necessary, and in need will do so. A very loud signal that they stand ready to do the necessary, whatever is needed to achieve their mandate.
Though praising the Chinese authorities about their ways of addressing recent turmoil, the underlying message is one of waiting and observing global events. If need be, the ECB will take decisive action with all the unlimited means at its disposal. Hint: don’t fight the ECB. Euro swooned on cue, stock markets revived.
In this, Draghi may have pre-empted Fed chair Yellen. She, too, may feel things are going just swimmingly at home BUT things worldwide haven’t and in recent weeks seem to have US financial markets galloping, indeed on the run (if not yet on ropes). If this shortly blows over, good and well (also the public view of JP Morgan’s Jamie Dimon at Davos). But if it persists? The Fed has a long history of accepting that if markets become unruly and sell off too rapidly, with selling acquiring its own momentum, potentially heavily undershooting, damage is being done to the wider economy. And reason for the Fed to intercede.
The Fed, too, will therefore probably wait a while, talk a very soothing game, but if there is no let-up to current global events, watch Yellen eventually prepare a policy U-turn (though we are currently still far from such a moment).
This aside of what will be coming from the PBoC and others, with many hard-hit EM economies seeing their central banks turning more dovish of late.
The ECB, like the Fed, and no doubt many other central banks, such as BoE and BoJ, remains alive to the possibility of all this being noise, transient and passing, with things turning back to “normal” quite soon and no extraordinary policy measures being needed. But in case the ship does not right itself under its own power, and soon, it will likely mobilise central banks anew, something few have predicted for 2016.
In summary, like global financial markets, key central banks are also starting to signal (deepening) unease about the direction of events. It remains early days for them to respond, but the decks are being cleared in case the turmoil persists.
It would give yet another twist to a very robust start of 2016, if indeed turmoil were to persist.
South African implications could be many, both regarding an early becalming of market jitters globally, or key central banks taking more supportive policy action from this quarter: more respite for the Rand (clawing back lost ground), less inflation risk, a more dovish SARB on interest rates (even no change next week, like Brazil yesterday….?), less capital flow pressure for funding the SA current account deficit. And presumably let-up for the JSE stock market, along with other risk markets, at least for a while.
These are short-term sentiments. The longer-term is a lot more complicated….