Are central banks meaningless?
Kim Lubbers is portfolio manager at Kempen Capital Management.
German bund yields are almost back at their low of April 2015, mostly driven by a flight to safety rather than ECB-QE related. We also saw another fresh low in the EUR 5-year inflation swap rate.
The negative sentiment spilled over to Southern Europe with Italy-bund 10-year spread moving over 150 basis points.
Sentiment is likely to remain fragile over the coming weeks, and will probably bring further accommodative stance from central banks. Volatility is back.
Global markets are decidedly risk-off, central bank action looks uncoordinated and we see few signs of calm ahead.
Pessimism in the markets is growing, with equities down, oil prices hitting new lows, data in the US weaker than expected, China and credit markets showing signs of stress.
Deteriorating financial conditions and weak economic data have already forced every G4 central bank to adopt a more accommodative policy stance over the last month.
Over the past two weeks a number of comments by Fed speakers indicated that a rate hike in March is off the table. Yellen described in her last testimony that the economy has slowed and financial conditions have tightened since December.
The money market even pushed forward a rate hike beyond 2016. The ECB opened the door to further easing measures in its last meeting.
Market expectations for the ECB in March are growing again. Banks are talking of rates at -1.0% at the end of the year.
The Bank of Japan (BoJ) became the fifth central bank to implement a negative policy rate. The Japanese rate cut to -0.1% came as a surprise to markets, and caused movements in forex and asset prices in the short term.
But the longer term effect was limited, with the yen trading significantly stronger than before the cut and the Japanese equity market dropping 12%.
This is showing the diminishing marginal impact from the central banks actions.
One might question how effective monetary policy still is in the current environment of zero or negative interest rates.
The almost next to nothing impact of the surprise BoJ policy action has indeed added to concerns that the monetary policy equipment has been exhausted.
We are skeptical that negative rates will be effective in raising inflation and boosting activity. And a global problem cannot be solved by shifting exchange rates around.
The current market turmoil and tightening in financial conditions has become much more alarming if we consider that monetary policy has become meaningless.