Central bankers still winning, says JPMAM’s Nick Gartside
Nick Gartside, international CIO for Fixed Income at JP Morgan Asset Management, says the evidence is it still does not pay to fight central bankers.
Read my lips is the clear message emanating from central bankers around the world. The switch from reactive to proactive all started back in July last year when European Central Bank president Draghi told the world he would ‘do what it takes’ to save the euro and was swiftly followed by ‘unlimited’ quantitative easing from the Federal Reserve.
Recent moves from the Bank of Japan reminded investors that western central banks don’t have a monopoly on easing (and driving their currencies lower), as have recent cuts from emerging market central banks such as Turkey.
Faced with deepening recession, the ECB joined the rate cutting frenzy last week; and, fearful of being left behind, the Fed quashed talk of ‘tapering’ asset purchases by reminding investors that they can increase, as well as decrease, bond purchases. No prizes for guessing the direction of policy when governor Carney gets his feet under the table at the Bank of England in July.
Where does this leave markets? Well, the reality is that it never pays to fight central bankers. Continued and aggressive easing removes extreme tail risk, and to a degree helps to underwrite poor economic fundamentals. It also puts ‘technicals’ in the driving seat. Simply, the huge amounts of cash being created each month have to be invested and bond supply remains limited. Against this backdrop well researched bonds continue to look attractive and yields are set to creep lower. The risk? Arguably the key indicator to watch is wage inflation. When consumers start to get meaningful wage increases, inflation expectations will rise and central banks will move to tightening policy. The evidence so far?…not good, as wage growth in many economies remains stagnant