Market get mixed message from central banks

Most markets are looking for direction as central banks moved the goalposts over the last 24 hours.

Yesterday Fed chief Janet Yellen said that the central bank now sees an additional rate hike needed for next year as its policies appear to be working.

Laugh at that. The reason Yellen & Co are seeing improvement is because of the expectations of the Trump Administration’s pro-growth business policies.

And just Thursday morning, Bank Of England chief Mark Carney said the central bank will unexpectedly hold rates at 0.25% and will proceed with an $88 billion program of bond buying program because the outlook is far from rosy.

So who is right? Yellen or Carney? Neither?

Dollar strength will rule the day in 2017. So until that plays out growth in the US and globally will be curtailed as China, Japan and other export countries suffer the slings and arrows of currency revaluation.

The UK by beginning the Brexit talks with EU next year will be buffeted by a pound trading lower against the greenback.

The euro could also be trading below par with the dollar in early January as the ECB takes on a two-front war between the UK and its southern flank of Greece and Italy.

So King Dollar will rule the roost during the Trump’s Administration’s honeymoon period, which could hamper the push to keep jobs here in the US.

This makes the need for tax policy reform so much more critically important to get done soonest to stem the call for exporting jobs.

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Markets are unusually jittery for August

There are many one-offs occurring this week in the markets.

Equity markets this week are finding it tough sledding, as stocks can’t find a direction as currency markets are taking the yen back to 101 level, meaning the Japanese currency is getting stronger against other currencies.

This strengthening is generally negative for stocks due to the carry trade, where you buy US stocks with yen to lever up your position.

On Tuesday, the Bank of England came up short as bondholders did not want to part with their longer-duration paper and central banker Mark Carney could not buy enough bonds to cover its allotted purchases for its QE operation. Again this has never happen before.

Precious metals are moving higher this week independent of currency moves. Wednesday pre-market saw silver up 2.5% or $0.50. Gold was only up 0.8% or $12. But if gold makes the same percentage jump as silver you are looking at a spike of nearly $40, which would get some notice at the Fed.

Some will attribute the one-offs as being driven by illiquid, low volume August markets as traders are away from their desks on vacation.

I don’t see that as being much of a factor anymore since most of the trading is done by high-frequency trader’s black boxes.

Let’s say I think this needs to be watched as we move through this month.

Brexit forces BOE's Carney to throw the kitchen sink at it

Markets were flat in the US while awaiting the move by the Bank of England. The central bank cut its interest rate in half to 0.25% Thursday morning and will increase QE.

As the news came out markets were still unsure of how to play the move. After 45 minutes US equities moved higher along with precious metals.

Despite all the talk of England being on the winning side on its decision to exit the EU, BOE President Mark Carney had telegraphed the first move in 7 years to counteract the Brexit vote. Carney is also thought to increase QE to spur economic growth. The BOE cut its 2017 GDP estimate from 2.3% to 0.8%.

The new 0.25% interest rate is the lowest rate in the 322 years of the central bank.

The idea that Carney had to throw the “kitchen sink” at the post-Brexit economy is troubling. To cut 2017 GDP projections by 65% — while Carney says no — suggests a hard-landing recession for the UK beginning now.

History will tell you that QE has little benefit to 95% of the population, since its mainly used to provide liquidity for troubled bank balance sheets.

Market reaction will take some time to play out, but suffice it to say, that equities will rise on this “bad” news.

As England, so goes Yellen

What does the Bank of England’s decision on Thursday to leave its interest rate at 0.5% tell us?

  • There is no economic growth across the pond, same as the US.
  • The UK banks are still not right with their balance sheets and need to be supported and need more time to repair their impairments.
  • Since global central banks work in unison, the Federal Reserve will not raise rates in Sept.

IMF chief Christine Lagarde has told these bankers that 2015 was not the year to raise rates, and yet some still believe there was drama before the announcement Thursday in London.

Taking the playbook for what Fed chief Janet Yellen will say at the September press conference after announcing that rates will hold steady,  BoE head Mark Carney cited a strong British pound and cratering commodity prices as a reason to not raise rates.

The commodity price slide has all central bankers fearful of disinflation, since consumer spending is depressed despite lower fuel costs.

I see it as a global recession with depressed economic growth and investors putting their money into sovereign debt for safe keeping that is behind a stronger pound and dollar.

The two currencies — pound and dollar — are not strengthening on the prospects of future growth, but the fear of a global recession. A huge difference in market psychology.

What’s my proof of a standstill Fed in Sept. off of the BoE rate call? US equities soared in pre-market on the news. Enough said.