Central banks hint at pandemic stimulus exit. Markets aren’t buying it
As strict coronavirus lockdowns end, some central bank- ers have started hinting at another kind of exit — from emergency stimulus they launched just three months
ago. Markets so far appear to be calling their bluff.
The estimated $5 trillion in asset purchases unleashed by the five biggest central banks to cushion the impact of the pandemic has helped lift world stocks to within 10% of re- cord highs, while the global economy seems set for recovery — confirmed by advance readings of June business activity surveys.
Some central banks have signalled full-throttle stimulus won’t last for ever, though, including the Bank of England which last week slowed its bond purchases, citing signs of economic improvement.
Yet in contrast to the decade after the 2008 financial crisis, when any hint that stimulus might be unwound provoked a “taper tantrum”, markets have paid little heed.
Responses to the BoE were confined to a brief spike in sterling and a dip in bond prices. Nor did markets react much to People’s Bank of China Governor Yi Gang urging stimulus restraint and “timely withdrawal of policy tools in advance”.
There are many reasons why central banks may be wary of keeping asset purchases at their current pace, above all the potential for a debt “hangover” highlighted by Yi. But inves- tors reckon policymakers are only preparing the ground for changes.
“My interpretation is that central banks are sending little messages saying ‘don’t take me for granted’. Now some people will be listening, others won’t and others will say ‘yeah I heard you, but I think you are bluffing’,” said Kim Catechis, head of investment strategy at Legg Mason affiliate, Martin Currie, in Edinburgh.
He said investors likened central banks to firefighters: “They are going to stay there, chucking more water ... until the embers are completely out, and they don’t think that the job is done yet.”
Chinese 10-year bond yields rose 4 bps on Monday after the PBOC held off cutting its loan prime rate and are up 14 basis points in June. But Shanghai shares .SSEC are at three- month highs.
Norway’s and Canada’s currencies meanwhile firmed only modestly following relatively hawkish policy messages, with the Norges Bank even outlining a rate hike path from 2022.
The subdued reaction is partly because the big guns of central banking — the U.S. Federal Reserve, the European Cen- tral Bank and the Bank of Japan — show no signs of straying from the stimulus path. Fed chairman Jerome Powell vowed last week to keep his “foot on the gas”.