Daily Commentary BY THE CURVE TEAM –

Central Banks Brush off Market Malaise

9th of February, 2018

It was another rough night for global markets as the malaise from earlier in the week kicked back into gear. The re-emergence of volatility over the past week has done little to ruffle the feathers of central bankers as evidenced in comments from the Bank of England and our own RBA overnight.

US equities had another poor night with the Dow closing down more than 1000 points for the second time in the past four days. Bond rates were heading high at the outset before the equity selling really set in while the USD continues to be the main beneficiary of the turn in sentiment.

While the wild market moves have investors on edge, central banks are still focused on the medium term outlook and are unperturbed by the recent unsettling of global markets.

Following the Bank of England’s monthly board meeting, Governor Mark Carney said that “were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report.”

It speaks volumes to central banks’ commitment to the job at hand that the BoE remains committed to normalising policy in the face of Brexit uncertainty, consumer retrenchment and a lukewarm outlook for domestic growth.

The more important speech that really deserves to be read in full was from RBA governor Lowe overnight speaking at the A50 dinner. It was full of valuable insights on the current state of the Australian economy and included both the opportunities and challenges that lie ahead. You can read it here.

While it will be fleshed out in much greater detail in today’s quarterly Statement on Monetary Policy, the RBA remains confident that it will achieve its objectives over the medium term. The focus continues to be on the word “gradual” which reinforces that the RBA is in no rush to shift on its current policy stance.

Importantly, for those who want some insight into what is happening on global markets at the moment, Governor Lowe summed it up quite nicely. In downplaying the affect the increase in volatility will have on the outlook, Lowe said that:

“it is worth keeping in mind that the catalyst for this volatility was a reassessment in financial markets of the implications of strong growth for inflation in the United States. For some time, many investors had been working under the assumptions that unusually low inflation and unusually low volatility in asset prices would persist, even with above-trend growth at a time of low unemployment. A reassessment of these assumptions now appears to be taking place against the backdrop of strong economic conditions globally.”

Essentially, markets are finally waking up to the fact that the punchbowl of low rates and easy money are finally being taken away. It suggest that the top, or bottom depending on the market, could be in place and volatility is set to stay for a while yet.

David Flanagan

Director - Interest Rate Markets