Intraday Market Thoughts

Central Bank Shifts Obscured by ‘Deadlines’

by Adam Button
Oct 21, 2020 17:23

USD's facing its biggest decline in 3 months, but stocks are negative. Such unusual moves can be attributed to choppy market climate/uncertainty, or possibly protracted gains in the Chinese yuan, helping metals (but not oil). GBP was the biggest winner on a double dose of positive news (Brexit talks resuming til mid Nov and BoE's Marsden distancing away from negative rates). Another fake political deadline coming and going Tuesday was a reminder to focus on the secular trends, including the global shift in central bank thinking. A new Premium trade was posted yesterday, adding the number of open trades to 5.  Below are a series of Ashraf's tweets regarding today's unsusual market moves. 

Perhaps we were naïve to think Pelosi's stimulus negation deadline was as advertised. She held another round of talks with Mnuchin on Tuesday as her 48-hour self-declared deadline ticked down. Afterwards, she said negotiations would continue for another day, leaving no sense of when the real deadline is.

We've seen so many Brexit and political deadlines ignored in the past few years that we should have known better. That said, we're now 13 days to the US election and that is a genuine deadline. Next Monday the US Senate will also take up the confirmation of Amy Comey Barratt for the Supreme Court, eating up much of the remaining time. So maybe we weren't naïve to see the deadline as a bluff, but naïve not to see that the real deadline has already passed.

For his part, Senate Republican leader Mitch McConnell said he will have a vote on any stimulus package that passes the House and is endorsed by the White House; but importantly he said the vote would come 'at some point' suggesting it might not be until after the election.

In the world of central banking, the RBA underscored two ongoing shifts in the latest minutes. The first is more open-mindedness towards negative rates, or getting closer to the lower bound. AUD was rattled Tuesday by that talk and the BOC earlier this month also left the door open for negative rates while the BOE continues its long flirtation with the idea.

The second is the abandonment of forward-looking inflation targeting in favor of regimes of waiting for actual inflation to materialize. The idea has taken central banks by storm as a way to strongly reinforce forward guidance.

The market is still skeptical that central banks will hold rates near zero when inflation rises above 2% but if so, the result could be inflationary and a big boost to asset prices or yet-another hit to central bank credibility.


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