Unreliable central bankers are leaving investors bamboozled

Central bankers have huge influence on the markets. But their lack of conviction is leaving investors unsure about what to expect, says John Stepek.


Central bankers: a harem of unreliable boyfriends
(Image credit: © 2018 Bloomberg Finance LP)

The Bank of England didn't raise interest rates yesterday.

After a few months of implying that rates were firmly on the upward path, then an abrupt U-turn, bank boss Mark Carney doesn't so much look like an "unreliable boyfriend" as a runaway bridegroom. The man just can't commit.

But to be fair, while he's the worst, he's not the only unpredictable central banker around right now. And given their influence on the markets, that makes life harder for investors.

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In fact, there's now only one major developed market with a high-conviction central banker still sitting at the helm and that's good old Japan.

A harem of unreliable boyfriends

Yesterday was yet another "Super Thursday" for the Bank of England. "Super Thursday" has always had a slightly comical air about it. The thrill of having an inflation report, Bank of England interest rate decision, and the minutes from the latest meeting all arrive at the same time is hard to describe as "super", even for the most ardent central-bank watcher.

And the reality is that most Super Thursdays have only been notable for how dull they are. Yesterday was no exception.

The Monetary Policy Committee voted 7-2 to keep interest rates at 0.5%. The two dissenters wanted to hike right away, but the rest of the team is happy to wait until they see whether the slightly weaker first quarter economic data is temporary or here to stay.

My own view is that the Bank's actions are not that consequential right now, one way or the other. Either the economy rebounds and wages pick up (which is what I suspect will happen) or it doesn't and they don't.

If the economy does rebound, then sterling has a long way to strengthen, which effectively tightens monetary policy and will help to offset inflationary pressures for a little while. If the economy doesn't rebound, then the Bank will probably find itself in much trickier territory coping with relatively high inflation and a slowing economy.

But for now, under Carney for sure, it seems that Britain is assumed doomed until proven otherwise. So expect Bank policy to err on the side of dove-ishness.

What about the US Federal Reserve? Well, Jerome Powell doesn't seem unreliable. He's been quite keen to prove that he's set on steadily tightening monetary policy, no matter how uncomfortable the markets seem to be with the idea.

And yet, the economic data is currently giving him an easy ride too. Core US Inflation data came in lower-than-expected at 2.1%, although it's worth noting that this was mostly driven by a fall in used car prices. This was, says Capital Economics, "primarily due to the fading of replacement demand following last year's record hurricane season." In other words, it's a somewhat artificial decline.

The market was happy to take the reading at face value, despite the fact that US jobless claims are now at a near-50-year low. I'll be very surprised if US inflation doesn't end up surprising quite substantially later this year, but for now, the market has decided that the pace of rate rises doesn't have to be as rapid as it feared. As a result, the dollar eased off, stocks climbed, and US ten-year Treasury yields fell.

The European Central Bank (ECB), meanwhile, is pulling off its usual juggling act. The more hawkish members would like to wind down quantitative easing (QE) more rapidly. But ECB boss Mario Draghi realises that QE is one of the main things that is keeping a lid on the eurozone's various internal tensions.

For example, Italian assets have been remarkably relaxed about the prospect of a populist coalition taking charge of the country. You could put that down to the fact that political chaos appears to be a feature, rather than a bug, of the Italian system. But it'd probably be more accurate to note that Italy's colossal government debt is currently backstopped by an open-ended ECB slush fund. Cut that off, and who knows what would happen?

And while Draghi has done a good job of holding everything together, his term is up next year. I imagine there'll be some real fireworks when that handover goes through.

The constant central banker

In short, between mixed economic data and new or indecisive faces at central banks around the world, markets aren't quite sure what to expect.

That leaves only one major global central bank which, for now at least, has no intention of changing direction: the Bank of Japan.

The Japanese central bank is struggling to hit its inflation target. As a result, it has dropped the idea of hitting the 2% goal by a certain date, because it keeps missing the target.

Yet at the same time, unemployment in Japan is now getting so low that wages appear to finally be taking off. As my colleague Merryn Somerset Webb points out elsewhere, Japanese cash earnings grew by 2.1% in April year on year. Markets had expected a 1% gain.

As Merryn points out, the Bank of Japan may end up surprising us and being forced to consider tightening monetary policy at some point. But if it does, it'll be because economic growth and inflation has turned out to be so strong that it can't be ignored. And if that's the case, you'll want to be exposed to that market anyway.

So what does this mean for investors? Easy money policy has been good for stockmarkets. On that front, the only major global market promising unequivocally easy monetary policy for the foreseeable future is Japan. So, put simply, whatever else you own own some Japanese stocks.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.