June 3 (Reuters) – It is this year’s bargain: central banks
will remain easy, allowing asset prices to march higher despite
all those pesky details about growth and inflation.
There is lots of evidence to show this is a genuine
phenomenon – the ECB is expected to ease on Thursday, perhaps in
new and creative ways, and the Federal Reserve, while theorizing
about some fine day it will raise rates, is careful not to
encourage any breath-holding.
And markets are doing their part, with asset prices of both
stocks and bonds rising slowly and steadily, all amidst
unusually low volatility. Not only is the benchmark S&P 500
index up 5 percent this year, and 17 percent over one
full year, yields on benchmark 10-year U.S. government bonds
have fallen strongly in most major markets, powering
gains almost across the board in fixed income.
Low volatility may be key to understanding both what is
happening and why. Investors apparently aren’t afraid of
unexpected moves – using an index of volatility on the S&P 500
as a gauge, the Vix, they are as calm as they have been
since before the financial crisis.
The positive read on that is that investors are calm for
good reason. While the economy is not taking off, companies are
profitable, swimming in cash and actively buying up their own
shares and increasing dividends. That inflation and wage growth
are both too low, this thinking goes, is bad news more for those
who sell labor than those who own assets. Central banks want to
drive up inflation to safer territory, and to help labor markets
heal. Part of the price they are paying to fix that is to stoke
asset prices. If rising asset prices are no longer the central
plank of their strategy, as arguably they were in earlier stages
of quantitative easing, now it is a side-effect, one unlikely to