Central bankers everywhere after Bernanke warning

May 23, 2013

It’s raining central bankers today which is well-timed after Federal Reserve Chairman Ben Bernanke dropped the bombshell that the Fed could take the decision to begin throttling back its money-printing programme at one of its next few policy meetings. If that’s the case, and it’s not yet a done deal, then it will be the Fed that will move first in that direction, presumably putting further upward pressure on the dollar and send financial markets into something of a spin.

European stock futures look set to open sharply lower – 1.5 percent or more down – buffeted by suggestions that the Fed could soon change tack. Safe haven German Bund futures have opened higher for the same reason, though in a much more measured fashion. One of Bernanke’s colleagues, James Bullard, speaks in London today. Another, Charles Evans, is in Paris.

The European Central Bank has never got into the realms of QE but it did produce the single most important intervention over the past three years. Ten months after his pledge to save the euro fundamentally changed the dynamics of the currency bloc’s debt crisis, ECB chief Mario Draghi returns to the scene of his game-changing promise – London – to deliver a keynote speech. Draghi does not speak until the evening but his colleagues – Weidmann, Noyer, Coeure, Liikanen and Nowotny – all break cover earlier in the day. Draghi has said the ECB is prepared to act further if the economy worsens, having already cut interest rates to a fresh record low this month and ECB chief economist Peter Praet said last night that its toolkit could be expanded if necessary. But what?

The ECB’s bond-buying plans are dormant because no country needs the help at the moment and there is no talk of a repeat of last year’s 1 trillion euro splurge of cheap long-term liquidity to banks. There is talk of cutting the deposit rate – the rate banks get for parking funds at the ECB – into negative territory to try and get them to lend. But will that do much? Despite being in a world awash with central bank money and stock markets in the ascendant, the fact that safe haven bond markets such as Bunds and U.S. Treasuries haven’t sold off much denotes ongoing nervousness among banks and investors.

Flash PMIs for the euro zone, Germany and France for May follow first quarter GDP data which showed Europe’s largest economy just about eked out some growth but nobody else in the currency bloc did. That trend is likely to be reaffirmed with a harsh winter, having curbed German activity in Q1, allowing for a rebound in sectors like construction in Q2. France and the rest of the pack are unlikely to be so lucky. China’s PMI has show factory activity shrank for the first time in seven months so the global vista looks sour again.

For the markets, this has put all sorts of assets in demand since if the economy worsens, central bank largesse will stay in place for longer and could be enhanced and if recovery finally shows up, well then that should be good for stock markets at least. The only real losers so far have been in the commodities and energy arena. But if the Fed follows through on its signal, all that could be turned on its head.

Regardless of the economic malaise, bond market pressure on the euro zone remains entirely absent with the ECB underwriting now augmented by the new Japanese money coursing around the world seeking a decent return. Spain will auction up to four billion euros of three-, five- and 13-year bonds. It is a good example of the market/economy disconnect. Spain is mired in recession but has already effortlessly shifted more than half the bonds it needs to this year in less than five months.

German officials have been getting active in recent weeks in some interesting ways. Yesterday, Finance Minister Wolfgang Schaeuble and his Portuguese counterpart announced that Germany’s state development bank KfW would help set up a Portuguese financial development institution with the aim of tackling youth unemployment. Schaeuble mooted similar plans with Spain recently to help get credit flowing to smaller companies. Berlin seems to be embarking on a number of bilateral initiatives which circumvent Brussels. Is something going on here? The working assumption has been that all bets are off until September elections are out of the way.

Germany has also said it wants to work together with Paris on an initiative to get the young into work which will be aired in full next week. Today, the Bank of France is hosting a two-day conference with the Bundesbank, with their respective chiefs – Noyer and Weidmann – running the show. Italian Prime Minister Enrico Letta and French Finance Minister Pierre Moscovici, both advocates of easing up on austerity, hold talks in Rome. Rome is preparing its own youth jobs plan. Germany’s Angela Merkel and Dutch premier Mark Rutte – much less keen on shifting the focus from debt-cutting – meet in a Netherlands border town.

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