The debate on what central banks should do next

While the discussions and debates had already started, it was yesterday’s WSJ editorial from Kevin Warsh on top of another puke in the market that has brought front and center what we all think the Fed and other central banks should do in light of the economic headwinds we all face. 

Warsh by the way will be interviewed on CNBC at 7am pushing his point of view. I’d ask him this: While rational people can argue whether the Fed should cut or not, what do you possibly think the ECB and BoJ can do with monetary policy with rates already negative (which has damaged bank profitability) and QE already ongoing?

My viewpoint stated here again is that there is nothing that will be ‘stimulated’ monetarily from a rate cut or two that isn’t already being ‘stimulated’ by the very low rate environment. And rate cuts aren’t a vaccine and won’t bring factories back and people traveling again. If the purpose is to respond to the ‘tightening of financial conditions’, aka try to lift the S&P 500 and narrow credit spreads, I ask this question. What would be worse, a Fed that tells us that they will do nothing right now and wait to see how this virus plays out or they ‘do something’, the markets rally for a few days or weeks and then goes right back down again in response to the underlying economic fundamentals like they did in response to the last two rate cutting cycles in 2000-2002 and 2007-2008? I’d argue the latter would be worse. Now can a rate cut or two ‘stabilize’ the markets and calm everyone down? Maybe but I highly doubt it more than for a short period of time as I really believe this central bank put is now worthless. The economic fundamentals, whether good or bad have taken over and that is what is and will drive markets. Stopping the spread of this virus is the best economic stimulant we could have.

While most global bond markets continue to be the destination of scared money, keep an eye on the Italian bond market as yields are rising for the 6th straight day as people are worried about what the virus spread will do to the country’s stretched finances and excessive debt levels. The 10 yr yield of 1.12% is the highest in a month.

Not that January economic data means anything but at least tells us where we stood before this virus, Japan said its industrial production number was better than expected as was South Korea’s (less negative than feared). There was disappointment with Japan’s labor market data as its unemployment rate jumped by two tenths unexpectedly to 2.4%, the number of employed fell and the job to applicant ratio plunged to 1.49 from 1.57. On the latter though, the labor ministry said it was due to a calculation change for job listings that began in January. The yen today is back to being a flight to safety as its rallying to the highest level vs the dollar since early February.

Also out in Japan in January was retail sales that were better than expected which is good to see considering the VAT hike back in October. The February CPI figure for Tokyo was up .7% y/o/y, down from .9% in January and one tenth less than expected. It sure is a good thing that the cost of living has remained muted, particularly now.

Notwithstanding the static economic story in German, especially now, their labor market still remains pretty solid as their February unemployment rate held at 5% and the number of unemployed fell by 10k instead of rising by 4.5k as expected.  This has been the one bright spot of the German economy. The euro is up.

The UK consumer continued to feel better in February as confidence rose for the 3rd straight month to match the best level since May 2017. Boris Johnson now needs to close these trade deals with the EU this year.