Have Central Banks run out of Ammunition? – 12th September 2016

 

Have Central Banks run out of Ammunition?

The European Central Bank induced some nervousness amongst financial markets on Thursday when it failed to announce any expansion of its quantitative easing programme. Equity prices fell as investors questioned if central banks have run out of ammunition.

The Bank of Japan didn’t ease concerns the day before as they too failed to come up with any new stimulus. Stock markets in the Far East opened lower on Friday and share prices continued to fall in Europe and North America, as did commodity prices and the value of commodity-currencies with the Antipodean Dollars felling most of the pain. Compared with Thursday morning’s levels the Aussie and Kiwi Dollars are both 1.3% lower.

With the US Federal Reserve’s policy meeting scheduled for 20-21 September committee members must be silent during the preceding week, making no comment after today. They seem to be a bit of a rush to beat that deadline and investors get the impression it might be game-on for a rate hike this month. On Friday Boston Fed president Eric Rosengren spoke of the risks of waiting too long, saying “a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy”. Coming up today are speeches by the Atlanta Fed’s Dennis Lockhart and Lael Brainard, a Fed governor.

It is Ms Brainard’s appearance that most intrigues investors, not least because it has been shoehorned into the calendar at the last minute. Thus far she has been the most dove-like of doves. Were she merely to want to underline her oft-displayed dovish credentials there would be no need for the urgency. So, the logic goes, she must be about to change sides and talk up a September rate increase. Investors will find out this evening.

There is no economic data on today’s agenda however, the pace picks up tomorrow with the UK inflation figures and a speech by ECB president Mario Draghi. Wednesday brings the UK employment data for July/August. UK retail sales come out on Thursday and US inflation on Friday.

The main focus for Sterling will be Thursday’s monetary policy announcement by the Bank of England. No change is expected to the 0.25% Bank Rate but the minutes could be interesting.