Pro Perspectives 4/20/22

April 20, 2022

As we discussed yesterday, global central bankers and finance ministers are gathering in Washington this week for Spring IMF and World Bank meetings.
 
A key concern is inflation.  A bigger concern is inflation expectations. 
 
What can be manipulated by central bankers to manage inflation expectations?  Market interest rates (i.e. buying government bonds).  We’ve seen plenty of it over the past 14 years. 
 
Flatten the yield curve.  Invert the yield curve.  And suddenly, the experts are telling consumers and companies that economic recession is ahead.  Just like that, expectations are managed.  Behaviors can be changed. 
 
But the Fed is supposed to be out of the QE business.  They can’t step into the government bond market and manipulate yields anymore.  Right?  
 
Right.  But the Bank of Japan is still at it.  In fact, today they announced that they were a buyer of Japanese government bonds in UNLIMITED amounts.  They have a stated goal of manipulating their bond market, to maintain the 10-year JGB yield at 25 basis points.  That’s a license to do unlimited QE.     
 
The European Central Bank is still at it.  On the one hand, they have been telegraphing the end of QE.  On the other hand, just earlier this month, it was reported by Bloomberg that they were meeting to formulate a plan to prevent a spike in sovereign bond yields in the weaker spots of Europe … IF Le Pen were to win the French election.  That means, more QE.
 
Could this continued money printing in Europe and Japan translate into foreign central bank buying of U.S. government bonds, in effort to pin down U.S. market interest rates?  Of course. 
 
Remember, if there is one theme that has been consistent since the Global Financial Crisis, it’s been the omnipresent and celebrated (by policymakers) concept of “global coordination.”  
 
With this in mind, as finance officials are meeting this week, the proxy on global economic recovery and inflation (the U.S. 10 year yield) curiously declined today.  And, moreover, put in a technical reversal signal (an outside day). 

With central banks constantly involved in government bond markets, especially in an economic recovery with rampant inflation, they can suppress, if not cancel, meaningful market signals that have historically come from the “free markets.” That’s very dangerous. 
 
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