John M. Bland
Anticipating Central Banks
Most traders understand that financial markets are discounting mechanisms.That means that prices tend to be driven by consensus expectations for future events. Of course, the consensus view is not always correct, and those participants who can figure out when the markets are wrong can be very successful. The past couple of weeks have seen very interesting developments in the key U.S. and Eurozone credit markets. The recent period has seen the start of a "normalization" of long term interest rates in anticipation of key central banks starting to move away from highly stimulative monetary policies to a more routine posture. Thus we have seen the German 10-yr bund yield climb sharply higher from near-zero levels to 1.00%. In the past several weeks, we have also seen the yield on the U.S. 10-yr advance from around 1.80% to nearly 2.50%. I feel this has been a constructive development.
A Welcome Development
Unlike short-term interest rates which are tightly managed, central banks have little control over long-term rates. It is investors (and lenders) in the longer-term interest rate instruments who decide for themselves whether yields at current levels are attractive or not. If they are not, players can vote with their feet. What we have seen in recent weeks is the financial markets preparing for central bank policy tightening well before a decision for such a policy move has been decided. I feel this is constructive because the markets will likely now react less violently when a policy tightening is undertaken. This is a case when markets have dictated policy to the central banks, rather than the opposite.
The upcoming week is a relatively sparse one for key economic data.
-- Monday, June 15, sees U.S. Industrial Production, the Empire PMI Index and the NAHB Survey.
-- Tuesday June 16, features key U.K. inflation data and the German ZEW Sentiment Survey.
-- Wednesday June 17, will feature U.K. Employment data, Eurozone final May CPI and U.S. Housing starts. The Fed decision and Yellen press conference later in the day will be the highlight of the week.
-- Thursday June 18, will see the quarterly Swiss National Bank Policy decision and U.K. Retail Sales data. The U.S. will release CPI figures, 1Q15 Current Account data and the Philly Fed index.
-- Friday June 19, sees the latest Bank of Japan policy decision plus Canadian inflation and Retail Sales data.
John M. Bland
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.