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Admiral Markets: A Tale of Three Banks

As we enter the finishing straight for January central banks take centre stage once more. Last Thursday Mario Draghi and the ECB set the ball rolling.

Mr Draghi, no doubt chastened by the market’s reaction to his non-event in December, was more expansive, suggesting that the ECB would take the necessary steps to get the Eurozone economy back on track.

Though we must note that he didn’t actually take any action or indeed clarify exactly what those steps would be. Furthermore Mr Draghi mentioned structural changes that would aid economic recovery. But once again he did not elaborate any further.

Structural changes aimed at improving the competitiveness of the Eurozone would be welcomed. But we note that these are not in the gift of Mr Draghi and his fellow ECB council members. Rather they are the privilege of their paymasters, Eurozone politicians. Few of whom, it seem to us are pursuing a reform agenda at the present time.

But as Mark Twain famously said “never let the truth stand in the way of a good story “and the market certainly didn’t. The Euro weakened, equities rallied and even Oil enjoyed a brief respite (relief rally) after its tribulations earlier that week.

In the chart below we summarise the ECB dilemma, using the price of Oil as a proxy for the deflationary forces acting on the Eurozone and many other developed economies. Oil could be said to have undershot Eurozone inflation in recent weeks. The fear for the ECB and other central bankers is that persistently low Oil prices will anchor inflation to or even below the zero bound for the foreseeable future. As we noted in last week’s article on Oil , prices in the forward curves of Oil are not trading at substantial premiums to current levels. Suggesting the markets believe that cheaper Oil is here to stay.


On Wednesday evening it will be the turn of Janet Yellen and the Federal Reserve to occupy the monetary spotlight. We touched on the problems facing the Fed in our recent piece Growing Pains .

In essence the issue is that the markets believe that one or at most two rate rises are likely in 2016. The Fed however still sees room for as many as four. It’s hard to see the Fed taking any action at this meeting, unless they have seen something very surprising, to the upside, in Q4 GDP data. That is due out this Friday.

We had previously cautioned that the window of opportunity for the Fed to raise rates was short and narrowing all the time. Its striking to note that the FT carried two articles today (26/1) on the idea of a Fed error (in raising rates at its December meeting) one of these articles is an Op Ed by- Ray Dalio, the CEO of the world’s largest hedge fund, Bridgewater.

By some measures US manufacturing could be already thought of as being back in a recession. Though critics of this notion point out that, even if that is true, Services are the larger part of the US economy and therefore the odd negative survey from the Institute of Supply Management, or ISM, is not relevant in the bigger picture.

But not so fast. As we can see from the chart below the PMI (or Purchasing Managers Index) data for the Service sector, in the USA, has been declining since July 2014. And though it remains well above the threshold of contraction found at 50, the trend is clearly lower. Which deflates the idea that all in the garden is rosy, as far as the US economy is concerned. We still believe low and slow is the likely route map for US interest rates in 2016.


Japan is something of cause celebre as far as I am concerned. It has effectively been the world’s monetary policy “sand box” for the last ten years at least. Our view has been and remains that the Bank of Japan is literally acting out Einstein’s famous definition of insanity.

That is repeating the same actions in the expectation of a different outcome. As with Europe there are significant structural issues in Japan that need to be addressed, if the economy is not to remain in its current zombie like state. However there seems to be an overwhelming inertia when it comes to making these changes. For example Japan has an ageing population and falling birth rate and will therefore need to look to immigration to provide future generations of workers. In 2015 Japan received 7,586 applications from refugees looking to relocate there and it accepted just 27 of those or just 0.35%.

There is also considerable irony in the fact that the Yen has re-emerged as a safe haven currency in 2016.This vote of confidence in the Yen could derail the progress that PM Shinzo Abe and BOJ Governor Kuroda have had in driving export growth via the weaker Yen. In the near term it may be the markets / capital flows that are in the driving seat as far as the Yen is concerned, rather than the authorities.

It follows then that BOJ may prefer to do nothing at Fridays meeting rather than making a futile gesture, with monetary policy already at the limit of what it can achieve.