This is what it sounds like when doves cry, writes Landon Whaley.
With every dovish-pivoting central banker soundbite over the last few weeks, Prince has been singing in my head, “This is what it sounds like when doves cry.”
After the Q4 carnage, investors globally were crying and begging for more of what central bankers have forced them to rely on over the last decade: dovish policy to inflate asset prices.
The Bank of Japan announced that it tapered its bond market purchases by ¥20 billion ($180.5 million). Well, it didn’t take long for the BOJ to come out strongly to ensure that the market didn’t misinterpret this latest policy shift. BOJ Governor Haruhiko Kuroda said on Tuesday that the central bank was ready to ramp up stimulus if a strong yen hurt the economy or derailed the bank’s 2% inflation target. He went on to say, “Whatever we do, however, we need to carefully balance the benefits and the costs of the step such as the impact on financial intermediation and market functioning.”
The BOJ’s bottom line is that it’s dovish business as usual. They went to 0% interest rates 20 years ago, so they don’t know anything but easing and, given the rapid deterioration in economic data, I won’t be surprised to see more easing soon.
The Reserve Bank of Australia joined in by holding rates steady at its meeting earlier this month. Remember, what matters most happens at the margin, and at the margin the RBA keeping rates unchanged is a dovish move. Aussies are fighting declining property prices, high household debt and weak income growth, and that is not a combo platter for accelerating growth. Not to mention that last week’s release of the Service Purchasing Managers Index showed a dip into contraction for the first time in two years. Given the Fundamental Gravity reality in the land down under, a full dovish pivot is coming to a soundbite very soon.
Even Jamaica’s central bank is crying dovish, cutting its policy interest rate by another 25 basis points and lowering cash reserves for financial institutions in an attempt to boost private sector credit growth.
In fact, Jamaica is the 11th central bank to ease monetary policy this year, while just three have tightened policy. A quick glance at central bank policy trends over the last few years paints a distinct picture of where we are heading:
- 2016: 29 central banks tightened monetary policy, while 46 eased, giving us global net easing of 17 banks.
- 2017: 28 central banks tightened monetary policy and 34 eased, net easing of 6.
- 2018: 43 central banks tightened monetary policy and 32 eased, net tightening of 11.
- 2019-to-date: global net easing of 8.
After just a single calendar year in a tightening world, central bankers are back with more spiked punch, which is setting up a very predictable sequence of events: central bankers turn dovish, investors rush to buy stocks and other risk assets because the juice is loose, stock markets and risk assets rise in price, investors realize that central bankers turned dovish because economic conditions were guano, stock markets and risk assets sell off quick, fast and in a hurry.
To be clear, this time is not different. Central bankers are still making policy decisions on a huge lag, and most investors can’t (or don’t want to) see past today’s price action. We are currently experiencing the first three stages of the “dovish pivot” sequence. It’s only a matter of time before investors acknowledge the underlying cause for central banks’ dovish cry and react by selling everything that isn’t nailed down.
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