Central banks make way for governments to act and move markets, but there is only one real boss

The European Central Bank has left its policy unchanged, urging governments to act. Two other central banks did the same and the Federal Reserve is also on course to leave the action to elected officials. What is moving markets? Valeria Bednarik and Yohay Elam discuss the latest developments and remind everybody that the virus is in charge.

Yohay Elam: The European Central Bank took a break from its frenetic action and left its policy unchanged. The Bank of Japan did the same early in the week and also the Bank of Canada – with its new chief – left policy unchanged. Are central banks done?

Valeria Bednarik: BOJ also, by the way, although that's no news.

Yohay Elam: Did central banks do everything they could amid the coronavirus crisis?

Valeria Bednarik: Done, for now. Uncertainty is ultra-high as regardless of whatever it's said, the pandemic is not controlled, hence, we don't know when and how the economies will start recovering. Current upbeat figures are just modest bounces from record lows. Numbers are a bit tricky and the market is ignoring them. I would say that central banks are on-pause, and will probably remain so next August. Whatever happens next, depends on how much ground the economies could recover in these two months. They did for now. 

Yohay Elam: We had the shock, the bounce, but uncertainty is high.

Valeria Bednarik: Yes, and the latest I read, the world is losing 480 million jobs with the pandemic. Sure, most of them not in developed countries, but still a drag for major economies.

Yohay Elam: 480 million jobs. Wow.

Valeria Bednarik: Globally, yes. terrible in context.

Yohay Elam: We are focused on monthly figures for single economies, the global figure is shocking indeed.

Valeria Bednarik: and something we may not be paying to much attention, but indeed lifting uncertainty to unknown levels. Brexit and the US-China trade war seem almost a joke when compared to this. Anyway! central banks can only do up to one point. Guess they are saving some bullets for the case things get even worse.

Yohay Elam:  Side shows. And passing the ball to the governments? In Japan, the government is coping with a new wave of infections.

Valeria Bednarik: Yeah, and as other governments, trying to do anything but return to lockdowns. They felt the economic pain, and at this point, consider it a too high cost. That does not mean they could return to lockdowns anytime, and there we go again with risk-off, recession, and central banks adding stimulus. Summer came to the northern hemisphere, and there are no signs of a receding health crisis.

Yohay Elam: People use airconditioning in the summer.

Valeria Bednarik: Yeah, that's not helping either.

Yohay Elam: Here in Barcelona, we have several small flareups. Authorities said they will take measures, but not return to a full lockdown "under no circumstances." 

Valeria Bednarik: Those outbreaks are also taking place in Tokyo, Melbourne, etc.

Yohay Elam: Melbourne's lockdown seems to be keeping AUD/USD capped.

Valeria Bednarik: I believe that this "second wave" sort of speaking, because it's not, is hitting younger people, hence, resulting in a smaller death rate. And helping to keep economies open.

Yohay Elam: As long as hospitals are not overwhelmed, and that is not happening in Japan, Australia, nor Europe.

Valeria Bednarik: Exactly. From day one we knew that the target was that: not overwhelm health systems...in the meantime, we have tried to learn to live with the virus, with a clear uneven success. And in the meantime, economies continue to suffer. Reopenings are taking place, and yeah, some countries didn't even bother in putting in lockdowns. However, fear within people is high. Consumption is low everywhere. Retail Sales in the US were up, but from where?? record lows a couple of months ago. Not a single macroeconomic figure up to June has recovered to pre-pandemic levels.

Yohay Elam: In several US cities, hospitals are under pressure.

Valeria Bednarik: That could be a line in the sand. Pre-pandemic levels.

Yohay Elam: Retail sales jumped remarkably. Partially thanks to fiscal stimulus. But stubbornly high jobless claims are showing that the pre-pandemic levels remain very far.

Valeria Bednarik: Exactly. And inflation is among the most lagging indicators. And central banks care about employment and inflation. Not much needed to be added right?

Yohay Elam: Indeed, central banks will not raise rates in the next two years. Andrew Bailey of the BOE said that the Fed signaled that in the dot-plot, and all the rest will also keep rates low, whether they say that or not. Next week we have the Fed. No change from them either, right? Perhaps Powell will follow Lagarde in urging the government to maintain fiscal stimulus

Valeria Bednarik:  I would say so. Powell is quite conservative, so I don't think he will pull the trigger this time. The US government does not need Powell to say it.

Yohay Elam: Indeed. At the end of the month, some of the special unemployment benefits expire.

Valeria Bednarik: But another package is being discussed right? maybe I'm confused. Anyway! in an election year? For sure it will be discussed!

Yohay Elam: It would be political suicide not to extend them in an election year. But there is no decision yet. Perhaps Powell will push them to act.

Valeria Bednarik: Perhaps. But Powell is so balanced, so responsible, so different to other policymakers... my take is that he will prefer to limit himself to monetary policy decisions.

Yohay Elam: In comparison to his own self and to previous Fed leaders, he raised his rhetoric, but nothing in comparison to Draghi... So, if central banks stay put for now will fiscal stimulus, coronavirus data or economic data be the best market mover? 

Valeria Bednarik: Ha! I miss Draghi for sure. Coronavirus for sure, as all of the rest, depends on it.

Yohay Elam: Yes, the virus is the boss, not the lockdowns/reopenings.

Valeria Bednarik:  Unfortunately, I would add.