Central Bankers: Borrowing costs are headed north - Rabobank

Globally, Central Bankers are indicating towards higher borrowing costs in future and it’s certainly hard to avoid coming to that conclusion in markets, according to Michael Every, Senior Asia-Pacific Strategist at Rabobank.

Key Quotes

“Not that the ECB didn’t immediately try to take back President Draghi’s hawkish recent statement within 24 hours, however, as Vice President Constancio was rolled out on CNBC to explain what the President had just failed to explain. He tried to inject a more dovish tone in stressing a note of caution behind overall bullishness. That temporarily pushed EUR and Bund yields down, but not for long.”

“The need for such ECB caution is underlined by this recent special from our rootin’-tootin’ de Groot and van Schoot: “Low wages for longer, ECB’s conundrum stronger”. This explains how none of the ECB’s self-imposed criteria for inflation have been met, and argues that there may simply be more slack in the labour market than suggested by the headline unemployment numbers, while the bargaining power of labour has significantly declined over the past decade. It concludes that this is likely to be structural in nature, so the long-awaited pickup in wage growth may take even longer than the ECB (and everyone else!) has been hoping for. And this even before President Macron reforms the French labour market, which will hardly be boosting wages there.”

“Yet even as Europe back-peddled slightly, the BOE and BOC stepped forward boldly. Governor Poloz talked about the oil shock being in the past, and that “it does look as though those [rate] cuts have done their job…certainly we need to be just considering that whole situation now that the excess capacity is being used up steadily.” The result: CAD surged from 1.32 to 1.3034, following EUR higher vs. USD (where the Fed are actually already raising rates, remember!) The BOE’s Carney also chimed in that “some removal of monetary stimulus is likely to become necessary,” pushing GBP up to 1.2972, even as the who-what-when-where-why-how of Brexit remains as clear as mud. At least Sterling might be temporarily ‘Strong and Stable’.”

“So is CNY, which into quarter-end is once again getting a PBOC window-dressing push below the 6.80 level: obviously somebody somewhere wants to see a number below 6.80 for their end-Q2 spreadsheet cell, so the market must be made to oblige. Indeed, CNH has rallied from 6.86 to 6.80 since Wednesday morning, heady stuff in this market.”