Key central banks take center stage
In a financial world already awash in easy money and cheap loans, central bankers take center stage this week starting Tuesday as investors — many who have developed a growing dependency on steroid-like stimulus measures — await the latest policy moves from the Bank of Japan, Federal Reserve and Bank of England.
The key meetings involving three of the world’s most prominent central banks this week follow a market-moving last week from the European Central Bank, which took a number of fresh steps to jump-start flagging eurozone economic growth, boost dangerously low inflation and provide cautious European banks with more reasons to lend money to businesses and consumers.
The BoJ meets Tuesday, the Janet Yellen-led Fed breaks from its two-day meeting Wednesday and the BoE announces its latest monetary policy decision on Thursday.
What these powerful central banks say and do could move markets as stimulus measures and interest rate levels still play a key role in pricing financial assets in a world still struggling with subpar economic growth and inflation below the 2% level central banks view as healthy.
“It is clear as demonstrated again last week with the ECB that central bank policies can and do impact the financial markets,” Bill Stone, chief investment strategist at PNC Asset Management Group. “The ECB’s increased stimulus certainly started the focus on more possible central bank action.”
Investors will be watching closely Tuesday to see if the BoJ lowers rates further into negative territory, after cutting rates to -0.1% back in January, a move that surprised markets and caused volatility to shoot up as investors perceived the move as a sign things were worse than expected in Japan and questioned the effectiveness of central bank intervention. The Bank of England, which has held short-term rates at 0.5% since March 2009, is not expected to make any changes.
Financial market reliance on support from global central banks has risen dramatically following the end of the worst financial crisis since the Great Depression in 2009. Indeed, seven years after the start of the current bull market in U.S. stocks, how stocks perform is still very much determined by the level of support from central banks.
Many Wall Street pros say the Fed’s zero interest rate policy that ended after seven years in December was a major driver of U.S. stock prices more than tripling off of their March 2009 bear market lows.
Central bank moves, however, are diverging in 2016, as the European Central Bank and Bank of Japan have lowered rates into negative territory — which means depositors pay the central banks to park their cash there — as a way to stimulate their economies.
In contrast, the Fed hiked short-term rates for the first time in nearly a decade in December and are contemplating further rate hikes this year amid an improving U.S. job market and economy.
Investors don’t expect the Fed to hike rates Wednesday but will be listening to clues as to whether the Fed might go as early as its April meeting or perhaps in June.
“The odds of a Fed hike this week remain very low. However, the odds of a June rate hike have likely risen, particularly if, after this week, the Fed is perceived to have been faked out by stock market corrections in the space of six months.” David Kelly, chief global strategist at JP Morgan Funds