A tantrum or possibly just a sulk

After last week's fireworks in the capital markets this week has started at a more leisurely pace, as newsworthy events that caused investor nervousness in weeks gone by continue to be shrugged off, preferring to focus on last weeks dampening of rate hike expectations. The meeting on Monday between Merkel and Tsipras offered little but platitudes, as both referred to attempting to find common ground. One can't help but feel it is more realistic to describe them as stuck in no man's land. Reports suggest Greece has to the 20th of April before it runs out of money.  Overnight much weaker than expected Chinese manufacturing data will only lead to greater speculation that further policy measures will be announced at some stage from the Bank of China.

Asia was not the only region to see the release of economic reports on Tuesday, in Europe the latest Markitt Purchasing Manager composite index survey (combining services and manufacturing) came in slightly ahead of expectations. Breaking the information down to a country level, as has been the recent pattern, Germany beat expectations and France missed.  In the US the latest home sales and manufacturing data both came in above expectations.

Many investors were taken by surprise at the dovish nature of the comments from central bankers of the UK and US last week. Along with the manufacturing data, we received on Tuesday inflation reports showing that year on year inflation rate in the both regions fell to zero, one can only speculate as to whether central bankers last week had some advanced warning of today’s data leading to those dovish comments.

As bond yields remain at historic lows papers, analysts, and members of the Federal Reserve continue to be preoccupied by the possibility that a "taper tantrum" is on the cards after last weeks comments, particularly if the economic data from the US starts to surprise on the upside. A taper tantrum is a market term for a large selloff in the bond market, a la 2013 and 1994. James Bullard (a member of the Federal Reserve) added his voice to the fears on Tuesday of a violent market reaction if the markets became too complacent on rates and the Fed announced a rise, taking the market by surprise.

It may well come to pass that when the Fed does move we get a "taper tantrum", and sentiment after lasts weeks Fed statement has made markets more complacent rather than less when it comes to rate expectations. It is also possible markets could take the view that even if rates do move higher unless there is a strong rebound in the US economy the subsequent moves are going to be few and rates are not going back to historic norms for many years to come. On that basis a tantrum in our view may turn out to be no more than a sulk. 

Posted on March 24, 2015 .