Central Bank Communications Keep Markets Opaque

For all the communications that we have heard from central banks in the past week, the situation around the continuation of asset purchases is only getting more and more opaque.

China has been happy to let liquidity dry up within its interbank market, prompting fears of a credit crunch, whilst the most recent testimony from Fed Chair Ben Bernanke outlined a fairly definitive path that US data must follow in order for a reduction in stimulus to be made. The reaction to this from the market was swift and reminds me a lot of a sulking child – the toys were out of the stroller very quickly.

Some moves have been made to acquiesce the market overnight from Fed members, whilst ECB member, Benoît Cœuré, gave a speech including the statement that; “the various non-standard measures that have been introduced by the ECB to support monetary policy transmission in certain market segments will stay in place as long as necessary, and there are other measures, standard and non-standard, that we can deploy if warranted. Therefore, at the current juncture, there should be no doubts that our ‘exit’ is distant and our monetary policy is and will remain accommodative.”

Simply put, the ECB tap in Mr Cœuré’s eyes is staying on for a lot longer and may be opened wider if needs be. Combine that with Mervyn King’s testimony this morning that the UK ‘may be many years away’ from the end of QE and you can see why the market is having a day of green gains.

The one exception at the moment is Italy, following a poor retail sales number – 2.9% lower compared to a year ago – and the prospects of further political fall-out following Berlusconi’s conviction for being exactly what everyone thought he was.

The ‘path-on’ dynamic of US data came to the fore yesterday. As we defined last week, ‘path-on’ is any data that suggest that the US economy is making its way down the path to a destination that the Fed can feel comfortable tapering the level of asset purchases it makes on a monthly basis.

Yesterday’s Durable Goods Orders surprised to the upside while house prices also rose and consumer confidence hit the highest level since January 2008. Gathering steam? Today’s GDP announcement should also show an upwards revision to US growth for Q1.

Here in the UK, the Chancellor is due to announce £11.5bn of spending cuts due in 2014 alongside a plan of spending priorities to be enforced over the course of the next 5 years. We don’t anticipate too much reaction on sterling crosses.

Political risk has heightened on AUD however overnight as Prime Minister Gillard has called a leadership contest between herself and Kevin Rudd, the man whose job she took 3 years ago. AUD has so far remained unaffected but could get volatile after the vote, scheduled for 7pm Canberra time (10am BST).