Investors appear to be growing increasingly concerned that global central banks’ monetary policy has proven too accommodative.
The number of global fund managers who believe central banks are “too stimulative” in their monetary policy has reached a six-year high of 48 percent, according to this month’s Bank of America Merrill Lynch Global Fund Manager Survey.
The survey’s findings, which strategists entitled “The Fed Herring,” included an increasingly apprehensive view of global central banks and their role in monetary policy and economic stimulus. One key result was that too many fund managers see the Federal Reserve as a likely negative catalyst for the markets, while the recent inflection lower in economic growth and earnings per share estimates are “being ignored.”
Furthermore, fund managers’ perceived “biggest tail risks” were a crash in bond markets and a “mistake” made by the Federal Reserve or the European Central Bank. The “top tail risk” assessed by the monthly survey had not been a bond market crash since last November.
Those who are concerned about central banks’ easy-money policies have a point, but these policies do make sense in light of the low inflation that continues to be seen in developed countries around the world.
“The central banks definitely want to hike rates. They want to normalize policy sooner rather than later, but they’re prevented by the basic economic fundamentals right now, and I think that’s the conundrum we find ourselves in,” Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management, said Wednesday on CNBC’s “Trading Nation.”
In the U.S., “I think the jury is still out as to whether we’re going to get a December rate hike. I think the Fed desperately wants to do it because they very much want to continue with their normalization theme, but a lot is going to depend on the U.S. consumer. We really need the second half to come back strong. So far it’s been nothing but disappointment,” Schlossberg said.
“Last Friday’s retail sales were a disaster and I think if we see any more numbers like that, it’s going to be very unlikely the Fed is going to be able to raise rates any more this year,” he added, referring to disappointing retail sales figures reported last week.
The Bank of America Merrill Lynch survey was conducted between July 7 and 13, during which time central banks and big money managers publicly discussed the state of interest-rate policy around the world.
Federal Reserve Chair Janet Yellen last week made comments more dovish than anticipated in remarks before Congress, signaling interest rates need not rise all that much to achieve a “normalized” state of monetary policy.
The European Central Bank on Thursday left its key interest rates unchanged, and President Mario Draghi expressed caution heading further into a period of unwinding quantitative easing.
On Thursday, too, the Bank of Japan pushed back its inflation target for the sixth time and kept interest rates steady. The bank’s monetary policy has “completely gone off the rails in a scorched earth kind of way,” Peter Boockvar, chief market analyst at The Lindsey Group, wrote in a Thursday note to clients.
Meanwhile, from an investing perspective, some advise that playing for a greater-than-expected number of Fed rate hikes would be wise at this point.
“You make profits by being positioned against expectations. Expectations are so low, the bar is so low for a rate hike, that I think there’s a very good chance that Yellen uses September, hikes rates, because there’s also a rising probability of her leaving. Her term is up in February, and financial conditions are at the easiest since 2014,” Larry McDonald, managing director at ACG Analytics, said Wednesday on “Trading Nation.”
McDonald added that Yellen may, to “protect her legacy,” announce one or two more rate hikes. Of course, this would be a relatively surprising outcome.
The Bank of America survey, conducted monthly, queries 207 panelists who collectively manage $586 billion in assets.