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BNY's Marvin Loh Expects More Central Banks as Dovish (Audio) · Bloomberg Intelligence

• 0:00
  Speaker 1: We want to take a look at the bond market now.
• 0:02
  Speaker 1: After the Bank of England cut its key rate, there
• 0:04
  Speaker 1: was a big rally in UK guilts those are tenure
• 0:08
  Speaker 1: US Treasury bonds in the United Kingdom. In fact, there
• 0:11
  Speaker 1: was a global bond market rally. We want to bring
• 0:13
  Speaker 1: back to our show now Marvin Low. He's senior global
• 0:16
  Speaker 1: market strategist at d N Y Melon. So Marvin, isn't
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  Speaker 1: so funny. Earlier in the week it was all the
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  Speaker 1: Japanese bond market route was you know, maybe it was
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  Speaker 1: the end of the global bond market rally. Huh, looks
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  Speaker 1: like today maybe it's not over yet. Every day brings
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  Speaker 1: a different surprise, doesn't it. It sure does. What do
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  Speaker 1: you think? Um, you know, we did get, um, the
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  Speaker 1: amount of stimulus that we had expected. What the Bank
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  Speaker 1: Japan didn't do earlier this week was delivered. What the
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  Speaker 1: market had thought. In this case, there was you know,
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  Speaker 1: really pretty much odds that, um, the Bank of England
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  Speaker 1: was going to cut their interest rates. They did, um,
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  Speaker 1: but they also reintroduced bond buying, which included corporate bonds
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  Speaker 1: for the first time for the b o E. So
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  Speaker 1: it did kind of almost over deliver and you know,
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  Speaker 1: like you said, we had a pretty nice rally in
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  Speaker 1: UM in guilts, but that did carry over into mostly
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  Speaker 1: all the sovereign bond markets, Japan being an exception to that.
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  Speaker 1: UM and for the US, you know, we continue to
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  Speaker 1: push yields kind of the middle point of this range,
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  Speaker 1: but you know, definitely lower again, Marvin, should we read
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  Speaker 1: anything beneath the surface? Is the global economy really that
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  Speaker 1: bad that we've got the Bank of England lowering rates
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  Speaker 1: twenty five basis points? Is it really that terrible that
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  Speaker 1: this is necessary? Well, you know what, um so Brexit
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  Speaker 1: definitely changes all the rule if you will, because we
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  Speaker 1: really don't know how it's going to evolve. You can
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  Speaker 1: make the argument that the Bank of England was a
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  Speaker 1: little bit aggressive in making a move right now, but
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  Speaker 1: Marko was pretty pretty pointed in his belief that there
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  Speaker 1: was going to be a slow down in UM in
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  Speaker 1: the UK economy, and he acted based based on that,
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  Speaker 1: and of the prevailing thought was that there's going to
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  Speaker 1: be a spillover effect into other eCos. To me, so
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  Speaker 1: I think we're gonna continue to see this doubest type
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  Speaker 1: of commentary come out of at least three of the
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  Speaker 1: four bigger central banks, you know, the FED being the exception,
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  Speaker 1: which is still saying that they're in a position to
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  Speaker 1: raise rates this year. So and this seems to be
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  Speaker 1: one of the tough things for the FED. Actually, if
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  Speaker 1: you look at w I r P, those are world
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  Speaker 1: interest rate projections, very important page on your Bloomberg where
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  Speaker 1: you can check out the odds of the Fed's next
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  Speaker 1: rate hike going meeting by meeting, and it's a good
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  Speaker 1: bank of Japan, all the big develop nation central banks.
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  Speaker 1: Now there's no the odds of a of a rate
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  Speaker 1: hike don't move above in the FED funds futures market
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  Speaker 1: view until the end of next year. That was already
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  Speaker 1: at September. Now, granted they may be under pricing when
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  Speaker 1: the Fed's gonna move, but that's idea seems to be that,
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  Speaker 1: you know, it's getting harder and harder for the FED
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  Speaker 1: to high grades because the rest of the world is
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  Speaker 1: going in the opposite direction. They don't want to be
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  Speaker 1: the odd central bank out. I think I think you
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  Speaker 1: got a spot on, and I will UM, I will
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  Speaker 1: promote w I r P. Also, I use that I
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  Speaker 1: use that page pretty much every day. UM. The market
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  Speaker 1: is definitely looking at the Fed's words in a very
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  Speaker 1: skeptical eye. Um, the you know, whether it's the GDP
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  Speaker 1: number that we had, whether it's the you know, bouncy
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  Speaker 1: employment number. I guess we'll see whether or not UM
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  Speaker 1: last month's employment report was more indicative of where UM
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  Speaker 1: jobs were in the US or the one before that,
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  Speaker 1: which showed a very weak job market. But um, now
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  Speaker 1: the market is expecting to ECP to do something. The
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  Speaker 1: market is expecting more from the Bank of Japan. The
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  Speaker 1: market is expecting and and and pretty much the Bank
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  Speaker 1: of England said that they would be ready to act,
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  Speaker 1: to act if they needed to. It makes it really
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  Speaker 1: hard for the FED in that type of environment. Does
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  Speaker 1: it just make it easier and less expensive for governments
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  Speaker 1: to borrow and issue lots of debt, whether it's the
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  Speaker 1: U S Treasury or whether it's the UK Treasury. Yeah,
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  Speaker 1: barn costs there are definitely low. UM. So from a
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  Speaker 1: mathematical perspective, Um, you know, when they issue debt, it
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  Speaker 1: is going to cost less. When they're when they refinance
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  Speaker 1: older bonds with higher coupons, it's gonna cause less. But
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  Speaker 1: there is so much debt that's being issued and Um.
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  Speaker 1: It doesn't take much of a backup and yields to
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  Speaker 1: really start to worry people. Um. The next part of
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  Speaker 1: the accommodation uh slash stimulus. Stimulus discussion has started to
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  Speaker 1: um uh go down the route of helicopter money. And
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  Speaker 1: you know, whether or not that would really make investors
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  Speaker 1: uncomfortable U is something to be seen. But you know,
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  Speaker 1: Karney today said that he was not a fan of
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  Speaker 1: helicopter money. Uh. Carney said today that he UM and
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  Speaker 1: this is the Bank of England governor um said that
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  Speaker 1: he was not a fan of negative eiel So uh,
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  Speaker 1: we're not expecting that to come out of the Bank
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  Speaker 1: of England, but that is kind of the next stage
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  Speaker 1: when the tools become far scarcer and the episicacy, the
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  Speaker 1: efficacy of what they're doing is questioned. Well, and he
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  Speaker 1: was quite adamant, wasn't he. He's uh definitely in league
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  Speaker 1: with said chair Janet Yellen that negative interest rates or
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  Speaker 1: negative bond yields anyway, certainly not not something he's heading toward. Uh.
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  Speaker 1: And of course, UH, it's possible too that he does
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  Speaker 1: not face the same kind of situation, for example, the
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  Speaker 1: Bank of Japan does, right, I mean yes, the UK
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  Speaker 1: economy is going to take a big hit from Brexit.
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  Speaker 1: And Carl Weinberg from High Frequency Economics and the same
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  Speaker 1: thing earlier on the show today that you just said
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  Speaker 1: there's no precedent for Brexit. Nobody, no one can say
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  Speaker 1: in two years where the US the UK economy is
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  Speaker 1: going to be. But it went into all of this
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  Speaker 1: with remember, up until the Brexit worries, maybe the UK
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  Speaker 1: was gonna see a rate hike. So maybe that's another
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  Speaker 1: reason he's not going to consider it. He doesn't have to. Well,
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  Speaker 1: you know, I'll say that I was encouraged that he
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  Speaker 1: was adamant about not going into the negative yield regime
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  Speaker 1: or or a really um dead seat against it. And
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  Speaker 1: I was encouraged that um he really dismissed the concept
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  Speaker 1: of helicopter money. So it certainly makes the argument that
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  Speaker 1: that is one of the reasons the Fed wants the
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  Speaker 1: high rates if they can, because would give them a
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  Speaker 1: few more options. And remember it's not like they have
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  Speaker 1: a whole lot, but being able to start a bond
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  Speaker 1: buying program again, being able to actually cut rates and
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  Speaker 1: not have them in negative territorial territory already is an
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  Speaker 1: advantage that at least the b o E and the
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  Speaker 1: FED has UM so they can um take that hard
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  Speaker 1: line and hopefully, uh give the market a little bit
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  Speaker 1: of comfort that we're not going down there. But uh, well,
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  Speaker 1: once again get into an area where there's not a
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  Speaker 1: lot of room if in fact, these economies turn or
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  Speaker 1: there is a big financial shock, and and and that
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  Speaker 1: is this ongoing concern that we've had for you know,
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  Speaker 1: quite some time, because um, we're not seeing the growth
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  Speaker 1: that one would expect this late in um an accommodation cycle,
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  Speaker 1: and they're just are not that many traditional tools that
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  Speaker 1: are left in their toolbox. Well, Marvin, you just said it.
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  Speaker 1: If all of the action that they have taken after
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  Speaker 1: the financial debacle of two thousand and eight, if the
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  Speaker 1: action for lower interest rates has produced anemic growth and
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  Speaker 1: continues to produce anemic growth, or at least you have
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  Speaker 1: it concurrently, why don't they stop doing that? I mean,
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  Speaker 1: isn't that the definition of the crazy thing? Right? I mean,
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  Speaker 1: you know, if you keep getting the same results, stop,
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  Speaker 1: you know, absolutely great question, and we would be second
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  Speaker 1: guessing as to whether or not things would be far worse.
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  Speaker 1: So that certainly would be their argument. Um, But that's
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  Speaker 1: a that's a pretty thin I mean, I'm not saying
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  Speaker 1: that's your argument. I'm just saying, but that's a that's
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  Speaker 1: a pretty you know, thin, uh, basis on on which
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  Speaker 1: to you know, basis uh, you know, global monetary policy. Yeah,
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  Speaker 1: and um, and you know, Governor Carney was quite adamant
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  Speaker 1: in his um in answering one of his statements where um,
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  Speaker 1: I believe someone asked about either negative interest rates and
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  Speaker 1: or what savers should do, and he was of the
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  Speaker 1: approach that, you know, we think that X number of
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  Speaker 1: people are going to lose their job and we can't
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  Speaker 1: stand by. So while it is kind of a thin argument,
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  Speaker 1: it's an argument that I believe a lot of these
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  Speaker 1: central bankers hold true to heart. Um. We've kind of
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  Speaker 1: heard that come out of dragging before. Uh. And we've
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  Speaker 1: heard and read about, um about how the Fed kind
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  Speaker 1: of views it's extraordinary policy as okay, But but Marvin,
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  Speaker 1: let's let's just suppose that some of your clients actually
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  Speaker 1: received a decent yield on their bonds. What would they
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  Speaker 1: do with that money? Would they not go out and
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  Speaker 1: spend it in the economy? Um? You know, absolutely, it
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  Speaker 1: would be a better environment for savers and UM again.
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  Speaker 1: You and I I think are are coming from the
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  Speaker 1: same approach where we think that this um really artificially
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  Speaker 1: low rate environment is not doing what it's supposed to
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  Speaker 1: do from from from the economic perspective. At the same time,
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  Speaker 1: we've got central bankers that do not seem to be
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  Speaker 1: comfortable allowing volatility to come to the market for any
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  Speaker 1: extended period of time, and we see them time and
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  Speaker 1: time again, Uh go in and try to quash that
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  Speaker 1: volatility whenever it spikes, And unfortunately those periods of volatility
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  Speaker 1: seem to be more frequent, um slightly, you know, more acute,
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  Speaker 1: and the responses um from the central banks come quicker.
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  Speaker 1: And it's really this vicious cycle that we find ourselves in. Well,
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  Speaker 1: you know, I think I could take the other side
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  Speaker 1: of this too. So let's imagine a world where central
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  Speaker 1: banks start raising their key rates. Let's say the banking
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  Speaker 1: can raise the key rates. People would sell those or
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  Speaker 1: buy those guilts so fast, push up that price, push
• 9:42
  Speaker 1: the yield down even further because they'd say, oh my gosh,
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  Speaker 1: he's gonna make what could be a mild recession into
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  Speaker 1: a deep recession. I think the presumption is here that
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  Speaker 1: central banks alone control what the bond market does. There's
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  Speaker 1: a lot of investors out there making decisions now. True,
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  Speaker 1: if they keep buying bonds, that's gonna keep dry being
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  Speaker 1: down yields and pushing you know, the yields lower and
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  Speaker 1: you know, bringing down the yields on US treasuries. But
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  Speaker 1: I think that's the one of the problems for for
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  Speaker 1: central banks right now. They only really control the short end. Yeah. Well,
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  Speaker 1: well a few things UM kind of that that are
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  Speaker 1: you know, very interesting observations from what you just said.
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  Speaker 1: Number one is that we do have a flat yield curve,
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  Speaker 1: so and that curve continues to flatten, and today we
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  Speaker 1: did see a flattening as well as a decline in
• 10:25
  Speaker 1: um an overall yields. So the long end UH declined
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  Speaker 1: even more than the UH than the short ends. So
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  Speaker 1: that certainly is not a resounding um affirmation of you know,
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  Speaker 1: future growth in the economy. Um. The other aspect of
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  Speaker 1: it is that, you know, if they do wind up
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  Speaker 1: buying as much of the markets as they do, as
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  Speaker 1: we have in Japan, those markets start start to function
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  Speaker 1: very very um uh. They start to misbehave in a
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  Speaker 1: way that's very difficult to either analyze and or for
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  Speaker 1: the central banks to control. And we saw yields into
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  Speaker 1: hand increase from a percentage perspective after UM, the I
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  Speaker 1: guess disappointing b O j um decision as well as
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  Speaker 1: the disappointment from the physical stimulus perspective. Um, it's performed
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  Speaker 1: very poorly from a percentage perspective. Granted, you know, you
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  Speaker 1: went from negative negatives, so financing costs for the Japanese
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  Speaker 1: government is still pretty low, but the roads investor confidence
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  Speaker 1: in kind of this low rate environment, you can very
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  Speaker 1: easily wind yoursel wind up in a situation where it
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  Speaker 1: becomes harder for these governments to finance themselves. And that's
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  Speaker 1: a big concern too, because the amount of debt out
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  Speaker 1: there um is quite large that the central banks own.
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  Speaker 1: Even though we keep talking about a scarcity of government bonds,
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  Speaker 1: well that's if that's scared. If that's scarcity of government
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  Speaker 1: bonds continues, maybe the central banks can just open up
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  Speaker 1: their books and start selling some of them. Yeah, yeah,
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  Speaker 1: you know. UM, I had hoped that as part of
• 11:52
  Speaker 1: the normalization process that said would start to reduce its
• 11:54
  Speaker 1: balance sheets. Um. You know, And again the perspective is
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  Speaker 1: that the central banks are starting or continue to expand
• 12:02
  Speaker 1: their balance sheets, so we're not even getting at that discussion,
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  Speaker 1: but they certainly could. Um. It would help normalize the market.
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  Speaker 1: It would possibly um get the curve to be more
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  Speaker 1: positively shaped, which you know from a from from an
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  Speaker 1: investor perspective, might um build a little bit of comfort
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  Speaker 1: into the future prospects of the economy. But it's a
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  Speaker 1: very big house of cards. You talk about the housing market,
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  Speaker 1: you talk about UM, you talked about a lot of
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  Speaker 1: these other sound curves that are flying. Kind of the
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  Speaker 1: implications for those moves do become magnified. Thank you very
• 12:33
  Speaker 1: much for spending time with us. Marvin Lowe is senior
• 12:36
  Speaker 1: Global Markets strategist for b n Y MELON, giving us
• 12:40
  Speaker 1: his perspective on the Bank of England's rate decision today
• 12:44
  Speaker 1: and the policy of central banks around the world.