Recap 2015-01-20 : CB credibility, BAML FMS


OK, first I’ve read all sorts of rubbish this weekend about how the SNB decision means that central banks now have zero credibility.

Please. Let’s just all agree that it’s silly. Currency pegs, ceilings and floors have been set and broken by central banks for multiple decades. It’s nothing new, and folks who think otherwise clearly have not studied financial history. Central bank statements, especially regarding actions exclusively in their own currency, remain relevant. That may be a bit harder to believe than usual given recent market moves, (i.e. see the chart below from ‏@M_McDonough) but the key difference is that, unlike in FX markets, in domestic markets the central bank has the ability to control all the levers.

Speaking of central bank credibility, the ECB is widely expected to announce QE this Thursday. Now, whether it will have an impact or not is questionable, but the fact of the matter is that it will appear effective. That’s because leading indicators for Europe is already picking up. The latest ZEW print today, along with the improvement in the ECB lending survey all point to better EU growth in the coming quarters. Whether QE was intentionally timed to coincide with this or not, the ECB will likely end the year with kudos from the press for the effectiveness of QE, even though an improvement was already baked in by the time it will have been announced.

Finally, a fair bit of commentary has been published over the past week regarding whether QE conducted by national central banks will have a different impact than if it was conducted by the ECB itself, subject to its capital key. The hypothesis is that if the ECB conducts the QE itself, it will be a more explicit mutualization of sovereign credit risks than if the sovereign bonds end up on the balance sheet of the national central banks.

In my view, this is really a minor difference. The reason is that the mechanics of QE is explicitly an asset swap, whereby a liability of an EU country is swapped for a liability of the ECB – i.e. Euros. The risk mutualization is embedded in QE, regardless of where the debt ends up.

Separately, here are a couple charts from the BAML survey:

Interestingly, cash levels fell:

It’s unclear why that may be. The survey period was between Jan 9th through the 15th, so it was after the initial leg down in equities. Global equity allocations were actually little changed; perhaps the cash went to fixed income, (charts below) or were withdrawn. I don’t have the actual data points, but it seems like over the past few years, there has been a tendency for cash levels to fall in January.


  • German ZEW Survey improved to 48.4 vs 40 exp and 34.9 prev
  • US NAHB Housing Survey declined to 57 vs 58 exp and prev
  • China Data:
  • Retail Sales improved to 11.9% YoY vs 11.7% exp and prev
  • IP improved to 7.9% YoY vs 7.4% exp and 7.2% prev
  • GDP was stable at 7.3% in 4Q vs 7.2% exp
  • BofA lowers 2015 S&P 500 EPS to $119.50 to reflect lower oil / stronger dollar. They introduce 2016E at $128; both well below consensus.


  • Wed: NZ CPI, UK Employment, US Housing Starts, BoC, NZ PMI
  • Thu: US Jobless Claims, ECB, EU Consumer Confidence, DOE Oil Inventories, Japan PMI, China HSBC PMI
  • Fri: EU Mfg & Services PMI, Carney Speaks, Chicago Fed National Activity Indicator, Canada CPI, Retail Sales, US Markit Mfg PMI, Existing Home Sales
  • Mon: BoJ Minutes, German IFO, DallasFed, Australia NAB Business Confidence,
  • Tue: UK 4Q GDP, US DGO, Case Shiller HPI, New Home Sales, Consumer Confidence, Australia CPI

2 thoughts on “Recap 2015-01-20 : CB credibility, BAML FMS

  1. I agree with you about the SNB rubbish, although the bit that winds me up more is all the pundits rushing to tell me how inevitable the move was. OK, thanks…

    Having said that, I don’t think the dichotomy that you present between purely domestic and FX policy is the most useful prism to view the issue. Rather I’d see it as a reminder that CBs will often have conflicting objectives, are subject to the usual human foibles and the vagaries of committee dynamics, and are subject to political pressures and constraints. In this framework, there is no clear cleavage between domestic and international considerations. Of course, this is all nothing new, but after a few years where CBs have seemed to walk on water, it’s a useful reminder to those with short memories, no more, no less.

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