WEBVTT - BNY's Marvin Loh Expects More Central Banks as Dovish (Audio)

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<v Speaker 1>We want to take a look at the bond market now.

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<v Speaker 1>After the Bank of England cut its key rate, there

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<v Speaker 1>was a big rally in UK guilts those are tenure

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<v Speaker 1>US Treasury bonds in the United Kingdom. In fact, there

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<v Speaker 1>was a global bond market rally. We want to bring

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<v Speaker 1>back to our show now Marvin Low. He's senior global

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<v Speaker 1>market strategist at d N Y Melon. So Marvin, isn't

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<v Speaker 1>so funny. Earlier in the week it was all the

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<v Speaker 1>Japanese bond market route was you know, maybe it was

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<v Speaker 1>the end of the global bond market rally. Huh, looks

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<v Speaker 1>like today maybe it's not over yet. Every day brings

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<v Speaker 1>a different surprise, doesn't it. It sure does. What do

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<v Speaker 1>you think? Um, you know, we did get, um, the

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<v Speaker 1>amount of stimulus that we had expected. What the Bank

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<v Speaker 1>Japan didn't do earlier this week was delivered. What the

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<v Speaker 1>market had thought. In this case, there was you know,

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<v Speaker 1>really pretty much odds that, um, the Bank of England

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<v Speaker 1>was going to cut their interest rates. They did, um,

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<v Speaker 1>but they also reintroduced bond buying, which included corporate bonds

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<v Speaker 1>for the first time for the b o E. So

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<v Speaker 1>it did kind of almost over deliver and you know,

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<v Speaker 1>like you said, we had a pretty nice rally in

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<v Speaker 1>UM in guilts, but that did carry over into mostly

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<v Speaker 1>all the sovereign bond markets, Japan being an exception to that.

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<v Speaker 1>UM and for the US, you know, we continue to

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<v Speaker 1>push yields kind of the middle point of this range,

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<v Speaker 1>but you know, definitely lower again, Marvin, should we read

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<v Speaker 1>anything beneath the surface? Is the global economy really that

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<v Speaker 1>bad that we've got the Bank of England lowering rates

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<v Speaker 1>twenty five basis points? Is it really that terrible that

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<v Speaker 1>this is necessary? Well, you know what, um so Brexit

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<v Speaker 1>definitely changes all the rule if you will, because we

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<v Speaker 1>really don't know how it's going to evolve. You can

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<v Speaker 1>make the argument that the Bank of England was a

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<v Speaker 1>little bit aggressive in making a move right now, but

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<v Speaker 1>Marko was pretty pretty pointed in his belief that there

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<v Speaker 1>was going to be a slow down in UM in

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<v Speaker 1>the UK economy, and he acted based based on that,

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<v Speaker 1>and of the prevailing thought was that there's going to

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<v Speaker 1>be a spillover effect into other eCos. To me, so

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<v Speaker 1>I think we're gonna continue to see this doubest type

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<v Speaker 1>of commentary come out of at least three of the

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<v Speaker 1>four bigger central banks, you know, the FED being the exception,

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<v Speaker 1>which is still saying that they're in a position to

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<v Speaker 1>raise rates this year. So and this seems to be

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<v Speaker 1>one of the tough things for the FED. Actually, if

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<v Speaker 1>you look at w I r P, those are world

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<v Speaker 1>interest rate projections, very important page on your Bloomberg where

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<v Speaker 1>you can check out the odds of the Fed's next

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<v Speaker 1>rate hike going meeting by meeting, and it's a good

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<v Speaker 1>bank of Japan, all the big develop nation central banks.

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<v Speaker 1>Now there's no the odds of a of a rate

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<v Speaker 1>hike don't move above in the FED funds futures market

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<v Speaker 1>view until the end of next year. That was already

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<v Speaker 1>at September. Now, granted they may be under pricing when

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<v Speaker 1>the Fed's gonna move, but that's idea seems to be that,

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<v Speaker 1>you know, it's getting harder and harder for the FED

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<v Speaker 1>to high grades because the rest of the world is

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<v Speaker 1>going in the opposite direction. They don't want to be

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<v Speaker 1>the odd central bank out. I think I think you

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<v Speaker 1>got a spot on, and I will UM, I will

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<v Speaker 1>promote w I r P. Also, I use that I

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<v Speaker 1>use that page pretty much every day. UM. The market

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<v Speaker 1>is definitely looking at the Fed's words in a very

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<v Speaker 1>skeptical eye. Um, the you know, whether it's the GDP

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<v Speaker 1>number that we had, whether it's the you know, bouncy

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<v Speaker 1>employment number. I guess we'll see whether or not UM

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<v Speaker 1>last month's employment report was more indicative of where UM

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<v Speaker 1>jobs were in the US or the one before that,

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<v Speaker 1>which showed a very weak job market. But um, now

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<v Speaker 1>the market is expecting to ECP to do something. The

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<v Speaker 1>market is expecting more from the Bank of Japan. The

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<v Speaker 1>market is expecting and and and pretty much the Bank

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<v Speaker 1>of England said that they would be ready to act,

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<v Speaker 1>to act if they needed to. It makes it really

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<v Speaker 1>hard for the FED in that type of environment. Does

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<v Speaker 1>it just make it easier and less expensive for governments

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<v Speaker 1>to borrow and issue lots of debt, whether it's the

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<v Speaker 1>U S Treasury or whether it's the UK Treasury. Yeah,

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<v Speaker 1>barn costs there are definitely low. UM. So from a

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<v Speaker 1>mathematical perspective, Um, you know, when they issue debt, it

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<v Speaker 1>is going to cost less. When they're when they refinance

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<v Speaker 1>older bonds with higher coupons, it's gonna cause less. But

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<v Speaker 1>there is so much debt that's being issued and Um.

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<v Speaker 1>It doesn't take much of a backup and yields to

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<v Speaker 1>really start to worry people. Um. The next part of

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<v Speaker 1>the accommodation uh slash stimulus. Stimulus discussion has started to

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<v Speaker 1>um uh go down the route of helicopter money. And

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<v Speaker 1>you know, whether or not that would really make investors

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<v Speaker 1>uncomfortable U is something to be seen. But you know,

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<v Speaker 1>Karney today said that he was not a fan of

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<v Speaker 1>helicopter money. Uh. Carney said today that he UM and

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<v Speaker 1>this is the Bank of England governor um said that

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<v Speaker 1>he was not a fan of negative eiel So uh,

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<v Speaker 1>we're not expecting that to come out of the Bank

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<v Speaker 1>of England, but that is kind of the next stage

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<v Speaker 1>when the tools become far scarcer and the episicacy, the

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<v Speaker 1>efficacy of what they're doing is questioned. Well, and he

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<v Speaker 1>was quite adamant, wasn't he. He's uh definitely in league

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<v Speaker 1>with said chair Janet Yellen that negative interest rates or

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<v Speaker 1>negative bond yields anyway, certainly not not something he's heading toward. Uh.

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<v Speaker 1>And of course, UH, it's possible too that he does

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<v Speaker 1>not face the same kind of situation, for example, the

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<v Speaker 1>Bank of Japan does, right, I mean yes, the UK

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<v Speaker 1>economy is going to take a big hit from Brexit.

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<v Speaker 1>And Carl Weinberg from High Frequency Economics and the same

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<v Speaker 1>thing earlier on the show today that you just said

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<v Speaker 1>there's no precedent for Brexit. Nobody, no one can say

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<v Speaker 1>in two years where the US the UK economy is

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<v Speaker 1>going to be. But it went into all of this

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<v Speaker 1>with remember, up until the Brexit worries, maybe the UK

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<v Speaker 1>was gonna see a rate hike. So maybe that's another

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<v Speaker 1>reason he's not going to consider it. He doesn't have to. Well,

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<v Speaker 1>you know, I'll say that I was encouraged that he

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<v Speaker 1>was adamant about not going into the negative yield regime

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<v Speaker 1>or or a really um dead seat against it. And

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<v Speaker 1>I was encouraged that um he really dismissed the concept

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<v Speaker 1>of helicopter money. So it certainly makes the argument that

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<v Speaker 1>that is one of the reasons the Fed wants the

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<v Speaker 1>high rates if they can, because would give them a

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<v Speaker 1>few more options. And remember it's not like they have

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<v Speaker 1>a whole lot, but being able to start a bond

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<v Speaker 1>buying program again, being able to actually cut rates and

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<v Speaker 1>not have them in negative territorial territory already is an

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<v Speaker 1>advantage that at least the b o E and the

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<v Speaker 1>FED has UM so they can um take that hard

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<v Speaker 1>line and hopefully, uh give the market a little bit

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<v Speaker 1>of comfort that we're not going down there. But uh, well,

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<v Speaker 1>once again get into an area where there's not a

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<v Speaker 1>lot of room if in fact, these economies turn or

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<v Speaker 1>there is a big financial shock, and and and that

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<v Speaker 1>is this ongoing concern that we've had for you know,

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<v Speaker 1>quite some time, because um, we're not seeing the growth

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<v Speaker 1>that one would expect this late in um an accommodation cycle,

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<v Speaker 1>and they're just are not that many traditional tools that

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<v Speaker 1>are left in their toolbox. Well, Marvin, you just said it.

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<v Speaker 1>If all of the action that they have taken after

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<v Speaker 1>the financial debacle of two thousand and eight, if the

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<v Speaker 1>action for lower interest rates has produced anemic growth and

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<v Speaker 1>continues to produce anemic growth, or at least you have

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<v Speaker 1>it concurrently, why don't they stop doing that? I mean,

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<v Speaker 1>isn't that the definition of the crazy thing? Right? I mean,

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<v Speaker 1>you know, if you keep getting the same results, stop,

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<v Speaker 1>you know, absolutely great question, and we would be second

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<v Speaker 1>guessing as to whether or not things would be far worse.

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<v Speaker 1>So that certainly would be their argument. Um, But that's

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<v Speaker 1>a that's a pretty thin I mean, I'm not saying

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<v Speaker 1>that's your argument. I'm just saying, but that's a that's

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<v Speaker 1>a pretty you know, thin, uh, basis on on which

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<v Speaker 1>to you know, basis uh, you know, global monetary policy. Yeah,

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<v Speaker 1>and um, and you know, Governor Carney was quite adamant

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<v Speaker 1>in his um in answering one of his statements where um,

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<v Speaker 1>I believe someone asked about either negative interest rates and

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<v Speaker 1>or what savers should do, and he was of the

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<v Speaker 1>approach that, you know, we think that X number of

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<v Speaker 1>people are going to lose their job and we can't

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<v Speaker 1>stand by. So while it is kind of a thin argument,

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<v Speaker 1>it's an argument that I believe a lot of these

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<v Speaker 1>central bankers hold true to heart. Um. We've kind of

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<v Speaker 1>heard that come out of dragging before. Uh. And we've

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<v Speaker 1>heard and read about, um about how the Fed kind

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<v Speaker 1>of views it's extraordinary policy as okay, But but Marvin,

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<v Speaker 1>let's let's just suppose that some of your clients actually

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<v Speaker 1>received a decent yield on their bonds. What would they

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<v Speaker 1>do with that money? Would they not go out and

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<v Speaker 1>spend it in the economy? Um? You know, absolutely, it

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<v Speaker 1>would be a better environment for savers and UM again.

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<v Speaker 1>You and I I think are are coming from the

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<v Speaker 1>same approach where we think that this um really artificially

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<v Speaker 1>low rate environment is not doing what it's supposed to

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<v Speaker 1>do from from from the economic perspective. At the same time,

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<v Speaker 1>we've got central bankers that do not seem to be

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<v Speaker 1>comfortable allowing volatility to come to the market for any

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<v Speaker 1>extended period of time, and we see them time and

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<v Speaker 1>time again, Uh go in and try to quash that

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<v Speaker 1>volatility whenever it spikes, And unfortunately those periods of volatility

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<v Speaker 1>seem to be more frequent, um slightly, you know, more acute,

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<v Speaker 1>and the responses um from the central banks come quicker.

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<v Speaker 1>And it's really this vicious cycle that we find ourselves in. Well,

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<v Speaker 1>you know, I think I could take the other side

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<v Speaker 1>of this too. So let's imagine a world where central

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<v Speaker 1>banks start raising their key rates. Let's say the banking

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<v Speaker 1>can raise the key rates. People would sell those or

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<v Speaker 1>buy those guilts so fast, push up that price, push

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<v Speaker 1>the yield down even further because they'd say, oh my gosh,

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<v Speaker 1>he's gonna make what could be a mild recession into

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<v Speaker 1>a deep recession. I think the presumption is here that

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<v Speaker 1>central banks alone control what the bond market does. There's

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<v Speaker 1>a lot of investors out there making decisions now. True,

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<v Speaker 1>if they keep buying bonds, that's gonna keep dry being

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<v Speaker 1>down yields and pushing you know, the yields lower and

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<v Speaker 1>you know, bringing down the yields on US treasuries. But

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<v Speaker 1>I think that's the one of the problems for for

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<v Speaker 1>central banks right now. They only really control the short end. Yeah. Well,

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<v Speaker 1>well a few things UM kind of that that are

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<v Speaker 1>you know, very interesting observations from what you just said.

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<v Speaker 1>Number one is that we do have a flat yield curve,

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<v Speaker 1>so and that curve continues to flatten, and today we

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<v Speaker 1>did see a flattening as well as a decline in

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<v Speaker 1>um an overall yields. So the long end UH declined

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<v Speaker 1>even more than the UH than the short ends. So

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<v Speaker 1>that certainly is not a resounding um affirmation of you know,

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<v Speaker 1>future growth in the economy. Um. The other aspect of

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<v Speaker 1>it is that, you know, if they do wind up

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<v Speaker 1>buying as much of the markets as they do, as

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<v Speaker 1>we have in Japan, those markets start start to function

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<v Speaker 1>very very um uh. They start to misbehave in a

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<v Speaker 1>way that's very difficult to either analyze and or for

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<v Speaker 1>the central banks to control. And we saw yields into

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<v Speaker 1>hand increase from a percentage perspective after UM, the I

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<v Speaker 1>guess disappointing b O j um decision as well as

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<v Speaker 1>the disappointment from the physical stimulus perspective. Um, it's performed

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<v Speaker 1>very poorly from a percentage perspective. Granted, you know, you

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<v Speaker 1>went from negative negatives, so financing costs for the Japanese

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<v Speaker 1>government is still pretty low, but the roads investor confidence

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<v Speaker 1>in kind of this low rate environment, you can very

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<v Speaker 1>easily wind yoursel wind up in a situation where it

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<v Speaker 1>becomes harder for these governments to finance themselves. And that's

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<v Speaker 1>a big concern too, because the amount of debt out

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<v Speaker 1>there um is quite large that the central banks own.

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<v Speaker 1>Even though we keep talking about a scarcity of government bonds,

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<v Speaker 1>well that's if that's scared. If that's scarcity of government

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<v Speaker 1>bonds continues, maybe the central banks can just open up

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<v Speaker 1>their books and start selling some of them. Yeah, yeah,

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<v Speaker 1>you know. UM, I had hoped that as part of

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<v Speaker 1>the normalization process that said would start to reduce its

0:11:54.720 --> 0:11:58.920
<v Speaker 1>balance sheets. Um. You know, And again the perspective is

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<v Speaker 1>that the central banks are starting or continue to expand

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<v Speaker 1>their balance sheets, so we're not even getting at that discussion,

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<v Speaker 1>but they certainly could. Um. It would help normalize the market.

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<v Speaker 1>It would possibly um get the curve to be more

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<v Speaker 1>positively shaped, which you know from a from from an

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<v Speaker 1>investor perspective, might um build a little bit of comfort

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<v Speaker 1>into the future prospects of the economy. But it's a

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<v Speaker 1>very big house of cards. You talk about the housing market,

0:12:23.960 --> 0:12:27.080
<v Speaker 1>you talk about UM, you talked about a lot of

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<v Speaker 1>these other sound curves that are flying. Kind of the

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<v Speaker 1>implications for those moves do become magnified. Thank you very

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<v Speaker 1>much for spending time with us. Marvin Lowe is senior

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<v Speaker 1>Global Markets strategist for b n Y MELON, giving us

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<v Speaker 1>his perspective on the Bank of England's rate decision today

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<v Speaker 1>and the policy of central banks around the world.