Notes From Underground: Governor Carney Reveals the Full Monty

Santelli Exchange: August 4, 2016(Click on the image to watch me and Rick discuss why a dart board makes a better forecaster than central bankers.)

This is a brief note attached to a spot I did today with CNBC’s Rick Santelli where we discussed the Bank of England’s decision in full. To my great surprise Mark Carney delivered monetary policy on three fronts: 1. Cut the benchmark rate; 2. Began a new round of QE with purchases of 60 billion pounds of Treasury debt with a 10 billion corporate bond buy kicker; and 3. An enhanced Facility Lending Scheme now labeled as Long-Term Funding Scheme (TFS), which is an imitation of the ECB’s TLTRO, which is meant to get the banks lending the additional BOE-provided liquidity. The British domestic banks will incur penalties if they fail to pass the cheap credit into the financial system. My view still stands. The POWER OF THE TFS IS AMPLE STIMULUS AND THE CARNEY-LED MPC SHOULD HAVE HELD THE RATE CUT AND QE IN RESERVE.

The British Pound dropped 1.5% in response to the aggressive BOE action, the Footsie equity index was up almost 2% and the British gilts rallied as the yields on the long-end of the curve dropped 16 basis points. Carney followed his central bankers down the rabbit hole of “got to do something” for there is a supply shock. My criticism is that the BOE governor acted too quickly and should have let markets continued to seek out the real effects of the Brexit vote. Why are central bankers so terrified of the signals that markets provide about the economy? I will focus on the British pound and the GILTS as a weighing mechanism of market sentiment as we move forward. There is still much to digest concerning Brexit and Prime Minister May has shown herself to be flexible in confronting the EU.

***Tomorrow’s unemployment data is expected to reveal nonfarm payrolls of around 175,000 with a 0.2% increase in average hourly earnings and a jobless rate of 4.8%. Be patient as revisions to last month’s large increase may impact any strong number. If the number is above 280,000 there will be talk of September’s FOMC meeting being in play for a rate rise but after today’s BOE action the FED will be cautious because if Carney fears a large negative impact or supply shock from Brexit Janet Yellen will be loath to raise rates in the face of global headwinds.

Patience is advised in response to a summer market having to decode a great deal of economic nuance. But the most interesting asset class tomorrow will be the U.S. bonds and its reaction to very strong data. Today the U.S. Treasuries rallied strongly on the BOE action, confirming again that global bond markets are all connected by relative value trades. A large nonfarm payroll will test the durability of relative value and most certainly lead to a flattening of the yield curves.



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6 Responses to “Notes From Underground: Governor Carney Reveals the Full Monty”

  1. Bojo Says:

    Great interview, Yra, as always. Sometimes, it must be frustrating to be sane in an insane world. It is quite clear that all this cannot end well, and yet if one mentions this to most people, it is like they don’t even want to go there, it is ”just too horrible to think about it” or something. What I honestly still don’t know, is whether all this is by design or they don’t know what they are doing? Is the man behind the curtain malicious or just confused and desperate? Probably both. Or maybe there is nobody there, not really.

    • yra Says:

      Bojo–thanks for the kind words.I don’t think it is malicious but is an act of arrogance.Setting any policy into action is never easy because there are no sure things or in Mike Tyson’s words;”everybody has a plan until they get punched in the face.”The problem is for the Bernanke crowd they suffer from 1937 disease when the Fed erred by tightening too early as the Roosevelt administration was shrinking the government budget.Now they feel they must always do more before the market has a chance to actually work.The prevailing M.O. is must do more–Carney is just going down that path even though the data does not support it as of yet–pre empting something that might not ever take place allows him to cry success either way.

      • Bojo Says:

        Thank you, Yra, for your answer and for being a voice of clarity and integrity. Yes, I agree about arrogance, plus everybody, as you know, wants to hand over this mess to their successor. I can already see politicians here in the European Parliament and Council screaming, after the next accident: Mr Draghi (Yellen), you have to do more and save civilization! …. So as Bill Bonner says, we are probably going all the way, because there are too many people invested in the system. Plus, anybody saying to people walking around with sense of entitlement and selfie-sticks that they should take pain, would probably end up hanging by their testicles from the nearest bridge : )

  2. Chicken Says:

    RBS (Royal Bank of Scotland) hanging high from the bridge tower this morn.

  3. Frank C. Says:

    i am not sure if this will get off the ground, but if so

    • yra Says:

      Frank–no chance as again it is the Germans bankrolling the entire project—what price will they exact to endorse an anti-austerity plan–this supports why Draghi is in a hurry to keep piling the debt onto the ECB balance sheet—-NOW YOU CAN’T LEAVE

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