MacNicol’s Monthly Commentary-March 2019

The Great Pivot

At one point this week meeting minutes from four of the worlds major central banks were on my desk. Though much digital ink was spent disentangling what went wrong with preordained interest rate hikes and balance sheet reductions nothing quite satisfies a craving like the real thing. Besides scribbling notes on physical paper affords me not only the luxury of a gaining a deeper understanding of the key issues at hand, it allows me to judge those tasked with stewarding our economy…well that and the fact that today’s computer monitors are far too bright. Judging by my scribbles though, Philip Lowe, the Reserve Bank of Australia Governor, took top prize for most aggressive policy pivot. Lowe not only caught me personally off guard with his comments, he also caught a good number of Aussie dollar currency traders a sleep at the switches too. Lowe delivered a speech to the National Press Club of Australia on February 6th, 2019 that kyboshed hopes of there being upside risks to growth and rates. Game changer to be sure.

“Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down. Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced”. – Philip Lowe, Reserve Bank of Australia Governor

The “pivot”, in case you missed it, is sentence three in Lowe’s speech. Central Bankers tend to avoid speaking in clear, normal English because their words are usually sliced and diced by pundits for clues on where the economy and interest rates will go next…so you have to look at their musings very closely. Lowe, like fellow Central Bank chiefs in the United States and Europe is of course quickly distancing himself from the idea that interest rate hikes and balance sheet reductions are a foregone conclusion a narrative that played out through much of 2018…and 2017…and 2016. I suppose this is mostly good because in an age where computer algorithms scrutinize every punctation mark in a Central Bank news release, monetary policy leaders can deflect some of the attention investors place on them by being as vague as possible. Unfortunately, the use of the term “balanced” by a major central banker is pretty conspicuous especially when one considers all the previous news release sorts like yours truly have obsessed over for the past two years. “Balanced” also suggests economic data is turning over. So, the question becomes: either the economy was strong and suddenly became weak due to a change or the economy was never really that strong to begin with and the itsy-bitsy rise in rates we have had recently have done damage. Which is it? Well the MAAM Investment Team thinks that we are at some sort of an informational precipice where not only changes in the data but in the way the data gets communicated to investors will drive portfolio positioning. We do not see this plummeting markets into the abyss in and of itself but it is really hard to envision a world where markets go materially higher from here especially if economic data continues to be muted and monetary policy and the way it gets communicated continue to be sheepish.

As an example, take our base case for China, which is currently under review. Sharp changes in Chinese financial conditions have done wonders for commodities such as copper and iron ore, and Chinese stock markets (which spent most of 2018 falling) are soaring early on in 2019. Large, principally state-run, Chinese Banks have been a bit more uninhibited when it comes to lending with a 3.57 trillion-yuan ($572 Billion) bump in January credit. Chinese loan growth has some seasonality bias ahead of the Chinese New Year, but this year’s moves are still about 40% higher than in 2016, 2017 and 2018. Stimulation is supportive sure, but also fraught with risk when distributed in large quantities.

Readers may recall that China tried a bit of a pivot of their own when they attempted to strike a better balance between speculative investments of questionable value in the name of a more consumer driven economy. The idea was that you would get a better quality GPD figure albeit one that isn’t as sizzling as Chinese GDPs of yore. January’s tsunami of stimulus suggests a relapse by the Chinese towards the former, more unsustainable, path.


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The Monthly Commentary March 2019




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