A preview of life after the September Central banks

All these central banks meetings of the last 2 weeks have been important for setting out their stances for what’s to come. It is the end of the hike cycle, unless we get another bout of inflationary pressure, and pressure that needs to be more than just higher oil prices.

Central banks are right to declare they are not out of the inflationary woods because firms have adjusted their prices up quite quickly, and that’s all still going through an adjustment phase, in all aspects of pricing. The downtrend in inflation is still inflation, so prices are still going up. That’s where the stickiness plays into things, and the big worry of it trending higher again for central banks (see the likes of the BOC). If there are no surprises, then we will be getting our teeth well into the growth, a.k.a the cut trade.

Right now, the US is still top of the majors and despite seeing some gloomy data everywhere else, it’s still all pretty flat overall. The trouble starts if we start seeing big contractions.

So really, we’re likely to see growth patterns more like skimming stones on water, rather than lobbing bricks in. But, if the stones turn into bricks, then we’re in for a big old rate cut cycle that’s likely to carve through thoughts of a neutral level. Central banks can forget calmly cutting to 2.5% odd and then putting their feet up. 

For now, the Central bank plan is to weather the effect of hikes, hope economies don’t falter too much, clear the balance sheets as quickly as possible and get rates down to a neutral level. All before we do see a bigger downturn, or we hit the next meeting between Mr Poo and Mr Fan, and big easing is then needed again.

As mentioned on the Flow Show, we’re in a tidal flux period between the end of hikes, and when rates start coming down. Assets and FX will follow the growth patterns but as I’m not expecting huge variations between economies, we may be limited for any big trends in the interim. I also don’t think we’re out of the woods on inflation so if we do see Central banks hiking again, I’d be wary of the market taking a more negative view, i.e thinking further hikes now would translate to bigger economic weakness, rather than CB’s fixing things, as hikes have been largely viewed thus far.

Despite maybe not thinking we get any big trends, I still think we’ll get plenty of volatility to keep us occupied but we may be seeing more of those quiet periods between data points.

For central bank meetings for the rest of the year, unfortunately, they could be a dull affair but maybe with a couple of outlier hikes and the constant “will they, won’t they?” saga at the BOJ. If this is truly the end of the rate hike cycle, we need to prepare for a change in how markets react, and what they react to. Patterns that were prevalent throughout the hike phase, may wane and become invalid. Markets always change with the cycles. There may not be wholesale changes but something like risk could morph into another different entity. That’s what I’ll be watching for over the next few weeks, to see what may change in terms of sentiment and how markets react to things like data.

This is one of those times where traders need to be aware that the tides might be changing, and that we might have to adjust too. Markets will still be markets but we may have to trade them differently. The quicker you can notice and change to that, the better chance you’ll have of making, and more importantly, not losing money.