Thursday, June 4, 2015

WARNING: Western Central Banks Are Now On The Verge Of Losing Control

This daily update by Art Cashin doesn't say much, except for the brief quote by Peter Boockvar.
I’ve said this before but I’m sorry, I need to say it again. What we are witnessing in global markets is the inherent contradiction writ large that is modern day monetary policy where dangerously ZIRP, NIRP and QE are considered conventional policies. The contradiction is simply this: the desire for higher inflation if fulfilled will result in higher interest rates that central banks are trying so hard and desperately to suppress.

Outside of the short end of the curve, markets will always win for better or worse and that is clearly evident now. The ECB is getting their first taste of the market talking back and in quite the violent way. In the US, the bond market is watching the Fed drag its feet (its never-ending) with wanting to raise interest rates and finally said enough is enough. The US Treasury market is tightening for them. Since mid April, the 5 yr note yield is higher by 40 bps, the 10 yr is up by 55 bps and the 30 yr yield is up by 65 bps. 

The Fed now has two choices, raise rates in June or July and get back some control or don’t and lose it further. Bigger picture, IF the rise in rates continues around the world in coming quarters and it starts to impact global growth, central banks will then reach its next decision, whether to fight the rise with more QE or to just let markets normalize on their own. For US equities, I don’t think they should be so nonchalant with what is going on in bonds as extremely low interest rates have been their best friend over the years.

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