June 29, 2017 / 7:40 AM / 2 months ago

Daily Briefing: Central banks ask - Do you know what I mean?

Deutsche Bundesbank (German Federal Bank) President Jens Weidmann attends the ‘G20 Africa Partnership – Investing in a Common Future’ Summit in Berlin, Germany June 13, 2017.Axel Schmidt

LONDON (Reuters) - Europe's central banks have a huge task on their hands communicating their intention to gradually wean markets off years of unprecedented stimulus - witness the gyrations yesterday as new nuances emerged in the messaging of both the European Central Bank and the Bank of England.

Both will, at some point, tighten policy: very big questions still clearly remain about when, how and by how much. This will niggle investors for months; today Bundesbank President Jens Weidmann has a fresh opportunity to join the debate at a speech in Stuttgart due around 0930 GMT.

Today in Brussels European allies will tell U.S. Secretary of Defense Jim Mattis they are willing to help step up NATO's mission in Afghanistan - but only if the United States is clear on its strategy. Sounds familiar? This is a refrain we heard for much of the 2000s as the alliance built up its presence to a peak of 130,000 in 2012 before a withdrawal was completed four years later. The numbers are nowhere near like that this time - allies are talking about single-digit thousands of extra troops. But with security worsening, this is developing into a fresh test of NATO's resolve.

Yet another day of Britain's white-knuckle politics beckons with Northern Irish politicians given until 1500 GMT to clinch a deal on restoring the British province's power-sharing executive. If they don’t then the deadline will either be extended or London could restore direct rule.

Theresa May meanwhile faces votes on her legislative agenda. Her deal with the DUP passed its first test on Wednesday night when she won a vote in parliament by 323 votes to 309. But in a sign of the jittery moments to come, even the Foreign Minister Boris Johnson was called back from unification talks in Cyprus to vote.

MARKETS

Central banks will win no prizes for their communication skills over the past month, but some clarity is emerging and they all now appear to be signalling that it’s time to pull back the extraordinary collective monetary stimulus they’ve been delivering over recent years.

European Central Bank President Mario Draghi speaks during a news conference following the Governing Council meeting in Tallinn, Estonia, June 8, 2017.Ints Kalnins

The unexpectedly hawkish tilt from BoE governor Carney on Wednesday was the latest surprise, lifting sterling as he chimed with his chief economist Haldane and other BoE policymakers by saying a discussion about higher UK interest rates was now needed.

Even though the European Central Bank tried to calm markets after ECB chief Draghi made similar noises about reducing its stimulus the previous day, it failed to reverse big gains in euro government debt yields and the euro itself. With this year’s dollar retreat accelerating as U.S. President Trump struggles to get any legislation through Congress, the euro/dollar exchange rate has now vaulted $1.14 for the first time in over a year and has risen about 3 percent this week alone.

The prospect of central banks now gradually draining the monetary swamp has lifted U.S. Treasury yields as well as euro debt and British gilt yields. A rebound in oil prices over the past few days, with Brent crude now firmly back above $47, has helped fuel that move.

Britain's Bank of England Governor, Mark Carney, speaks during the Bank of England's financial stability report at the Bank of England in the City of London, Britain June 27, 2017.Jonathan Brady/Pool

Stock markets have bounced back somewhat despite several central bank warnings about frothy asset prices. Banks have led the way on hopes of higher net interest margins on the horizon and the Federal Reserve’s clearance overnight of buyback and dividend plans from the country’s biggest lenders.

The start of the Q2 earnings season over the next few weeks is also helping. Wall St stocks regained most of Tuesday’s lunge, Asia bourses are higher too in the slipstream and European stocks are expected to open higher.

So what more can we expect from central bank rumblings? The context of the change of tone likely comes from their annual gathering at the Bank for International Settlements forum in Basel last weekend, where central bank chiefs were warned by the BIS not to repeat the mistakes of 10 years ago that allowed credit and asset bubbles to develop while policymakers looked too narrowly at consumer price inflation. Bundesbank chief Weidmann is one ECB member that’s likely to echo that and he speaks later today.

The central bank speak also come ahead of next week’s G20 summit in Germany, where the 10th anniversary of the start of the credit crash will not be lost on leaders. German Chancellor Merkel meets other European leaders in Berlin today ahead of next week’s summit.  That BIS/G20 gatherings may partly explain why central banks are keen to talk tough even though this week’s latest inflation numbers will show little or no reason for tightening right now.

German and Spanish June inflation figures are released later, along with June business and consumer readings from the euro zone and UK consumer credit data.  

Editing by Toby Chopra

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