Bernanke Draghi Svensson Carney Iwata = CB Revolution

by Michael J. Howell21. December 2012 12:20

We celebrated just more than a year ago the appointment of Draghi at the ECB to continue  the good works of Bernanke at the Fed and Svensson at the Swedish Riksbank. Now Carney is slated to take-over the helm of the Bank of England, and rumours suggest that new Japanese PM Abe will turn to Iwata to lead the BoJ in 2013. These pro-employment CB changes are as significant as the selection of anti-inflation Volcker to head the 1978 Fed. The effect on the equity markets in 2012/13 may not be as dramatic as the impact Volcker had on the bond markets thirty years ago, but the positive effect will be felt.

This revolution attacks MV, i.e. money times velocity. Get M up via QE injections and raise V by creating inflation expectations via 'forward guidance', the Evans Rule (e.g. keeping rates low until unemployment drops below say 6,5%) or by weakening the US$. Taken together the latter are like having a nominal GDP target, or much as Carney as recently mooted for Britain.

All-in-all, given the well-known correlation between nominal GDP growth and nominal bond yields, this is poor news for global bonds. We expect yield curves to steepen. Normally this is bullish for other risk assets. The key to this puzzle may be Japan's JGB market. Investors must watch this bellwether in 2013 for confirmation that the new Central Bank Revolution is working its magic.

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