Being fooled by central banks

The Bank of England announced that it will increase their asset purchase plan which was thought by many to be ending. The total plan will be raised to $296 billion with an increase of $84 billion. With this type of surprise, we know what will happen. Bonds rallied and sterling got hammered. This was surprising given that PMI numbers look good and was actually industrial production is higher MOM. PPI is still negative but CPI is still only at the low end of the expected policy range.

The ECB, on the other hand, said that rates are appropriate and that they are satisfied with their asset purchase plan. President Trichet is expecting a recovery for Europe based on the improving economic numbers. This should give a boost to the euro in the coming weeks.

We are seeing the first signs of differences in monetary policy across the G10. For almost the last year, monetary policy was one directional with all central banks lowering rates and providing easy credit. This is not going to change in the near-term but we will start to hear differences in views of what stage the business cycle is at and what should be the monetary stance to reduce strong easing. This may start to cause forward curves to move higher on the front-end. This year yield curves have steepened because long rates have risen and short rates have stayed stable.