Rob Carnell, Chief International Economist at ING, questions that the bond yields fall further, dollar weakens, equity markets all red, oil still softish, gold ralliying - are central banks powerless? Key Quotes “From a macro perspective, there was little on the calendar to worry about yesterday. The second of the Yellen speeches in the US would be roughly a re-run of the one the day before, though with a somewhat higher quality of questions; the Riksbank was meeting and wasn’t expected to do a lot, and otherwise, the calendar was bare. The day started off badly (at least as far as our forecasts were concerned) with the Riksbank cutting the repo rate from -0.35% to -0.5%, and hinting that it was ready to do more. We are certainly surprised by this decision as (1) it seems far from obvious that such cuts do anything to boost lending / borrowing and hence the economy, (2) recent such cuts have put bank stocks under considerable pressure, and therefore likely further undermine lending activity, (3) the Swedish economy is not in bad shape, with both growth and inflation looking respectable by Eurozone standards, (4) the Swedish currency was not looking particularly overvalued. and (5) we don’t even know what the ECB will do in March, so this might be overkill. We can’t blame the rout in European and other international equity markets on the Riksbank move – equities had already fallen when the Riksbank announced their decision. The rally in global bond yields reflects a generalised “risk off “ mentality and mirrors the equity moves. But we can’t help wondering if this is another example of a central bank trying to get a positive risk response to its actions, and failing (e.g. BoJ, and arguably, the last ECB change). Indeed, perhaps the broader question is whether central banks running at / under / or close to the zero interest rate bound, are really running out of ammunition. We are not saying that there is no physical room for the Fed or ECB to cut rates further or reverse hikes in the Fed’s case. However, we, and perhaps the wider market, are beginning to wonder whether or not such policies will even give a boost to risk sentiment in the way it did when QE and other unorthodox policies were first unleashed – accepting that such policies do virtually nothing for the real economy, which now seems fairly clear. It is even conceivable that current attempts to gain an edge and push sentiment higher, are having a perverse effect. The Yellen speech went further than it did yesterday, spending more time suggesting that the Fed had not ruled out negative interest rates for all time. If this was supposed to provide reassurance, it did not work. Instead, it suggests that the Fed is more worried about the US backdrop than it has been, and has probably encouraged thoughts that the US is tipping slowly towards recession. Whether or not this happens, right now, what is lacking in the mix is some sold macro data to put such fears to rest. Today we have January retail sales data in the US. This has been trending down now since the middle of last year. There is nothing that we can put our fingers on currently in the high frequency retail data that says that this is about to change. At some stage, even when the data doesn’t change particularly, sentiment eventually turns, when it runs out of room to get much worse. This analyst doesn’t think we are there yet. A circuit breaker for this negative sentiment is certainly needed. This could be a good time for the G-7 / G-20 to come up with some co-ordinated action – a Louvre mk2 perhaps?” For more information, read our latest forex news.