It is this year’s bargain: central banks will remain easy, allowing asset prices to march higher despite all those pesky details about growth and inflation.
There is lots of evidence to show this is a genuine phenomenon - the ECB is expected to ease on Thursday, perhaps in new and creative ways, and the Federal Reserve, while theorizing about some fine day it will raise rates, is careful not to encourage any breath-holding.
And markets are doing their part, with asset prices of both stocks and bonds rising slowly and steadily, all amidst unusually low volatility. Not only is the benchmark S&P 500 index up 5 percent this year, and 17 percent over one full year, yields on benchmark 10-year U.S. government bonds have fallen strongly in most major markets, powering gains almost across the board in fixed income.
Low volatility may be key to understanding both what is happening and why. Investors apparently aren’t afraid of unexpected moves - using an index of volatility on the S&P 500 as a gauge, the Vix, they are as calm as they have been since before the financial crisis.Previously:
The positive read on that is that investors are calm for good reason. While the economy is not taking off, companies are profitable, swimming in cash and actively buying up their own shares and increasing dividends.
That inflation and wage growth are both too low, this thinking goes, is bad news more for those who sell labor than those who own assets. Central banks want to drive up inflation to safer territory, and to help labor markets heal. Part of the price they are paying to fix that is to stoke asset prices. If rising asset prices are no longer the central plank of their strategy, as arguably they were in earlier stages of quantitative easing, now it is a side-effect, one unlikely to go away....MORE
"Global watchdogs rattled by lack of fear in the markets"
Citi on Central Banks and Volatility
