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It’s been an eventful week for the bond markets. The inherent weaknesses of the global financial system are exposed by rising inflation, the continuation and worsening of the COVID-19 pandemic, and a resurgence of working class struggles.
The week began when the Reserve Bank of Australia (RBA) was forced to drop its target yield on an April 2024 bond to 0.1%. This was due to a massive selloff that saw the yield jump to 0.8%, meaning the central bank should have bought back all available bonds in order to maintain its target.
Faced with a rush to exits, which caused the bond’s price to drop and its yield to rise, the RBA decided to abandon the policy it had put in place in response to the accompanying financial crisis. the start of the pandemic in March 2020.
The RBA’s decision caught the world’s attention because it highlighted the evolution of global markets. Investors, who had acted on assurances from central banks that inflation is “transient,” suffered losses, sometimes significant, as the prices of short-term bonds fell in response to fears that price hikes could be expected. ‘root.
Attention then shifted to the US Federal Reserve on Wednesday. As expected, it announced the reduction of its asset purchases by $ 15 billion per month until next June, when they will cease altogether.
The financial markets, which had taken the tapering into account, responded positively to the Fed’s decision, with Wall Street continuing to climb to new records. Much of this is due to Fed Chairman Jerome Powell’s insistence that the central bank’s base interest rate, virtually zero, was not going to be lifted in the immediate future.
Powell has sounded no alarm because one of his main goals is to ensure the stability and continuous rise of the stock market. But his remarks indicated that the Fed, like other central banks, is being rocked by forces that it does not fully understand, let alone control.
For example, Powell said that while economic activity grew at a rate of 6.5% in the first half of the year, in the third quarter, “real GDP growth has slowed considerably from this rapid pace.” Indeed, the Delta variant had slowed the recovery and activity had been limited by supply constraints and bottlenecks in the automotive industry.
However, he had no answer to answer this problem, noting that “our tools cannot alleviate our supply constraints” before proposing a profession of faith.
“Like most forecasters, we continue to believe that our vibrant economy will adjust to supply and demand imbalances, and in doing so, inflation will drop to levels much closer to our target at higher. long term of 2%, â€he said.
But as to how long it might take for inflation to drop back from its current 5% rate, Powell had no idea. It is “very difficult to predict the persistence of supply constraints or their effects on inflation,” he said.
While there has been broad support for the Fed’s latest move, there are concerns that it will react too slowly to rising prices and need to adjust quickly.
Paul Jackson, head of asset research allocation at Invesco, told the Financial Time: “If the Fed ends up behind the curve, then it could end up raising rates very quickly and in large quantities. “
Such a move would have a major impact on Wall Street as its rise to record highs has been built on a mountain of debt that has only been supported by ultra-low interest rates.
On Thursday, the Bank of England (BoE) was in the spotlight as its Monetary Policy Committee (MPC) made its final decisions.
In the run-up to the MPC meeting, financial markets in Britain and around the world had largely taken in that there would be an increase in the central bank’s base interest rate from its current record high. 0.1%. As a result, the BoE would be the first major central bank to raise rates since the start of the pandemic.
The assessment was based on remarks by Governor Andrew Bailey last month that the central bank “will have to act” if inflation turns out to be stubbornly high.
UK inflation has shown no sign of slowing down with forecasts that it will drop from its current level of 3.1% to 5% in the coming months. So it seemed almost certain that the base rate would be lifted.
It was not to be. The BoE’s MPC voted seven to two to maintain its current rate.
This triggered a series of swings in UK and global markets in the opposite direction to that at the start of the week.
The yield on one-year government bonds nearly halved in a matter of hours, falling 0.22 percentage points, the biggest move since 2009 in the wake of the global financial crisis.
These declines were reflected in other markets, with lower yields on two-year US Treasury bonds. The yield on German one-year government bonds, already in negative territory, fell 0.08 percentage points, the largest one-day decline since the crisis of March 2020.
While these bond market moves are small in absolute terms, they can have major effects as they impact the vast amounts of money – hundreds of billions of dollars – that flood the financial markets every day. This happens when investors place bets, often involving complex transactions, on the movement of interest rates and other variables, such as currencies.
In his press conference following the ruling, Bailey rebuffed reporters’ claims he sent a message to the markets, insisting that “none of us” said the rates were would increase in November.
“It was a very close call,†he said. “We are in a situation where the calls are close, they are quite difficult.”
He was also asked about a claim in his prepared remarks that “there is little monetary policy can do to affect inflation in the short run”.
Current inflation, he said, was not caused by excess demand in the economy pushing against supply as in the past. Rather, it was the result of a “supply side shock” and monetary policy could not increase the supply of computer chips or gas.
Asked why central banks have not seen this shock resulting from the pandemic, he provided no answer.
He recalled the famous “Queen’s question†in 2008 when the British monarch asked a group of learned economists why none of them saw the financial crisis coming.
Bailey warned that if monetary policy is used in the wrong context in an attempt to fight inflation, it could make households worse off.
However, his real concern, like that of his counterparts, is not the millions of workers struggling to make ends meet as the prices of basic necessities rise. His concern is the stability of financial markets where a rate hike could precipitate a collapse of the debt-based house of cards.
The primary concern with regard to inflation is its effect on the development of the class struggle. This was made clear at the conclusion of his prepared remarks when he said that “short-term developments in the labor market will be crucial in determining the scale and pace of the BoE’s response” to inflation. .
If inflation becomes what central banks call “anchoredâ€, that is, if workers start pushing for higher wages, then the BoE is about to hike rates, inducing a contraction of economy, to suppress these demands.
There is a broader conclusion to be drawn from the press conference observation. The governor of the BoE, along with other central bank chiefs, is in an entirely new situation. They have no real idea of ​​where global growth is going, where inflation is going, when and how global supply chains will work, and what is going to develop in the job market.
Over the past three decades and more, they have been able to operate in conditions where inflation has been kept low. Cheaper goods have resulted from the globalization of production and the suppression of working class struggles which has led to a persistent downward trend in real wages.
Now that situation has changed dramatically, triggered by the pandemic. Global production has been turned upside down and the working class is returning to the fight, not only against the effects of the pandemic, but in response to the impact of the policies that led to it.
Whatever confusion central bankers may have, they are guided by a certain class instinct, sharpened by the experience of centuries of rule: that the future course of the profit system over which they preside depends on the defeat of the growing movement. of the working class. by any means necessary, including authoritarian forms of government.
For the working class, the crucial stake is the struggle for an internationalist and socialist perspective aimed directly at the conquest of political power.
This week’s gyrations in financial markets, as well as the deepening of the ruling class’s murderous policies on the pandemic, indicate that this confrontation is becoming increasingly to the fore.
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