by Mish

"How’s this for Grade 1 central bank hubris?

Peter Praet, the ECB’s chief economist said in a recent interview that, “Since the crisis, we have had serious concerns about deflationary risks on several occasions in the euro area, but now we can say they have disappeared.

Really? Has he seen the chart above, which shows core CPI in the Eurozone heading sharply lower and now approaching its all-time low seen at the start of 2015! Not only that, but Eurozone inflation expectations are also declining again, after surging in the aftermath of Donald Trump’s election. To be fair, Praet was focusing on the rise in headline inflation in the Eurozone, which touched 2% in February before dropping back in March to 1½%. After some 18 months bobbing around the zero mark, I can understand why central bankers might be heaving a sigh of relief, but for them to take credit for a recovery in headline inflation is totally disingenuous given it has been entirely driven by a recovery in the oil price.

Similarly, Janet Yellen was quoted saying the Fed is “doing pretty well” in meeting its congressionally mandated goals of low and stable inflation and a full-strength labor market. It’s this sort of comment that has led Marc Faber to want to short central bankers, the only way being to buy gold. The increasing volume of central bank hubris may even explain the recent breakout of gold to the upside!

It is not just eurozone inflation expectations that seem to be in retreat. The same thing is happening in the US too (see chart below). I am always surprised how dominated 10y inflation expectations are by short-term movements in the oil price and headline inflation, but it was noticeable just how rapidly inflation expectations ran up in the wake of Trump’s election – way in advance of what might have been expected by the bounce in the oil price.

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One might have thought the surge in the oil price from its trough some 12-18 months ago might have had more impact on wage inflation, but so far that does not seem to be the case.

Despite the euphoria in the markets about the “reflation trade”, survey inflation expectations have continued to drift downwards. One thing is certain: for central banks to call victory over deflation may prove very premature indeed. Nemesis awaits."

Reflation Trade Is Over

The reflation trade is over. It is fitting central banks now brag about oil-related and Trump-related phenomena over which they had zero control.

I discussed similar ideas in a series of recent posts including:

  1. Yellen’s Self-Serving Assessment: Fed is “Doing Pretty Well”
  2. “Secular Low in Bond Yields Remains in the Future” says Hoisington’s Lacy Hunt.
  3. PPI Services Shows No Price Pressures
  4. Hard-Boiled vs Soft-Boiled Economic Egg Debate: Cracking the Shells
  5. Six GDP Estimates: ZeroHedge, Mish, GDPNow, Nowcast, ISM, Markit

Mike “Mish” Shedlock.

Citizens Will Soon Turn their Rage Towards Central Bankers

Via Email, I received an interesting article from Albert Edwards at Societe Generale. Edwards claims citizens will soon turn their rage towards Central Bankers.

Monetary Schizophrenia: “Citizens’ Rage will be Directed Where it Belongs (At Central Bank)

Societe Generale’s Albert Edwards discusses “Monetary Schizophrenia” in his latest email alert. Here are a few interesting snips.

Dutch Central Bank President Cites “Financial Bubbles”, Voices Strong Opposition to QE in TV

Mario Draghi has strong opposition to his QE program from two sources: German central bank president Jens Weidmann and Dutch central Bank president Klaas Knot.

Mindless Central Bank Lemmings Head Towards Cliff

John Hussman had an interesting post this week on a The Decade of Zero and its Chaotic Unwinding.

Central Banks Rethink 2% Inflation Target (In the Wrong Direction of Course)

If Central Banks wanted to make a positive impact on the global economy, they would abolish themselves and let the free market set rates.

Bond Market Paralysis: What Happens When Central Banks Own the Market? Mish’s Sure-Fire Proposal

Here’s the question of the day: What happens when central banks own the market? The answer comes from Asia where Japan’s Government Bond Market Grinds to a Halt and the yield on 10-year Japanese bonds did not move for seven days.

UN Report Cites Central Bank Liquidity Bubbles, Loose Money, Debt Expansion

A UN report has everything wrong as to the cause of current problems. Yet, the report mentions central bank liquidity.

New Nothingness: Central Banks are Powerless “They Should Go Away” Steen Jakobsen

In a “Trading Floor” interview, Saxo Bank CIO and chief economist Steen Jakobsen, discusses the role of central banks in the global economy with Saxo Bank’s Michael McKenna.

Faith in Central Banks Again in Question: Ominous Implications for Bonds

All eyes are following implications of a yield curve inversion. A crucial portion of the curve signals something else.