Central Bankers vs Markets

Central bankers continue to sound an 'all clear' signal while markets continue to sound the alarm in a divergence that can't last. The yen climbed once again Wednesday and the S&P 500 touched the lowest since April 2014. There are 4 Premium Trades currently in progress and an additional one will be released around the ECB decision. The chart below highlights the general picture for the S&P500 following Wednesday's 76% retracement in the index. Ashraf will post the technical implications of the charts' developments following Draghi's conference.

A full-on panic hit markets once again on Thursday and the S&P 500 broke below the Oct 2014 low to the worst levels in nearly two years. At the lows, the S&P 500 was down 69 points but it recovered alongside oil to finish down 22 points.

The US CPI report was slightly below estimates at -0.1% m/m compared to a flat reading expected but the core reading matched the 2.1% consensus.

Unruffled BoC

The main focus of the day was the Bank of Canada decision. The market was evenly divided on what might come with many believing falling oil and asset prices warranted a rate cut. Poloz thought differently and he wasn't dovish either. The result was a quick spike higher in the Canadian dollar.

As oil and stock markets plunged, however, the move retraced but later when crude recovered, so did the loonie in an extremely volatile day of trading. The close lower in USD/CAD ended a 13 day streak of gains.

What's striking is how Poloz's reading on the economy differs significantly from markets. He remains optimistic on non-resource exports and the US economy. He's not alone. Other central bankers appear to be seeing a fear different world than market participants.

If markets are right, many central bankers will suffer (more) hits to their credibility. The Fed is in a particularly tough position and the US dollar also has the most to lose from the Fed scaling back expectations of a hike. At the moment, the Fed is in a blackout period ahead of the FOMC.

ECB is next

Up next is the ECB. A report from MNI Wednesday said there would be no serious discussion of new measures and that's not a surprise. The question is: Will Draghi also ignore the signals from markets and signal confidence in the economy?

There is a good chance he will and that may help the euro in the short term. But if markets continue to wilt, how long can that optimism last?