Viewed up close, the star-studded gathering of men and women who make monetary policy in the Portuguese resort of Sintra this week was a wonkish discussion of economic ponderables.
Yet listening at the door was a gigantic crowd of investors, traders and financial press. Half phrases and words flew around the world in a cascade of tweets and headlines, causing financial markets to lurch before the central bankers had returned to their seats.
Adding to the confusion was the subsequent spin. On Tuesday Mario Draghi, President of the European Central Bank spoke of reflation forces and economic recovery. The next day senior figures at the institution told journalists the market reaction, which pushed the euro to its highest price in dollars this year, had “misjudged” his words.
Even so, by the end of a week that whipsawed markets the euro had added two cents to trade at $1.14, bond yields around the world had jumped, and UK traders had decided a rise in base interest rates this year was more likely than not.
The first conclusion is a simple one: little matters more in world markets right now than views of the select group invited to Portugal by the ECB. “Central bankers have us at their beck and call again,” says Brad Bechtel at Jefferies International.
What they were trying to communicate, says Bob Michele, head of fixed income for JPMorgan Asset Management, “is that the 30-year bull market is over and things should go back to normal”.
In this case normal means higher interest rates, which are bad for bond prices, and leads to the second conclusion: after three decades of mostly falling bond yields, changing course is extremely difficult when prices for trillions of dollars worth of assets hang on every word.
Looming large over each discussion is the so-called taper tantrum triggered by the Fed’s plans to scale back its quantitative easing programme in 2013. Rick Rieder, chief investment officer for fixed income at BlackRock, argues that the situation today is very different from four years ago. He shrugs off this week’s turbulence as healthy. “Markets could use a bit of volatility,” he says.
Indeed, in some ways the reaction to the Sintra gathering reflects what the market had been itching for monetary guardians to say.
The journey differs for each central bank, with tapering of bond purchase programmes, higher interest rates, or not reinvesting debt bought as part of quantitative easing as it matures among the options in prospect.
The pace will also differ — long and slow, in the case of the ECB, quick and direct for the Bank of Canada, jerky and uncertain at the Bank of England, judging by the conflicting views of members of its rate setting committee.
Yet many share the view of George Saravelos at Deutsche Bank, who says that out of Sintra emerged “a co-ordinated shift by developed world central banks in a more hawkish direction”. He dubs it “the Sintra pact”.
Mr Michele says this need for co-ordination in part stems from the logic of central bank action. It will be easier for one institution to stop buying debt, or even shrink its holdings, if peers are still buying.
The ECB is in part poised to reduced its quantitative easing programme, he says, because it is better if it acts in co-ordination rather than alone. “Do you really want to be there next year allowing the Fed to normalise and leaving you with distorted policy?” he says.
Co-ordinated action would have big implications for currencies, say analysts. For the Federal Reserve, well down the road to policy normalisation, it may mean an even longer period of dollar weakness, as policies converge.
Yet for the Bank of Japan, it could mean a return to sustained yen weakness against the dollar. Barely noticed amid the excitement of Sintra was BoJ governor Haruhiko Kuroda sticking firmly to the status quo and keeping his monetary easing tools close at hand.
The dollar-yen trade, “finally has legs again”, says Mr Bechtel, who expects the yen to weaken against other currencies, particularly the euro.
How long this policy convergence trade lasts depends on factors on both sides of the Atlantic. Strong euro appreciation leads to tighter financial conditions, says Stephen Saywell at BNP Paribas, and if that is sustained or goes further, “there is less need for Mr Draghi to deliver on this hawkish monetary policy”.
Still, in their enthusiasm for parts of the message that fit that narrative, markets may have rushed ahead. John Wraith, head of UK rates strategy for UBS, compares bank governors to builders who shored up a building at risk of collapse.
To expect swift action is to misread the situation, he says: “You take down the first bit of scaffolding very carefully, you don’t drop it all at once.”
Nor does everyone think central banks can remove the support of monetary stimulus without causing something to break. Matt King, a senior Citi strategist, predicts the subsequent volatility could even wreck the economic recovery.
“It will probably destabilise markets sufficiently that by next year central banks will have to step back into markets again, no matter how unpleasant they find it,” he says.