Wednesday, March 25, 2009

QE: Shock And Awful

Was it only a week ago that Macro Man was writing about the "shock and awe" of the Fed's dramatic embarkation into the world of QE and credit easing? The world seemed alive with possibilities, with the triple barrels of the Fed, the BOE, and the SNB aimed at stemming the impact of collapsing global monetary velocity.

A week on, and "shock and awe" is looking more like "shock and awful." Ten year note futures are nearly a full point below the first price printed after the FOMC announcement, and a point and a half below the closing level on the day. If you bought and held bonds on the Fed's announcement, you have lost money. Put another way, the only way to make money out of the Fed's QE was to be on the distribution list-and make no mistake, it exists in the banana republic market that the US has become-and get the tip-off in advance. As an additional kick in the teeth, the Fed, after having initially announced that the vast majority of UST purchases would be in the 2-10 year sector, announced last night that it would buy back some long bonds as well. While the two statements weren't technically contradictory, in hindsight the first one now appears to have been misleading. The 10-30 steepener has now gone wrong as well. Awful indeed.
Meanwhile, in the UK, the impact of QE was dulled yesterday by a higher-than-expected inflation print (the joys of a weak currency!) and comments from Merv the Swerve. Less than three weeks into QE, and Merv was already talking about the possible need to hike rates aggressively at some point. He also suggested that the BOE might not deploy its fully allotted £150 billion of buybacks should the program prove effective. While there was nothing technically wrong with these comments, they were the wrong thing to say to a teetering Gilt market, and were received with all the pleasure of a swift kick to the groin from an iron-tipped boot. Like Treasuries, Gilts are now below the closing on the day of the QE announcement.
Finally, EUR/CHF. The manner in which the SNB prosecuted its intervention on March 12 was awesome indeed, and hearkened back to earlier comments from SNB member Phillipp Hildebrand suggesting "unlimited" intervention to weaken the franc. So naturally, the market took this as a strong statement of intent from the Swiss. Since then, the SNB has been AWOL from the market, and EUR/CHF has-you guessed it!-now fallen below the closing level of the day of the policy announcement.

Now, regular readers may justifiably ask why Macro Man advocates weaker currencies in Switzerland and Singapore, while repeatedly chastising China for pursuing a similar policy. The difference is one of size. Singapore and Switzerland are both small open economies where there is a strong pass-through from currency moves into the domestic price level- similar to what we have observed in the UK.

China, despite its large trade surplus, is a fairly closed economy. Yet the sheer size of its intervention activities carries all sorts of negative externalities, from generating excess domestic liquidity (via non-sterilization of the intervention) to creating an undesired easing of monetary conditions in the West (the bond "conundrum") to, of course, mucking about in other countries' currencies-including day trading-in the name of "reserve management."

Now, is Macro Man bitter because he's dropped some money on QE-coat-tailing trades? Yup. Does he wish that he were on the secret distribution list of the BRA* (Banana Republic of America)? Undoubtedly.

Yet there is a larger, slightly less selfish issue to what he is writing about today. In its most basic form, monetary policy is meant to influence the behaviour of economic actors. Virtually nobody outside of a few banks transact at central bank policy rates. But central banks change those rates in an attempt to influence other, market-based rates which do have a meaningful economic impact-bond yields, mortgage rates, etc. In a very real sense, while central banks adjust the sign posts, financial markets do the real work in changing monetary policy by moving market rates.

And yet when it comes to QE, Macro Man is hearing things like "the SNB wants to shake out a few longs before intervening again." What possible purpose does it serve to "punish" the very people who are supposed to make the policy work? While the SNB may be throwing a bone to the ECB by declaring that they don't actually want a weaker currency, it seems pretty clear that they do. Yet by submarining the market's positions, the SNB is creating a situation wherein any further intervention could be met with selling from relieved longs, rather than the sort of coat-tailing that would put EUR/CHF back to where it was a few months ago. Similarly, one wonders why the Fed would introduce unnecessary volatility in the back end of the yield curve by misleading the market with its statement a week ago.

To be clear, Macro Man is not asking for a handout or a tip-off, nor does he require one to make money these days a la Bill Gross. But by the same token, central banks should realize that the market is their ally in QE, not their enemy. Clear, unswerving policy and a total public committment to maintain it (even if you don't actually mean it) will render maximum effectiveness unto QE. Ambiguity and flip-flopping will put the relevant asset prices right back where they started, with the market further out of pocket, and the "nuclear option" exhausted and ineffective. Granted, that's been the inevtiable outcome of all previous policy initiatives since the crisis started. But it would be a pity to see a shock and awful outcome for the last policy bullet in the gun.

*The central purpose of which seems to be supporting a bunch of tits

28 comments:

Anonymous said...

It's been stunning to see how Short Sterling and Euribor term structures have steepened in recent sessions.

A good time to build up positions in my opinion...

AS.

Anonymous said...

MM, one of your best pieces todate!

Anonymous said...

I was on the wrong side of all of those trades, but none of the QE announcements shook me out. I just piled on more at better prices. So far, so good.

Anonymous said...

a certain bond fund in California was paying 30y swap spreads 15 minutes before the announcement yesterday. Seems like the market has been divided into the have's and have not's; those who have knowledge of whatever the plutocrats in DC are working on and those who don't. It's pretty unbelievable how pathetic their returns are despite their inside information and market impact trading strategies.

Macro Man said...

...hence the comment that they cannot make money without the inside info!

Anonymous said...

mm - i had eurchf on too. cut my position out of frustration.
they sent the first battalion in with no cover fire. Really poor follow through.


-mpm

Anonymous said...

Ditto Anon at 10:17am

MM you are not the only one frustrated at the apparent situation where those punting (presuming they are not privvy to the BRA leaks) on policy announcements get paid whilst those reacting to said policy get screwed.

It seems the optimal response to policy for the moment is to wait 30 mins then pile into the "wrong" side of trades.

Harry

MW said...

FWIW, I emailed the Fed to ask why they changed their tune on what part(s) of the curve they'd buy. No response as yet.

Macro Man said...

MW, if they revert, by all means pas on their feedback, either here or offline at the email address. cheers, MM

Anonymous said...

MM - I can't figure out whether what we are hearing from Obama and company is "Stop me if you've heard this one before" or "Bigmouth Strikes Again".

Anonymous said...

The casual observer might assume you are paranoid MM, but in the trenches we know better: a, to remain anonymous, "former" US Ibank buying Apr 9 .7000 Aud Calls in good size the day before FOMC at a premium in a massively offered market? Please. BNA indeed, soon to be summiting with Zimbabwe. Meritocracy is dead, long live cronyism.

lincoln said...

Must give props to MM as I used his long touted "merv the swerve" on a CNBC hit this morning.

Aside from the cutsy nature of name calling the point is rather salient - move the goal posts and lose the market participants.

Not quite save the cheerleader save the world - but ultimately more important

Anonymous said...

MM:

did you get my e-mail about your ACL? I sent you my experience with it. Never heard. Just wondering.

Macro Man said...

I read everything that is sent to me, and while I usually endeavour to reply to everything sometimes a backlog builds up and I never get caught up. (Usually when the mail falls off the first page of the Gmail inbox.) Recently, between the financial crisis, the knee, and the radio stations, I have been inundated with mail. I received a numnber of very helpful mails with respect to the knee; per the above, I endeavoured to reply to all of them. If I failed to reply to yours, I apologize; trust me, it wasn't because it wasn't appreciated.

thanks

Ian said...

Weird move in the dollar and gold before the new home sales numbers...Geithner's comments on SDRs?

Anonymous said...

what's going on with the dollar?

Anonymous said...

return of lloyd bentsen--as if fx was illiquid and vol enough before we decided we didn't know what our dollar policy is

Macro Man said...

Geithner was misquoted on Reuters as saying that he was open to China's SDR reserve currency proposal; in fact, he said he was open to expanding the pool of SDRs. Hard to know whether Geithner or Reuters was at fault for the misquotation, but someone please point him to the last paragraph of this post!

Damcanu said...

Merv the swerve - I wonder if the BoE governor will enter the Finance Hall of Fame ? (if there is one)

2001 - Mervyn Davies who was affectionately known as 'Merv the swerve' is the latest Welshman to be inducted into the International Rugby Hall of Fame.

The former Wales Capt. Davies, won 38 caps for his country and becomes the seventh Welshman honoured - more than any other nation.

Anonymous said...

MM - where are you seeing the misquotation? Certainly Reuters hasn't published any correction yet.
Cheers, Chris

Macro Man said...

I know a guy who knows a guy who was there.

Anonymous said...

Haha thanks. More evidence that it's not what you know but who...
Bloomberg still picking it up that Geithner said this. Perhaps he needs to take some lessons from the Greenspan school of making yourself unintelligible!
Chris

Macro Man said...

If you read the BBG headline carefully, all it says is that he is open to increasing the pool of SDRs....NOT that he is open to moving to a new reserve currency system, as the Reuters headline intimates.

hopefully anon said...

"to creating an undesired easing of monetary conditions in the West" is a purple herring. it's like blaming mcdonalds for obesity.

Anonymous said...

the fed bought it's first round of treasuries, and bid to cover was 'good'

many calling for tim's resignation after today, as he sent treasuries down

off topic- a 10 yr study by nat inst. of health and aarp realeased today concludes 'eat red meat you die of everything' stop red meat and improve:

9:30 Daily Red Meat Consumption Raises Death Risk - Study
WASHINGTON (AFP)--People who eat more red or processed meat have a higher risk of death from all causes including cancer, while a higher consumption of white meat reduces such risks, a decade-long U.S. study released Monday found.
The joint study begun in 1995
-deac

Macro Man said...

I guess we can blame Mickey D's then.....if you're willing to believe that it's actually meat in their burgers....

dogismyth said...

they're all crooks! It's that simple. Trying to fix this POS system is a waste of time. It needs to implode. I'd rather pick up the pieces with hope, then sit in despair and frustration for the rest of my life.

NEVER trust anything out of Reuters. Hasn't anyone figured that out yet? Look who owns Reuters.

Sasa said...

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