We’re clearly going to have to be out on the hunt for a new TMMism regarding a Bernankage – good thing that “Yellenage” also works and even sounds nice, coincidentally rhyming with mileage as in “what’s the mileage from Yellenage”? Well just as you thought that TMMisms were already getting heavy, we got another wake-up call from Plosser the Tosser this morning – more on this shortly. Everyone been portraying JY as the über-dove for ages and here she goes bazooking away the FF’s curve:
Now one thing that piqued TMM is Yellen’s assertion that interest rates aren’t seen as potentially rising before a “considerable time” after the end of asset purchases. Now we’re going to throw a curveball here and say that there’s no way Yellen necessarily meant six months in saying that. Asset purchases should have ended by the end of October according to Fisher yet the economy should have picked up some steam which means that even accounting for the fact that the six month rule might be correct, TMM sees considerable upside potential to the FF's short-end. Let us not forget that the current level of Fed funds is 0% TO (note the notion of a BAND here) 0.25% while overnight implied is now 0.08%. In other words, you could already see that drift higher well ahead of the 0.25% level implied for March 2015 by FF. In fact, March 2015 could well be when the FOMC first hikes by 25bps. Returning to Plosser the Tosser, his comment earlier on that we’re likely to see FDTR at 4% in 2016 would basically set us up for 50bps clips of rate rises starting next March – rather than the 25bps increments currently priced in. In TMM’s view, this has the potential to see a number of things move higher in rates: 1y5y swaptions (below) – and any rates-related vol generally (see one of TMM’s measures (z-score based) below also):
An interesting other curveball that TMM is keeping a close watch on is Turkey. Obviously we’ve all been seeing how Erdogan is helping curtail the EPS (?!) generated by Twitter. That said, there’s a further Troika-related issue round the corner. TRY continues to grind lower vs. USD while local real rates should keep rising – again, not the ideal predicament for a country like Turkey which suffers from one of the ailments that TMM (in a preceding life) had highlighted last June. Chart courtesy of the US ex-investment bank:
Now the curveball nature of this particular elephant is fairly simple. As some TMMers may have read, the biggest creditors of the Turkish corporate sector are…the Greek banks (see below, courtesy of CS):
So while the EU may have happily been brushing aside the issue of seriously engaging talks with Turkey on some sort of trade agreement, the EU/Troika could thus happily find themselves in the position of having to bail out Greece yet again. But this time, the bailout would effectively be one of the Turkish corporates. And herein lies the third curveball: Grexit come dark hole come final resoluto-conflagration of the EU governance disaster. TMM is acutely aware of the fact that this sounds like a distinctly catastrophic scenario but the non-“dive into your bunker” outcome of this all really boils down to 1) flatteners/long vol in the US belly, 2) higher USD still vs. EM and more broadly speaking G10 and 3) watch Turkey – bigger turkey than you think.