Yesterday was quite interesting insofar as US fixed income was generally weak despite the fact that equities were down pretty much all day (albeit closing on their highs of the day), oil was down, USD/JPY got marked lower, etc. Is this a sign of growing unease/expectation that the Fed will, if not take away the punch bowl, at least put the Everclear back in the liquor cabinet? Perhaps. Clearly some commentators, notably Goldman's Jan Hatzius, expect the FOMC to re-insert the "nearly balanced" reference to risks, ostensibly making June a live meeting.
While Macro Man concurs that June is likely to remain live, he is somewhat sceptical about using "nearly balanced" risks as a fingerpost to potential rate moves. For one thing, it is heavily redolent of Trichet's ECB, where "strong vigilance" was the watchword for a forthcoming rate hike. Needless to say, any behaviour that parrots the Trichet ECB is almost by definition suboptimal. Moreover, inserting and withdrawing the phrase as a "market timing" device could either hamper the Fed's flexibility or mislead the market, neither of which desirable (though the Fed has shown little compunction in doing the latter, it must be said.)
The divergence between equities and rates has been notable, however. For several months yields tracked the SPX with a slight lag...but over the last seven weeks or so a substantial gap has opened in the relationship. While it's easy to blame the March Fed announcement for the divergence (and that dovish release clearly exacerbated the divergence), the wedge between the two time series actually started at the beginning of March.
Over this time, oil is up some 25% or so...not exactly deflationary. Overall financial conditions are back to where they were before last August's China Syndrome, at least according to the GS index. Obviously the Fed will not totally disregard the risks of a re-tightening, but it does give them some leeway in terms of another step on the slow road to normalization.
What's slightly odd, however, is that the yield curve has been largely impervious to any change in financial conditions or Fed policy approach. It would have been a reasonable supposition that easier financial conditions plus an implicit "commitment to reflate" should have been a curve steepener...and yet here we are, with the curve largely as flat as it's been in this cycle.
Taking a step back, of course, it's hardly surprising that the curve should be flattening in the early stages of a tightening cycle...after all, that's pretty normal. Then again, this tightening cycle is far from normal. And the elephant in the room, of course, is the global grab for (positive) yield in the wake of NIRP-world in Europe and Japan.
In any event, punters need to mind the gap between rates and equities. Will it continue to widen as Spooz and Bloozers count their winnings, or willsanity normalcy resume, and with it a closure? For choice, Macro Man takes the latter view, though with a conviction level that can only be described as "modest."
While Macro Man concurs that June is likely to remain live, he is somewhat sceptical about using "nearly balanced" risks as a fingerpost to potential rate moves. For one thing, it is heavily redolent of Trichet's ECB, where "strong vigilance" was the watchword for a forthcoming rate hike. Needless to say, any behaviour that parrots the Trichet ECB is almost by definition suboptimal. Moreover, inserting and withdrawing the phrase as a "market timing" device could either hamper the Fed's flexibility or mislead the market, neither of which desirable (though the Fed has shown little compunction in doing the latter, it must be said.)
The divergence between equities and rates has been notable, however. For several months yields tracked the SPX with a slight lag...but over the last seven weeks or so a substantial gap has opened in the relationship. While it's easy to blame the March Fed announcement for the divergence (and that dovish release clearly exacerbated the divergence), the wedge between the two time series actually started at the beginning of March.
What's slightly odd, however, is that the yield curve has been largely impervious to any change in financial conditions or Fed policy approach. It would have been a reasonable supposition that easier financial conditions plus an implicit "commitment to reflate" should have been a curve steepener...and yet here we are, with the curve largely as flat as it's been in this cycle.
Taking a step back, of course, it's hardly surprising that the curve should be flattening in the early stages of a tightening cycle...after all, that's pretty normal. Then again, this tightening cycle is far from normal. And the elephant in the room, of course, is the global grab for (positive) yield in the wake of NIRP-world in Europe and Japan.
In any event, punters need to mind the gap between rates and equities. Will it continue to widen as Spooz and Bloozers count their winnings, or will
37 comments
Click here for commentsexcellent stuff as always.
ReplyMM, I'm just wondering. how do you keep track of all of this? you seem to look at everything. rates, FX, equities, commodities, exotic stuff like dividend futures as well as all the interdependencies. it's lots to look at. do you have one gigantic Bloomberg Excel sheet and flip through the charts or how does it work? or is it just from reading and chatting to colleagues you get your inspirations from?
Henner - That s like asking a grand master chess player how he knows where all the pieces are.
ReplyEven MM is human. There must be some kind of trick to it 😊
ReplyIs he? The whole thing about boarding a plane and so on might just be a neat trick.
ReplyMaybe MM never came back, maybe TMM is still in charge :D
ReplyThe way I see it is, Janet is with China, has put ECB on a leash, and will send a very clear signal to Japan... Fall in line or I will crush you.
ReplyEverything else is secondary.
Skr - Janet having Mario on a leash... thats some disturbing imagery right there
ReplyThe Fed wants to be transparent, unlike the verbose Greenspan days of yore for those old enough to remember. But they also dont want to panic the markets and they want to go (in this case hike) only when its fully priced in. Seems like a contradiction to me, especially when the market has historically understated Fed hikes going back many cycles and when you have a cacophony of Fed members (some voting and some not) singing a different every other weeke (Bullard). Seems like a set up for sub-optimal results...and in today's markets its not Fed Funds that really matters, its the rambunctious FX markets that you have to worry about
ReplyLakshman Achuthan had a nice article in Maudlin's outside the box last week, saying the Dec Fed hike maybe like ECB in 2011 or BoJ in 2006...also had some interesting thoughts on Productivity. Worth a read if you like that kinda stuff.
Ah....reading MM back in Trichet-bashing mode almost makes me feel young again. Almost.
Reply"Obviously the Fed will not totally disregard the risks of a re-tightening, but it does give them some leeway in terms of another step on the slow road to normalization."
Well, perhaps. Assuming there can ever be 'leeway' in a game of chicken.
What are the range of outcomes that encompass "normalisation" (not just interest rates).
ReplyAllow me to explain what's happening in Central Bank Land. Politicians (or at least those in the treasury depts) and Central Bankers are greatly concerned by current demographics.
ReplyAs most people are aware, we have a retiring 'boomer' generation in developed markets, and this peaking in demographics was preceded by a large debt buildup (brought forward demand, to substitute for declining work-force GDP growth). To avert a financial crisis, and then to prop up asset prices, ZIRP/QE etc was used. Asset prices must remain supported or this entire generation will see their retirement investments/home equity destroyed. This is not politically acceptable.
However, one (of many) problems with these monetary policies is that it can lead to beggar thy neighbor situations; thus you see semi-coordinated efforts by G10 central banks in pursuing said policies.
To quote ex-chair Bernanke, we will not see a normalization of rates in our lifetimes. This statement provides you with an approximate timescale that we would expect these policies to continue. There will of course be large dislocations in financial markets due to ZIRP/QE and their later withdrawal. The debt problem also remains.
These latter issues can be dealt with by extending maturities of relevant fixed income securities and the achievement (or overshoot) of 2%+ inflation targets over the above timeline, both of which will reduce debt to manageable levels. Also bear in mind that as the 'boomer' generation recedes into further old age, assets will be passed to younger generations (and taxed), providing a re-balancing effect.
Retiring generations and the need to save results in the thrift paradox. Savings are devalued by the competitive nature of them. they ultimately need to buy services but someone still has to be around to provide the service. If service supply drops because everyone has retired or is on holiday then price of services goes up and those savings have to compete for them.
Replythe savings game is an arms race where we are competing with each other. You may have savings that you think will be ok to get you through, but much like the joke about the two fellows, the one pair of training shoes and the lion, you don't have to beat the lion you have to beat the guy next to you because the guy with the least savings will end up having to supply the services to the one with the most. Basically the value of savings is comparative not absolute.
Now as we are talking about bonds and gaps in equity/bond spreads. the Q is which flinches. Naturally you'd expect both as if bond yields rise it undermines the value of stocks. But if its a calamity lead closure then stocks fall. Or a growth/inflation lead closure then bonds fall catch up. So we are basically back to square one with respect to bipolar beliefs of disaster vs OKness.
Now then .. MM.. there is a golden rule for all us old lags, never short JGBs - there has only ever been one macro trader I know to have made money shorting them, and that was because he was quick. However, I may be tempted to look at Japan steepening and try to short 30yr JGBs. I know this sounds fool hardy and rash but I have some cash to burn against recent USDJPY and Nikkei successes so .. What do you think ?
"However, I may be tempted to look at Japan steepening and try to short 30yr JGBs"
ReplyI think it is a winner, for what it is worth. Do it! It won't be the big "reset" short, but will make a few quid when it reverses. And, it ... will ... reverse. Count on it.
@CB thx that makes sense - I do wonder sometimes why everyone assumes that just because such and such is the only politically acceptable outcome, that therefore it must come true as a matter of course. Plenty to upset the applecart you know…
ReplyI also feel that the idea that we borrowed a bunch of real growth and asset inflation from the future and it may be a long time before productivity, earnings, and demographics catch up with it will slowly become mainstream. Once its taken for granted that trickle down is passe because there is nothing left to trickle down, focus would then shift to making sure the spoils are now distributed back through wages, tax policy, and re-regulation - we are in the first or second innings of that movement.
Janet will not raise until Dec out of her own interest in self-preservation before the election. All this "balance of risk" talk is just a sideshow.
ReplyChina's got the same issue with their political transition next year.
Everyone "knows" that the price action in commods was just short covering and that the dollar will resume it's upward trajectory, maybe. But to me the setup is more in line with albeit temporary burst of inflation.
The last two times monetary policy was held on the easy side resulted in historic bubbles. Sure things arent cheap and their are pockets of irrational exuberance, but show me the asset class that is trading at retarded levels. It doesnt exist yet, so as uncomfortable as it may seem I think we get a final leg higher.
Not only did Durable Goods miss by a mile in March but they revised that abysmal -3% even worse in Feb ; same with Cap Goods Ex Air
ReplyBloomy only takes $PG revs back to 2006 .... the revs just out are lowest in last 10yrs and they plunged 13% YoY . EPS the worst since 2009. Revenues & EPS just collapsing
Here's a simple explanation of what's going on now, though the author has missed MM's gap:
Replyhttps://www.briefing.com/investor/our-view/the-big-picture/from-dollar-daze-to-dollar-days.htm
Rossmorguy
@Rossmorguy
Replymakes sense as earnings have been dropping but stocks rose anyway.
But Spoos has been falling back from the 2100 level all last year, seems huge resistance there
Since we're setting down 10,000 foot views here (CB, Polemic), I thought I'd put down my own. Happy to see it taken it apart by your comments as I'm sure parts/all of it are flawed or worse:
ReplyThe Fed targeted 2% inflation against a backdrop of deflation emanating from EM the past few decades. Consequently, policy was too loose and credit growth far outpaced economic growth and total debt/GDP went from ~150% to ~350%. Now rates *must* be low because materially higher interest expense would cause defaults throughout this higher-levered economy. For rates to eventually go higher, we need a Dalio-esque "beautiful de-leveraging" scenario to play out (a pickup in productivity would really help). Another possibly benign scenario of higher rates would follow a one-off part monetization of debts so debt/GDP falls back to a less fragile level, ideally coupled with the Fed changing to a credit-to-GDP targeting goal instead of an inflation targeting one so we don't get into this mess again. Those are my good scenarios. As we wait for a productivity lift or some decisive policy, we could have another shock or some gestalt shift that causes solvency risk to get materially repriced and then we go down the rabbit hole ....
Agree with CB. Though I also do think that supporting and driving housing prices up as a presumed source of "growth" is a dead end, since by themselves things associated with housing aren't drivers of activity, excluding one off construction and renovation events. Which are very narrow sectors and this spending to living costs is void from other types of potential spending producing more residual economic activity. So to me housing looks more like a black hole with a one off effect, ultimately turning into a drag.
ReplyBut I do agree they have no choice, since it seems in DM housing costs have historically grabbed a continuously larger share of income, while incomes have remained relatively stagnant. It must be supported, as housing hence makes up a larger portion of personal wealth and mortgages make up a larger portion of bank assets. To me the growing "importance" of housing is a synonym for lack of aggregate demand growth in other areas.
Obviously this plan is expanding to all kinds of assets. Old holders get flushed out of these assets through lower yields and a lot of household and fund cash gets released. Which will then do what exactly? People don't need to buy more more clothes, food, cars or washing machines. If they did, they'd have less excess income than they currently have. On an even longer term I expect CBs and governments to get closer together and hence government to own more of this stuff which are cornerstones of the free market economy, which might ultimately lead to unfortunate events such as communism and the destruction of the free market system which the DM economies today claim to be defending. Like shooting a tranquilizer dart in the elephant: lo-and-behold when it's unable to react to anything anymore, as can probably be already witnessed in government bond yields not reacting to inflation prospects today at least partially. Sweden, Switzerland, Denmark etc. seem to be the pioneers in this but other DM areas are close behind, as they all have the same demographic problems as CB said.
The unfortunate effect of dragging demand forward with increasing debt much faster than income is that we might actually have to live in very low demand growth for a long time. The system is already so sedated that increasing debt will have negligible effects on growth at best, excluding the possibility of helicopter (=free of charge) money. Remember even this growth since the last financial crisis is achieved with magnitudes of debt never seen before. I wonder what happens in case should the growth rate of debt begin to actually fall, considering even this anemic growth since 2008 is achieved under the "best case" scenario?
Check out the Cleveland Fed Financial Stress Index relative to the Goldman version. Cleveland still shows us on the brink.
Reply@Anon 2:53, wow that $PG report is no picnic on the outlook either.
Reply"P&G noted that fourth quarter Core EPS is expected to be significantly lower than prior year due to a combination of increased advertising investments, a higher tax rate, headwinds from foreign exchange and lower non-operating income."
Monetary policy as practiced over the past few decades has been about asset prices and credit growth. That was fine when asset prices were low (1982) and when credit was useful because investment was needed (post WW2 Europe, post-Mao China, etc.). But, it has run its course. Ratcheting down rates eventually leads to overcapacity and more income going to those with a lower propensity to consume. In short, it leads to a lack of demand.
ReplyI wish central bankers would push for a change. To use tools that promote the growth of income and not asset prices and credit. What if the Fed reaffirmed a 2% inflation target and committed to:
1) Raise rates back to 2% over a few quarters/years.
2) Stop the overuse of QE programs but affirm that they will use them briefly in periods of market panic
3) Use helicopter money as the primary tool for policy when easing is required and rates are at 2%
My preferred version of helicopter money is the issuance of debit cards to every social security number. The debit cards would have an expiration date. The debit cards would be a liability on the Fed balance sheet that cannot be reversed (they would create cash to balance out their balance sheet).
It seems to me that you could hold cash rates much higher while issuing helicopter money. To me this policy seems less distortive than the status quo. But, I am sure it also has its issues.
Oh well, back to reality. I do think helicopter money will be attempted by a major central bank during the next significant recession.
@Corey:
ReplyI think Dame Yellen has wanted to raise rates since last summer. But the Chinese and energy markets have foiled her plans. After the swift recovery in both stocks and oil since February, I see no reason for Yellen to continue the dovish dance.
I think Dame Yellen tilts somewhat hawkish by leaving June on the table for a rate hike. She has to balance the political consequences in America vs the slow-but-steady American economy vs the slowing Chinese economy vs DXY/energy/emerging markets.
There was reason in March to sound dovish. That was many S&P points ago. There is no reason right now. I think she plays her cards close, but says that markets have recovered and are continuing to recover.
Should she tilt hawkish, then short EM might be the cleanest trade for a bit of walking around money.
I too would love more about MM's process, the actual nuts and bolts of how he does things ... those posts are always my favorite
Reply@AB:
ReplyI would assume that the BoJ has Bernanke on retainer at this point. Of course you've read the Bernank's 2002 deflation speech. It had a bit about Japan: "Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has."
The Bernank is convinced he can cure Japan. So yeah - facing another recession, helicopter money will arrive in Japan.
Why Yellen does what she does...(she is being led around by her nose...she has no choice)
Reply"Moreover, once one principal player begins to compete with a new and terrible weapon...i.e. negative interest rates in monetary policy, then all principal players must adopt those tactics or lose the game. "
"The ECB took a page from the Bank of Japan’s playbook and announced that they would now buy non-bank investment grade corporate credit as part of their QE asset purchases, and that’s at least as big of a deal as the BOJ taking a page from the ECB playbook in January and adopting negative interest rates. When two of the Big 4 adopt any policy, a point becomes a line and an idiosyncrasy becomes a pattern. The direct purchase of corporate securities by central banks is now in the official tool kit of every central bank. You cannot un-ring this bell. It is a “Goodfellas moment” of enormous consequence."
http://www.salientpartners.com/epsilon-theory/hobsons-choice/
Peak central bank masking the rot in the financial markets, the economy and massive soverign debt and giving those who are clued in and watchful, an opportunity to make a lot of money. That's the hand being dealt right now.
Helicopter money?! It wont work - consumer behavior has changed - they would just use it to pay down debt. They'd be better off buying the goods direct themselves via newly created money and then distributing them to the populace. Or better yet, buy a bunch of stuff with newly created money and then pile it up and set it aflame. They can start by buying the bombed out properties in Detroit and Baltimore at par. Helps the banks and beautifies the neighborhood.
ReplyReally these jackasses could do a lot better if for the next round they sell some T-bonds and steepen the curve so banks can make a little money.
Just remember, monetary policy is not a panacea. It's only short term until the fiscal stimulus kicks in... Well I dont know where everyone else is sitting, but from my view the chasm btw the politicos in this country is only growing wider.
So take your pick here is an abbreviated list for reasons why rates arent going up in June; PG earnings, S&P not at all time highs, not enough inflation, oil is too high, oil is too low, earnings contracting, weather, too much pollen in the air, whatever.
Hey, I've got an idea for how to get productivity back up, everyone stop wasting their time trying to figure what the Fed is going to do! Sorry to be so ridiculous today, I'm thinking of changing careers to grocery bagger just so I can get a shred of sanity back in my life.
@Corey:
ReplyI don't yet have an opinion on whether they will hike or stand pat in June. I just think tomorrow will tilt a bit hawkish.
It is not worth debating the merits of central bank policy anymore. We live in their world have to play by their rules. The hall of mirrors that is our financial reality is a surprisingly resilient system.
Frankly the most therapeutic solution I've discovered to the madness is setting fitness goals that are tough but within my reach. I get a sense of peace afterwards that is unmatched.
Good luck to you.
Lol, thanks for the advice, going to give that some serious consideration.
ReplyOn Fed, yes, if they continue the recent pattern of surprises alternating between hawkish and dovish then it seems like a good possibility. I would take the opposite view regarding MM's "balanced risks" and think it will be a pretty benign stmt, leaving many questions unanswered if one is still to believe that June is actually on the table, but I would add my conviction in this is pretty modest.
Tim Cook is apparently not Steve Jobs...
ReplyA really bad report from the #1 tech company...at best these results could be called running in place...let's hope they have something on the back burner for next quarter.
BnT they don't. Predictions are poor. That's poor Goog, Msft and Apple now.
ReplyYes, folks. More earnings misses from Jumbo Tech, more weakness in FANGs and silly shit like TWTR. AAPL is especially important at this juncture. The longs who want to sell AAPL tomorrow (and remember ownership is widespread) are going to drag down the Spoos and the Qs, and b/c of AAPL's participation in the index ETFs, stops will be hit in the SPY and the QQQ, meaning there will then be more selling of AAPL. Selling begets selling, as they say. Now we might add the possibility of a slightly Hawkish Tilt from Dame Janet, meaning even La Paloma Blanca may not show up to save the JBTFDers.
ReplyWe added to our dollar long positions today, and to our US equity, and crude oil shorts. We are also short AUDUSD and CADUSD, and the GDX. In periods of forced liquidation everything of a reflationary flavor will get sold and turned into dollars and/or yen. Better bar the door, Katie, there's a Bear there, and he's knocking.... we might just be about to see not only volatility but a little bit of verticality, something we haven't seen in these markets for quite a while. We have some deep OTM June puts, but a big dump could be upon us as soon as May. Once the selling starts in earnest, the reasons for the drop in the market will no longer matter. When you are losing your shirt, your shoes and your pants, then you don't need a narrative.
Or... Apple buys the shit out of it's own stock tomorrow, and Janet whispers sweet nothings to anyone listening.
ReplyCalm down with the "JBTFD is doomed". We're at the top of a stupidly vertical rally in spooz, there is going to be some re-tracement, this is natural. Personally I'd love for spooz to fall back heavily so I can buy them all before the next major leg up.
Reply"Helicopter money?! It wont work - consumer behavior has changed - they would just use it to pay down debt. They'd be better off buying the goods direct themselves via newly created money and then distributing them to the populace. Or better yet, buy a bunch of stuff with newly created money and then pile it up and set it aflame. They can start by buying the bombed out properties in Detroit and Baltimore at par. Helps the banks and beautifies the neighborhood."
ReplyAgree but this looks more like fiscal policy and in the realm of Congress stepping up and actually implement some fiscal expansion. But don't hold your breath.
Fiscal policy MIA since the stimlous during the crises. Hence monetary policy streched to make do. But you can only strech a rubber band so far.
LB,
ReplyOZ CPI just shit the bed