Authored by Wolf Richter via WolfStreet.com, The fate of asset bubbles under the new regime. Everyone is hoping that next Friday and Saturday, at Sotheby’s auction in Monterey, California, the global asset class of collector cars will finally pull out of their ugly funk that nearly matches that during the Financial Crisis. “Hope” is the right word. Because reality has already curdled. Sotheby’s brims with hope and flair: Every August, the collector car world gathers to the Monterey Peninsula to see the magnificent roster of best-of-category and stunning rare automobiles that RM Sotheby’s has to offer. For over 30 years, it has been the pinnacle of collector car auctions and is known for setting new auction benchmarks with outstanding sales results. This asset class of beautiful machines – ranging in price from a 1962 Ferrari 250 GTO Berlinetta that sold for $38.1 million in 2014 to classic American muscle cars that can be bought for a few thousand dollars – is in trouble. The index for collector car prices in the August report by Hagerty, which specializes in insuring vintage automobiles, fell 1.0 point to 157.42. The index is now down 8% year-over-year, and down 15%, or 28.4 points, from its all-time high in August 2015 (186). Unlike stock market indices, the Hagerty Market Index is adjusted for inflation via the Consumer Price Index. So these are “real” changes in price levels. The index has now fallen nearly 7 points below the level of August 2014. That was three years ago! In fact, the index is now at the lowest level since March 2014. The chart below from Hagerty’s August report shows how the index surged 83% on an inflation-adjusted basis from August 2009 to its peak in September 2015, and how it has since given up one-third of those gains. This is what the inflation and deflation of an asset bubble looks like (I added the dates): During the Financial-Crisis, the index peaked in April 2008 at 121.0, then plunged 16% (20 points) to bottom out in August 2009 at 101.39. By then, the liquidity from the Fed’s zero-interest-rate policy and QE was washing across the world, and all asset prices began to soar. The current drop of 15% from the peak in “real” terms is just below the 16% drop during the Financial Crisis. But the current 28.4-point-drop from the peak exceeds the 20-point drop during the Financial Crisis. Concerning the current market, the Hagerty report added: While the auction activity section of the rating had been kept strong by increases in the number of cars sold at auction so far this year, the trend hasn’t continued and auction activity decreased for the second consecutive month thanks to a 2% drop in the number of cars sold compared to last month. Private sales activity also experienced its second consecutive decrease, again thanks to a small drop in the average sale price as well as a small drop in the number of vehicles selling for above their insured values. The number of owners expressing the belief that the values of their vehicles are increasing continues to gradually decline, and this is true for the owners of both mainstream and high-end vehicles. The drop is particularly pronounced, however, for owners of previously hot models like the Ferrari 308 and Ford GT. For the second month in a row, expert sentiment dropped more than any other section. The asset class of vintage automobiles was among the first bubbles to pop. This didn’t happen in one fell swoop. It’s a gradual process that started in the fall of 2015, and observers brushed it off because it was just a minor down tick as so many before. But since then, it has become relentless and persistent, with plenty of ups and downs. Every expression of hope that it would end soon has been frustrated along the way. And every day, there’s still hope. For example, back in May, the Hagerty report commented that “prices have started to normalize.” Since then, the index has continued its methodical decline. This may be what asset class deflation looks like under the new regime. There will be talk of “plateauing,” as is currently the case in commercial real estate. Then there will be talk of prices “normalizing,” as is the case in collector cars. Then there will be talk of “buying opportunities,” and so on. And there are ups and downs, and this may drag on for years. But month after month, buyers of vintage cars become a little less enthusiastic and sellers a little more eager. Yet, unlike during the Financial Crisis, there are no signs of panic. The tsunami of liquidity is as powerful as before. Financial conditions are easier than they were a year ago. There’s no forced selling. Just an orderly one-step-at-a-time asset bubble deflation. Now the Fed is tightening. QE ended about the time the classic car bubble peaked. The Fed has raised its target for the federal funds rate four times so far in this cycle. It will likely announce the QE unwind in September and “another rate hike later this year,” New York Fed president William Dudley told the AP. And the below-target inflation is not a problem. Read… Fed’s Dudley Drops Bombshell: Low Inflation “Actually Might Be a Good Thing”
It should be crystal clear to everyone that after 10 years of the most accommodative monetary policy in the worlds history the bond market is significantly overpriced. The bond market still has little to no yield (negative yields in some countries) to offset the abundance of risks – liquidity, duration and spread risks to name a couple. After 10 years, there are managers and firms whose success is in large part to risks taken in one trade – to be long fixed income and front run central bank policies. But someone forgot to tell them this trade is over. Large balance sheets continue to trade the bond market in a monopolistic, high volume basis hoping for some large issues to drive yields lower and generate pricing gains to offset such limited yields. If investors are hoping for an economic slowdown, lower levels of inflation, geopolitical risk or even a government shutdown to help drive yields, maybe they shouldn’t be in the trade to begin with. These are the bigger fool theory motivators to lower yields. Yields are now lower than prior cycles of recession, depression, war or pretty much any other risk this country has ever experienced. You can experience any and all of these risks and still have a probability yields shoot higher, not lower. But some say inflation is slowing down and that must be good for bonds. Normally bonds trade 200 to 300 basis points – or 2 to 3% above the level of inflation. Since inflation is currently around 2%, inflation has to go to -1% to bring bonds somewhat close to fair value. With health care and housing costs jumping and expected to continue to show above average price increases, the chances of deflation – even with all the lower biased adjustments our inflation statistics go through – is minimal. Comically, others say the debt ceiling debate is a source of volatility so own bonds for the flight to quality trade. So we reach our debt ceiling and have difficulties paying our bills – and that’s good for bonds??? It’s apparent that the Fed and other notable officials see the potential of a bond bubble deflating rapidly and the potential impact on the real economy. They have been trying to deflate it slowly by adjusting the Fed Funds rate off of zero and announcing a reduction in accumulated balance sheet. This week, the NY Federal Reserve President William Dudley said that he expects another Federal Funds rate increase this year. And Alan Greenspan, the former Federal Reserve chairman, has continued to express the risks to the markets from the bond bubble that has not corrected. Sadly, bonds have yet to respond. Should the Fed be doing more to prepare the markets? They talked and manipulated yields lower with unprecedented Fed policy. Should they have been doing the opposite years ago when the systemic risks were corrected? The Fed wants to be the life of the party, but not the chaperone. Since they have refused to take the punchbowl away from the party in a reasonable amount of time, the hangover is going to be a bad one this time. by Michael Carino, Greenwich Endeavors, 8/16/17 Michael Carino is the CEO of Greenwich Endeavors, a financial service firm, and has been a fund manager and owner for more than 20 years. He has positions that benefit from a normalized bond market and higher yield
One day after the 5th consecutive miss in US CPI, NY Fed President William Dudley threw currency and eurodollar traders for another loop when he said on Monday that it was not "unreasonable" to think that the central bank would begin trimming its balance sheet in September and sees another rate hike this year - supposedly in December - should economic data hold up, ignoring the message sent from monthly inflation reports. In an interview with the AP, Dudely warned that "the expectations of market participants are unreasonable," when asked if the expectation of the Fed reducing its bond holdings in September was accurate. The news sent the dollar and yields higher, pushing the 10Y from 2.2050% briefly to 2.2230%, although the move was subsequently faded. The news also sent December rate hike odds modestly higher on the day, up to 33% from 25% earlier, after Dudley said that he expects another rate rise as long as economic data meets his expectations. "I would expect — I would be in favor of doing another rate hike later this year." Despite the lack of inflation, Dudley expanded "my outlook for the economy hasn't changed materially since the beginning of the year. Continue to look for growths around 2%, slightly above trend, growth sufficient to continue to tighten the labor market. I did not raise my growth forecast after the Election because of the prospect of fiscal stimulus because I felt that there was a lot of uncertainty about how big it would be, what its composition would be, and when it would actually take effect. So, I always viewed it as a risk to the forecast. In other words, an upside risk to the forecast, but I never put it into my baseline forecast." Pressed on inflation, the NY Fed president said "the reason why inflation won't get up to 2% very quickly on a year-over-year basis is because we've had these very low inflation readings over the last 4 or 5 months. So it's going to take time for those to sort of drop out of the year-over-year calculation." "Now the reason why I think you'd want to continue to gradually remove monetary policy accommodation, even with inflation somewhat below target, is that 1) monetary policy is still accommodative, so the level of short-term rates is pretty low, and 2) and this is probably even more important, financial conditions have been easing rather than tightening. So despite the fact that we've raised short-term interest rates, financial conditions are easier today than they were a year ago." Some more highlights from his interview transcript, courtesy of Bloomberg: "The stock market's up, credit spreads have narrowed, the dollar has weakened, and those have more than offset the effects of somewhat higher short-term rates and the very modest increases that we've seen in longer-term yields." On December hike odds, Dudley said that "If it (data) evolves in line with my expectations, I would expect -- I would be in favor of doing another rate hike later this year." "I think that if the economy continues to grow above trend, and the labor market continues to tighten, I do think we'll get to the point where that will lead to higher wages and that will show up in terms of higher inflation." "Now, the question is at what level of the unemployment rate will that all take place? So, if there are these secular forces that are pushing inflation lower, perhaps we can actually go to a somewhat lower unemployment rate. I would actually view -- rather than people wringing their hands that this is so awful that inflation is low, it actually might be a good thing because it could allow you to run the economy at a little bit higher level of resource utilization, which I think ... people get employed, they get job skills, they'd be able to build their human capital over time. (00:07:29) The productive capacity of the US economy would be greater -- all those things would be good things." There was also the amusing, token take on the stock market as reflective of the current state of the economy: "My own view is that -- I'm not particularly concerned about where our asset prices are today for a couple of reasons. The main one is that I think that the asset prices are pretty consistent with what we're seeing in terms of the actual performance of the economy." Which of course, is a "fake news": Dudley also spoke on balance sheet reduction: "And second of all, we can obviously announce the start of the program but delay the actual start date. So I think that -- I don't think the debt limit will have big impact on our decision about whether to start or not start the balance sheet normalization process... It's one of the reasons why the reinvestment process, phasing that down, is going to happen very gradually, that we're not just going to stop abruptly because we want to make sure that the adjustments are small, the model is gentle, and don't have a big consequence for financial statements.So far I would say that the market reaction has been extraordinarily mild. As expectations have gone from relatively low probability that we're going to start this to a very high probability that we're going to start this relatively soon. And so that makes me more confident that when we start, it's not going to have a big consequence for financial statements." Finally, on whether Gary Cohn will replace Janet Yellen: "I don't want to evaluate the various candidates for the Federal Reserve, except to say that I think Gary is a reasonable candidate. He knows a lot about financial markets. He knows lots about the financial system. I don't think you have to have a PhD in Economics, which I have, to be a Chair of the Fed or Governor or a President of one of the Federal Reserve Banks."
The global rout resulting from tensions over the North Korean nuclear standoff continued on Friday as world stocks tumbled for the fourth day, on course for their worst week since November following a third day of escalating verbal exchanges between Trump and Kim, as European and Asian shares tumlbed, volatility spiked, and the selloff in US futures continued albeit at a more modest pace as the escalating war of words over North Korea drove investors on Friday to safe havens such as the yen, Swiss franc and gold. In addition to North Korea, attention will be closely focused on today's US CPI print, which could result in even more currency volatility, should it surprise significantly in either direction. "What has changed this time is that the scary threats and war of words between the U.S. and North Korea have intensified to the point that markets can't ignore it," said Shane Oliver, head of investment strategy at AMP Capital in Sydney. "Of course, it's all come at a time when share markets are due for a correction, so North Korea has provided a perfect trigger." All eyes remained on the sharp short squeeze in the VIX, which exploded more than 50% above 16 on Thursday from single digits the day before - the highest print since Trump's election victory - and extended gains on Friday rising nearly 5% to 16.80, after briefly topping 17, a potential "margin calling" nightmare for countless vol sellers over the past year. Thursday also saw the highest VIX volume day on record as 937K VIX futures traded across the curve. The Global Financial Stress Indicator surged positive after trading in negative territory since April. The global rout that sent the Nasdaq lower by 2% on Thursday, spread to China which saw the Shanghai Composite tumble by 1.6% to 3,208, its biggest drop this year, led by mining and resource stocks, with nearly 20 names halted limit down, after Chinese metals prices tumbled by 5%. The Chinese volatility index jumped by the most since January 2016 to its highest level in more than seven months. While there wasn't a specific catalyst for the rout, a driver for the sharp commodity selling was the announcement by the China Steel Industry Association which said the recent surge in steel futures was not due to market demand but misunderstanding by some institutions. Adding fuel to the fire was a Reuters report that the Shanghai Futures Exchange told its members it may raise margins on steel rebar contracts if market trade volume is too large. As a result, metals also led declines on the mainland CSI 300 Index: Xiamen Tungsten slides as much as 9.3%, most intraday since September; Jiangxi Copper falls as much as 8.3%; China Molybdenum slips as much as 7.7%; the Bloomberg China Steel Producers Valuation Peers Index tumbled 5.9%, with Nanjing Iron & Steel, Maanshan Iron & Steel, Angang Steel dropping at least 6.9%. "Chinese investors locked in profits on commodity shares following strong gains which had been driven by bets that capacity cuts would boost prices", said Helen Lau, Hong Kong-based analyst with Argonaut Securities. "Stock markets are in a risk-off mode due to escalating geopolitical risks, so recent outperformers would be the first to take a hit amid a selloff." In HK trading Aluminum Corp. of China tumbles as much as 7.4%, the biggest intraday drop since February 2016, while China Shenhua Energy dropped as much as 4.8%, among the worst performers on Hang Seng Index. Also hurting Chinese sentiment was the plunge in Tencent, with the Chinese tech giant dropping as much as 5% in Hong Kong, its biggest intraday decline in more than a month, following news of a Chinese probe into Tencent, Sina and Baidu for cyber-security law violations. Stocks of related tech companies were all lower with Sina down 3%, Weibo down 4.5%, and Baidu down 2.5%. Earlier in the session, the onshore Chinese yuan dropped as much as 0.43% vs USD to 6.7080, its biggest drop since Jan. 19, after the PBOC set the fixing at a weaker level than expected. As Bloomberg reported overnight, the PBOC strengthened fixing by 0.19% to 6.66420, compared with forecasts of 6.6477 from Commerzbank, 6.6552 from Mizuho Bank, 6.6559 from Scotiabank and 6.6549 from Nomura. At the same time, the offshore yuan dropped as much as 0.28% to 6.6853, most since June 26, although putting the drop in context, just one day earlier, the CNY rose to its strongest level since August 2016 on Thursday, prompting Bloomberg to call the Yuan the new "safe haven" currency. Elsewhere in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan had skidded 1.55 percent, its biggest one-day loss since mid-December, to leave it down 2.5 percent for the week. Australia’s S&P/ASX 200 Index fell 1.2 percent at the close in Sydney. The Hang Seng Index in Hong Kong tumbled 2 percent and China’s Shanghai Composite Index was down 1.6 percent. The Japanese yen rose 0.2 percent to 108.96 per dollar, the strongest in more than 15 weeks. Japanese markets are closed for the Mountain Day public holiday. South Korea's KOSPI fell 1.8 percent to an 11-1/2-week low, but its losses for the week are a relatively modest 3.2 percent; volatility on the Kospi 200 surged as much as 27 percent. "Pretty remarkable, perhaps even extraordinary, considering," said fund manager BlueBay strategist Tim Ash. The Korean won also continued to skid, down 0.45 percent to 1,147.2, falling below its 200-day moving average for the first time in a month. European markets continued sliding into risk-off mode although at a slower pace; even so Europe's where regional indices were set for the worst week of losses this year as sentiment on ongoing fears about escalation between the US and North Korea. Euro zone volatility jumped to the highest since April, when France's election was rattling the region. Weakness has been seen across the board (Eurostoxx 600 -1.0%), however mining names have notably underperforming amid Chinese metal prices slumping by some 5% overnight. The iTraxx Crossover extended its recent widening, leading sentiment as hedges are placed into the weekend. European equity markets opened lower led by mining sector, as base metals sell off heavily in Asia after a report saying the Shanghai exchange may raise margins on steel rebar contracts, which was later confirmed. DAX futures dip to approach 200-DMA, financials under pressure after HSBC warns low-vol environment could hit 2H revenues. CHF and JPY marginally outperform in G-10, EMFX weaker against USD across the board. Core fixed income extends rally and bund curve flattens further, yet UST/bund spread widens 3bps as USTs lag amid focus on U.S. CPI data which may add to the recent dollar pains should inflation come in weaker than expected. U.S. treasury yields fell to their lowest in more than six weeks ahead of inflation data expected to show a pickup in price growth, which could boost the chances of a further rate hike this year, while the Fed’s Kaplan and Kashkari are due to speak. The dollar declined against the Japanese yen for a fourth day as North Korea tensions remained elevated. The yield on 10-year Treasuries fell one basis point to 2.19 percent, the lowest in more than six weeks. Germany’s 10-year yield decreased three basis points to 0.38 percent, the lowest in more than six weeks. Oil was modestly higher even though the IEA cuts its OPEC demand estimates for this year and next year by by 400bpd after revising down its demand estimates going back to 2015, rejecting OPEC's own assessment of rising demand growth for the near future. Aside from North Korea, inflation data is where the market is most sensitive to a surprise at the moment, even if yesterday's weak US PPI doesn't suggest an imminent rise. For the US CPI today, consensus expected core CPI inflation to rise +0.2%, and should finally snap its streak of four consecutive monthly misses which could be important. As recent Fed statements have emphasized, policymakers will be monitoring near-term inflation trends closely. Hence, an in line print would provide tentative evidence that the recent downshift in core inflation may be behind us. New York Fed President William Dudley cautioned that it will “take some time” for inflation to reach the central bank’s 2 percent target, the latest official warning that price pressures remain muted. The Federal Reserve Bank Dallas President Fred Kaplan speaks this afternoon. Also today, Moody’s may publish a review of South Africa’s credit rating, two months after reducing its foreign- and local-currency assessments to one level above junk. JC Penney, Magna International and Telus are due to release results. July consumer price data is also due later. Bulletin Headline Summary From RanSquawk Geopolitical tensions continue to act as a driving force for markets amid the latest exchange between the US and NK This has seen downside in EU equities (Eurostoxx 50 -1.0%) and a FTQ in other assets Looking ahead, highlights include US CPI, Fed's Kashkari and Kaplan Market Snapshot S&P 500 futures down 0.1% to 2,434.25 STOXX Europe 600 down 1.0% to 372.26 DAX down 0.3% to 11,980 MSCI ASIA down 0.8% to 158.49 MSCI ASIA ex JAPAN down 1.5% to 515.81 Nikkei down 0.05% to 19,729.74 Topix down 0.04% to 1,617.25 Hang Seng Index down 2% to 26,883.51 Shanghai Composite down 1.6% to 3,208.54 Sensex down 1.1% to 31,193.00 Australia S&P/ASX 200 down 1.2% to 5,693.14 Kospi down 1.7% to 2,319.71 German 10Y yield fell 3.5 bps to 0.38% Euro down 0.1% to 1.1759 per US$ Brent Futures down 0.9% to $51.45/bbl US 10Y yields unchanged at 2.19% Italian 10Y yield rose 2.1 bps to 1.743% Spanish 10Y yield fell 0.6 bps to 1.452% Brent Futures down 0.4% to $51.70/bbl Gold spot up 0.1% to $1,287.31 U.S. Dollar Index up 0.04% to 93.44 Top Overnight News China Urges Restraint as Futures Slide; FOMC Voters to Speak After CPI Data; Snap Slammed Amid Facebook Pressure The escalating war of words between Trump and North Korean leader Kim Jong-Un sent Asian markets tumbling as the region braced for more provocations from his regime next week President Donald Trump stepped up his campaign of pressure on North Korea, warning the regime not to follow through with a missile test near Guam and promising massive response to any strike against the U.S. or its allies Treasury yields may climb from a six-week low if Friday’s U.S. consumer- price data merely meet expectations, as the market is on high- alert for evidence that inflation is heating up and supporting the Fed’s case for higher interest rates For all the talk that Chair Janet Yellen’s plan to shrink the Fed’s balance sheet will hurt Treasuries, U.S. mortgage bonds face a bigger test The International Energy Agency cut estimates for the amount of crude needed from OPEC this year and in 2018, after lowering its historical assessments of consumption in emerging nations including China and India All that stands between German Chancellor Angela Merkel and a fourth term is six weeks of campaigning Morgan Stanley added its voice to a growing chorus of skepticism surrounding debt valuations, with Pacific Investment Management Co. writing in a report released Wednesday that investors should pare relatively expensive assets like corporate bonds in favor of safer investments like Treasuries Credit Suisse Group AG is barring its traders from buying or selling certain Venezuelan securities and business as the political and economic crisis in the South American country intensifies Gold advanced to the highest in two months as the spike in tensions between the U.S. and North Korea fanned demand, with hedge fund billionaire Ray Dalio flagging rising risks, including “two confrontational, nationalistic, and militaristic leaders playing chicken with each other” President Donald Trump laid out a path for Senate Majority Leader Mitch McConnell to get back in his good graces: replace Obamacare, overhaul the U.S. tax code and find a way to pay for big infrastructure improvements RBA’s Lowe says next interest rate move likely up, but could be some time away; RBA prepared to intervene in A$ in ’extreme’ situations Snap, Blue Apron Fall Flat as the Incumbents Smash the Upstarts IEA Cuts Estimates for Crude Needed From OPEC This Year and Next Chinese Regulator Starts Probe Into Tencent, Weibo and Baidu Stolen 1MDB Funds Are Focus of U.S. Criminal Investigation Health Insurers Face Long Odds to Win Reprieve of Obamacare Tax U.S. Stocks Gain, Hong Kong Loses Weight in MSCI Indexes: SocGen FBI Says ISIS Used EBay to Send Cash to U.S.: WSJ Anbang Ownership Secrets Subject of U.S. Workers’ Complaint Hollywood Heads For Its Worst Summer Box Office in a Decade Asia stock markets were heavily pressured amid continued geopolitical tensions after further fighting talk between US and North Korea, which also saw US indices close negative for a 3rd consecutive day. The fresh goading came from both sides as US President Trump suggested his fire and fury comments maybe was not tough enough and warned North Korea to get its act together or it will be in trouble like few nations have ever been. This evoked a response from North Korea which vowed to mercilessly wipe out the provocateurs and stated the US will suffer a shameful defeat. As such, ASX 200 (-1.2%), KOSPI (-1.7%) Hang Seng (-2.0%) and Shanghai Comp (-1.7%) all traded with firm losses, while Nikkei 225 was shut due to public holiday. PBoC injected CNY 70bln in 7-day reverse repos and CNY 60bln in 14-day reverse repos, for a net weekly drain of CNY 30bln vs. CNY 40bln drain last week. Top Asian News War of Words Between Trump and Kim Has Asia Bracing for Conflict South Korean Banks Follow Won Lower Amid Rising Trump Rhetoric China Data Dump and Alternative Gauges Both Signal Steady Output Maker of India’s Aircraft Carrier Surges 22% on Trading Debut Biggest India Lender Slumps as Bad-Loan Surprise Hits Profit KKR Completes 26 Investments in China as of Aug. 1 Freeport Urged to Reinstate Workers to End Indonesian Strike India July Local Passenger Vehicle Sales Gain 15% Y/y to 298,997 BlackRock’s James Lenton Joins Fidelity as Trader in Hong Kong European indices are set for the worst week of losses this year as sentiment is weighed by the war of words between the US and North Korea. Weakness has been seen across the board (Eurostoxx 50 -1.0%), however mining names have notably underperforming amid Chinese metal prices slumping by some 5% overnight. EGBs supported by flight to quality with Bunds printing fresh session highs, while there had been reports of 5k lots tripping stops at 164.50. Peripherals underperform this morning, led by BTPs, subsequently the GER-ITA spread has widened to 162bps Top European News Morgan Stanley Makes ‘Multi-Year Call’ For Strong Euro on Reform Europe Miners Slump as Metals Fall on China Steel Body’s Warning Tullow Oil, Genel Energy Drop; GMP Cuts Both Stocks to Reduce Old Mutual First-Half Profit Climbs as Insurer’s Split Looms Merkel’s Bloc Holds All the Coalition Options in Latest Poll Buy BNP Paribas, Credit Suisse; Sell Barclays, Goldman Says Nordea Chairman Hints HQ Review Isn’t Limited to the Nordics In currencies, safe-haven support for the currency has continued as USD/JPY made a brief break below 109.00 overnight. Although, with the war of words showing no signs of stopping, JPY could make a push back to the April low at 108.11. So far, the pair have traded in a narrow range with investor focus for the USD shifting to the US inflation figures due out later in the session. AUD softened in Asian trade as commodities prices slipped. Crude prices fell over 0.5%, despite Saudi Arabia and Iraq's announcement to ensure that all major producers comply to the OPEC production cut, while Saudi also left the door open to deeper cuts. Additionally, Chinese iron ore prices fell some 5%, further weighed on the currency, subsequently pushing AUD to the mid 0.78. In commodities, China state run newspaper editorial comments state China will remain neutral if North Korea launches an attack on US, but if US strikes first and tries to overthrow North Korean government, China will stop them. Saudi Arabia Energy Minister Al-Falih stated the possibility for continuation of output cuts is on the table and if the size of cuts need to be adjusted, this will be examined and subject to approval by 24 countries. North Korea vows to mercilessly wipe out the provocateurs, says US will suffer a shameful defeat, according to North Korean state media. IEA raises 2017 global oil demand forecast to 1.5mln bpd vs. 1.4mln bpd, global oil supply rose by 520k, while OPEC compliance fell to 75%. Looking at the day ahead, the main focus will be its inflation stats for July, with expectations at 0.2% mom (for core) and 1.7% yoy. Onto other events, the Fed’s Kaplan and Fed’s Kashkari will also speak today. US Event calendar 8:30am: US CPI MoM, est. 0.2%, prior 0.0%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.1% US CPI YoY, est. 1.8%, prior 1.6%; CPI Ex Food and Energy YoY, est. 1.7%, prior 1.7% Real Avg Weekly Earnings YoY, prior 1.09%; Real Avg Hourly Earning YoY, prior 0.8% DB's Jim Reid concludes the overnight wrap I'm hoping I'll be on this planet for as close to 36,525 days as I can get and I'm also hoping tomorrow will be the only day of that stint that I'm stupid enough to be picking up a brand new car with no miles on it. So in some ways it's exciting and in some way it’s very annoying as I vowed never to waste money on a new car. The twins have forced the issue and I'll be figuratively setting light to wads of bank notes as I roll out the forecourt. I'm driving 80 miles to Poole to collect it and I'm setting off very early as I have to get back to make sure everything is ready at home for the new arrival. The excitement is building, I'm very nervous and hopes and dreams come in abundance with such a fresh start. Yes Liverpool kick off their season at lunchtime tomorrow and I need to make sure I'm back in time to watch it. Wish me luck. The markets and more importantly the world is wishing for a bit of luck at the moment and a peaceful solution to the North Korean spat. The nuclear fallout from this week's high stakes geopolitical jaw boning couldn't completely unsettle markets on Wednesday but Thursday was a different story. We finally broke the 15 day run of sub 0.3% closes in either direction with the S&P 500 -1.45% after a day where the news we covered yesterday morning concerning North Korea's threat to attack Guam by mid-August increasingly spooked global investors as the day progressed. Mr Trump then raised the temperature another notch late in the US session last night, saying his ‘fire and fury” comment earlier in the week “wasn’t tough enough” and that “things will happen to them (NK) like they never thought possible..” and has “declined” to rule out a pre-emptive strike on NK, noting “we’ll see what happens”, all of which helped the US close at the lows for the session and shatter the recent low vol environment. Given the previous record low vol run was 10 days in 1966, if I do live to be 100 I'm statistically unlikely to witness anything like what we saw in the 15 days before yesterday. The S&P 500 had its worse day since mid-May this year when it fell 1.8%. Over at the Vix, the fear gauge broadly traded up most of the day and surged 44% higher to close at 16.04, which is actually the first day the index closed above 16 in CY2017. Across the pond, the Vstoxx was up 26% to 18.9, the highest level since April when Europe had heightened political risks in the run up to the French elections. Investors pushed safe haven assets higher again, with gold up 0.7% to a 9 week high, the Swiss franc up 0.1% (was +1.1% the day before) and JPY/USD +0.8% higher. Over in European government bonds, changes in core yields were more tempered following the ~5bp fall the day before. Bunds fell 1bp (2Y: unch; 10Y: -1bps), with Gilts down 3bps (2Y: +0.3bp; 10Y: -3bps) at the long end of the curve, while French OATs were broadly flat (2Y: unch; 10Y: -0.5bp). Peripheral bond yields were up slightly across the curve, with Italian BTPs (2Y: +1bp; 10Y: +2bps) and Portuguese yields (2Y: -0.5bp; 10Y: +2bps) not sure whether they were a flight to quality instrument or a high beta asset. Across the pond, the UST10Y fell 5bps yesterday (2Y -1bp) but is fairly flat this morning. In Asia, markets have continued to fall. The Kospi recovered a little to be 1.6% down as we type, the Won/USD dipping another 0.2%. The Hang Seng fell for the 3rd consecutive day (-1.9%), with Chinese bourses down 1.1% to 1.6%. We also got a glimpse of what China might be thinking, with the Global times (English paper under the People's Daily) writing that China should make clear that: i) it will stay neutral if the US retaliates after NK launches missile that threaten American soil, but ii) if countries try to overthrow the NK regime, China will prevent them from doing so. Moving on, if we can pull out attention away from the nuclear threat, inflation data is probably where the market is most sensitive to a surprise at the moment, even if yesterday's weak US PPI doesn't suggest an imminent rise. For the US CPI today, our economists expect core CPI inflation (+0.2% vs. +0.1%) should finally snap its streak of four consecutive monthly misses which could be important. They also remind us that as recent Fed statements have emphasized, policymakers will be monitoring near-term inflation trends closely. Hence, an in line print would provide tentative evidence that the recent downshift in core inflation may be behind us. Following on the theme of inflation, DB’s Luzzetti examined the impact of recent US dollar depreciation on the inflation outlook. Based on their own inflation models and analysis cited by Fed officials, they think that recent dollar weakness – assuming that it does not reverse – could lift year-over-year core PCE inflation by about 0.2pps by mid-2018 and 0.1pps by mid-2019. More details here. Turning to Europe, the flip-side of recent currency moves is discussed by DB’s Mark Wall who has written on how euro appreciation will be balanced against growth momentum in determining the ECB’s exit from QE. He argue that all else unchanged the euro’s appreciation since June could reduce the ECB staff core inflation forecast for 2019 from 1.7% yoy to 1.5% yoy. More details here Returning to the equity market sell-off in a little more depth, US bourses all weakened yesterday, with the S&P (-1.5%), the Dow (-0.9%) and the Nasdaq (-2.1%) sharply lower. Within the S&P, only the utilities sector was up (+0.3%) versus larger losses elsewhere (IT -2.2%; Financials -1.8%). European markets also fell across the board, the Stoxx 600 was down 1% to the lowest level since March with all sectors in the red. Across the region the FTSE 100 (-1.4%), the DAX (-1.2%), Italian FTSE MIB (-0.8%) and CAC (-0.6%) were all lower. Currencies were mixed but little changed, the USD dollar index dipped 0.2% post the lower than expected PPI data. The Euro continued to edge ahead against the USD and Sterling, up 0.1% and 0.3% respectively, while the Sterling/USD was down 0.2%. In commodities, WTI oil fell 2%, despite OPEC raising its demand forecast for oil and two of the largest OPEC producers (Saudi Arabia & Iraq) agreeing to strengthen their commitments to production cuts. Notably, Iraq's recent compliance to production targets is not exactly great (29% in July). Elsewhere, precious metals were modestly up (Gold +0.7%; Silver +1%) and aluminium continues to gain (Copper -0.3%; Aluminium +0.9%). Agricultural commodities were broadly lower, with corn, wheat and cotton all down ~4%, while soybeans, coffee and sugar were down ~3%. This follows a USDA report which suggest US farmers will produce more corn and soybeans than analyst forecasts. Away from the markets, Trump has made his disappointment with Senate majority leader McConnell well known, tweeting “can you believe that McConnell, who has screamed repeal & replace (Obamacare) for 7 years, couldn’t get it done…” and “…Mitch, get back to work…”. However, Trump was more conciliatory on special counsel Mueller, saying he “hasn’t given it any thought about firing Mueller” and that “I’m not dismissing anybody”. Elsewhere, NY Fed president Dudley cautioned that it will "take some time" for inflation to reach the Fed's 2% target, which is consistent with comments made by his colleagues earlier in the week. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the July PPI report was softer than expected. The core measure (ex-food & energy aggregate) was -0.1% mom (vs. 0.2% expected) and 1.8% yoy (vs. 2.1% expected). The PPI for healthcare services, which is closely correlated with that within the PCE deflator, rose a steady 1.4% yoy. Elsewhere, claims data were mixed, with initial jobless claims up 3k to 244k (vs. 240k expected) and continuing claims at 1,951k (vs. 1,960k expected). In Europe,France’s June industrial production (IP) was modestly lower than expectations at -1.1% mom (vs. -0.6% expected, 1.9% previous) and 2.6% yoy (vs. 3.1% expected), while manufacturing production was slightly better at -0.9% mom (vs. -1% expected) and 3.3% yoy (vs. 3.2% expected), which is just a bit weaker than Markit PMI readings had foreshadowed. Over in UK, IP for June was higher than expectations at 0.5% mom (vs. 0.1% expected) and 0.3% yoy (vs. -0.1% expected), while June manufacturing production was flat and in line, at 0% mom and 0.6% yoy. The UK’s trade deficit also unexpectedly widened in June as exports fell but imports rose. Looking at the day ahead, the final CPI figures for Germany (1.5% yoy expected), France (0.8% yoy expected) and Italy (1.2% yoy expected) will be released. Over in the US, the main focus will be its inflation stats for July, with expectations at 0.2% mom (for core) and 1.7% yoy. Onto other events, the Fed’s Kaplan and Fed’s Kashkari will also speak today.
With the traditional post-payrolls market lull setting in, and most trading desks taking a week or two off, it will be a relatively quiet week with attention turning to inflation data with releases in the US, China, Norway & Switzerland, a key factor as central banks consider if/when to tighten in the near future. The US print will gain most attention: a strong number will validate the Fed's balance sheet unwind intentions and a potential December rate hike. The major US release for the week comes on Friday in the form of July’s CPI. As RanSquawk notes, analysts expect the headline to come in at 1.8% YY from 1.6% last time out, while the core reading is expected to rise by 1.8% YY from 1.7% last time out. The core metric has missed expectations over the last four releases. HSBC opines that “One major reason why core inflation has softened this year has been a slowdown in the pace of increase in rents.” At its most recent decision the Federal Reserve noted that it is “monitoring inflation developments closely” while it is of the belief that “inflation will remain somewhat below 2% in near term, but stabilise around 2% in medium-term.” This is of course against a back drop of limited wage growth. It is also worth noting that North American liquidity will be lower on Monday owing to a Canadian national holiday. Other releases of note during the week: Monday US Fed Labour Market Conditions Index (Jul) Tuesday US JOLTS Job Openings (Jun) Wednesday US Nonfarm Productivity (Q2) US Unit Labour Costs (Q2) US Wholesale Inventories (Jun) Thursday US PPI (Jul). There will be some July China macro data released, starting with FX reserves on Monday. Chinese trade data for July is due on Tuesday, with analysts expecting the surplus to widen to USD 46.08bln from USD 42.77bln last time out. HSBC believe that “exports growth likely remained strong in July supported by still resilient external demand.” The latest Caixin manufacturing PMI gives credence to this view, as it pointed to new export orders expanding at a faster pace. On the import front HSBC expect that “import growth remained strong, supported by the broad-based nature of the economic recovery.” In EM, there are monetary policy meetings in Mexico, Peru and the Philippines. Other releases of note during the week: Monday Chinese FX Reserves (Jul) Tuesday Japanese Current Account (Jun) Australian NAB Business Survey (Jul) Wednesday Australian Housing Finance Data (Jun) Thursday Australian Melbourne Institute Inflation Expectations (Jul) During the week: Chinese New Yuan Loans & Money Supply Data (Jul) US inflation, Fedspeak & China data After a robust NFP report, focus this week turns to US inflation prints. We expect core CPI to accelerate to a 0.2% m/m clip in July, ending a four-month streak of subdued prints. We also hear from several Fed speakers, including NY Fed President Dudley. July macro data from China will also be released over the next two weeks, starting with Monday's FX reserves data. Our economists expect the July reading of activity growth to moderate from June's strong levels. CPI likely stayed flat, while PPI may continue to ease on base effects. Meanwhile, headline new credit data have likely declined, but M2 growth may rebound modestly. The week ahead in Emerging Markets There are monetary policy meetings in Mexico, Peru and the Philippines. Sovereign rating review in South Africa In other data In the US, inflation will be the main focus, but we also have non-farm productivity and unit labor costs, the monthly budget statement and several Fed speakers. In the Eurozone, a very quiet week ahead with no key data releases. We have final CPI and industrial & manufacturing production for Germany, France, Italy and Spain. In the UK, we get industrial & manufacturing production, construction output and trade balance. In Japan, we get the current account and trade balance, money supply, machine orders and PPI. In Australia, RBA Governor Lowe is due to appear before the parliamentary economic committee and we hear a speech by Assistant Governor (Financial Markets) Kent. On the data front, we receive both consumer and business sentiment and housing finance approvals. In New Zealand, focus will be on the RBNZ, though we also get the manufacturing PMI and RBNZ Governor Wheeler will also appear before Parliament Select Committee. A detailed breakdown of the main weekly events courtesy of DB's Jim Reid Monday starts with Germany’s industrial production figures for June in early morning, followed by UK’s July Halifax house price index and then US’s consumer credit stats for July. On Tuesday, Japan’s balance of payments and trade balance figures for June will be out in early morning. Then Germany’s June trade balance, current account, export and import stats are due. France will also report its June trade balance and current account figures. Over in the US, there is the NFIB small business optimism index for July. Turning to Wednesday, China’s CPI and PPI for July will be out in early morning. Later on, Italy’s June industrial production figures and Bank of France’s business sentiment indicator are also due. Over in the US, there is the 2Q nonfarm productivity and unit labour costs data, June wholesale inventories as well as the MBA mortgage applications. For Thursday, the June industrial production and manufacturing production figures for UK and France will be out. Further, June trade balance stats for UK and Italy are also due. Over in the US, we have the July PPI data, the monthly budget statement as well as the initial jobless claims and continuing claims figures. On Friday, the final CPI figures for Germany, France and Italy will be released. Over in the US, CPI stats for July are also due. Onto other events, today starts with speeches from the Fed’s Bullard and the Fed’s Kashkari, followed by the OPEC/Non-OPEC joint technical committee meeting in Abu Dhabi. Then on Thursday, the Fed’s Dudley will speak. Onto Friday, the Fed’s Kaplan and Fed’s Kashkari will also speak. Finally we'll still have earnings season continuing on both sides of the Atlantic but we're now past the peak. * * * Finally, here is a table from BofA and guidance from Goldman with a breakdown of the key US events together with consensus estimtes The key economic release this week is the CPI report on Friday. There are several scheduled speaking engagements by Fed officials this week. Monday, August 7 11:45 AM St. Louis Fed President Bullard (FOMC non-voter) speaks: St. Louis Fed President James Bullard will give a speech on the U.S. economy and monetary policy at the America’s Cotton Marketing Cooperatives’ annual conference in Nashville, Tennessee. Audience and media Q&A is expected. 01:25 PM Minneapolis Fed President Kashkari (FOMC voter) speaks: Minneapolis Fed President Neel Kashkari will participate in a moderated audience Q&A session at an event hosted by the Sioux Falls Rotary Club in South Dakota. 03:00 PM Consumer credit, June (consensus +$15.25bn, last +$18.41bn) Tuesday, August 8 10:00 AM JOLTS job openings, June (consensus 5,700k, last 5,666k) Wednesday, August 9 08:30 AM Nonfarm productivity (qoq saar), Q2 preliminary (GS +0.6%, consensus +0.7%, last flat); Unit labor costs, Q2 preliminary (GS +1.1%, consensus +1.0%, last +2.2%): We estimate non-farm productivity increased 0.6% in Q2 (qoq ar), modestly below the 0.75% average achieved during this expansion. We expect unit labor costs – compensation per hour divided by output per hour – to increase 1.1% (qoq saar). 10:00 AM Wholesale inventories, June final (consensus +0.6%, last +0.6%) 11:00 AM Cleveland Fed President Mester (FOMC non-voter) speaks: Cleveland Federal Reserve President Loretta Mester will give the keynote speech at the Community Bankers Association of Ohio’s Annual Convention in Cincinnati, Ohio. 01:00 PM Chicago Fed President Evans (FOMC voter) speaks: Chicago Fed President Charles Evans will discuss current economic conditions and monetary policy in a closed group interview with representatives of the press in Chicago. 01:30 PM San Francisco Fed President Williams (FOMC non-voter) speaks: San Francisco Fed President John Williams will give a speech titled "Monetary Policy's Role in Fostering Sustainable Growth" in Las Vegas, Nevada. Audience and media Q&A is expected. Thursday, August 10 08:30 AM PPI final demand, July (GS flat, consensus +0.1%, last +0.1%); PPI ex-food and energy, July (GS +0.1%, consensus +0.2%, last +0.1%); PPI ex-food, energy, and trade, July (GS +0.2%, consensus +0.2%, last +0.2%): We estimate that headline PPI was flat in July, reflecting a modest rise in core producer prices offset by a decline in gasoline margins and energy prices. We estimate PPI ex-food, energy, and trade services rose by 0.2%. In the June report, PPI exceeded expectations as higher-than-expected food and core prices excluding trade services more than offset a retracement in the volatile trade services category. 08:30 AM Initial jobless claims, week ended August 5 (GS 245k, consensus 240k, last 240k); Continuing jobless claims, week ended July 29 (consensus 1,960k, last 1,968k): We estimate initial jobless claims rebounded 5k to 245k in the week ended August 5. Initial claims can be particularly volatile around this time of year due to annual auto plant shutdowns, and we expect a rebound in these factory closures to boost claims for this week. Additionally, we expect a rebound from depressed levels of jobless claims in California. Continuing claims – the number of persons receiving benefits through standard programs – have trended up recently after falling sharply in the first four months of the year. 10:00 AM New York Fed President Dudley (FOMC voter) speaks: New York Fed President William Dudley will give opening remarks at an “Economic Press Briefing on Wage Inequality in the Region” held at the Federal Reserve Bank of New York. Audience and media Q&A is expected. 02:00 PM Monthly budget statement, July (consensus -$55.5bn, last -$90.2bn) Friday, August 11 08:30 AM CPI (mom), July (GS +0.20%, consensus +0.2%, last flat); Core CPI (mom), July (GS +0.21%, consensus +0.2%, last +0.1%); CPI (yoy), July (GS +1.8%, consensus +1.8%, last +1.6%); Core CPI (yoy), July (GS +1.8%, consensus +1.7%, last +1.7%): We expect a 0.21% increase in July core CPI (mom sa), which would be its fastest pace since January and would produce a one tenth increase in the year-over-year rate (to +1.8%). Our forecast reflects a boost from the second California tobacco tax increase of the year – a roughly US$2 per pack increase effective July 1 – as well as stabilization in used car prices, and mean reversion in airfares, apparel, and lodging following recent weakness. We also expect a reprieve from cell phone plan disinflation in the communication category, as a price hike for some T-Mobile plans is likely to offset new discounts offered by a few smaller pre-paid carriers. We also expect an above-trend increase in education prices, reflecting firming college tuition inflation indicated by press reports and university budget summaries. We estimate a 0.2% rise in headline CPI, reflecting rising food prices but a modest decline in energy prices. This would be consistent with the year-over-year rate rising two-tenths to 1.8%. 09:40 Dallas Fed President Kaplan (FOMC voter) speaks: Dallas Federal Reserve President Robert Kaplan will take part in a moderated Q&A session at the sixth annual CPE day hosted by the University of Texas at Arlington’s Accounting Department. Audience and media Q&A is expected. 11:30 AM Minneapolis Fed President Kashkari (FOMC voter) speaks: inneapolis Federal Reserve President Neel Kashkari will participate in a moderated audience Q&A session at the Independent Community Bankers of Minnesota’s annual convention in Bloomington, Minnesota. Source: BofA, DB, Goldman
US stock indexes remain at record highs, and volatility near its lows, despite signs that their recordsetting run is losing steam as it becomes increasingly dependent on a narrow band of stocks. Indeed, signs that the rally is running on fumes have convinced portfolio managers and Wall Street strategists that the second-longest bull market of all time will be over in less than 18 months, while a similarly longstanding rally in bonds is also nearly ready to roll over, according to a Bloomberg survey of fund managers and strategists. “The poll of 30 finance professionals on four continents showed a lack of consensus on the asset judged as most vulnerable now, with answers ranging from European high yield to local-currency emerging-market debt - though they were mostly in the bond world. Among 25 responding to a question on the next U.S. recession, the median answer was the first half of 2019.” Of the 21 participants who responded to Bloomberg's question of when they see a slide of more than 20 percent for the S&P 500 Index, the median response was the fourth quarter of 2018. Two forecast that the bear market would begin during the final three months of this year. Of the 21 respondents who forecast a bear market for credit, defined as a 1 percentage point jump in the premiums of US investment-grade corporate bond yields over comparable government-debt yields, the median pick was the third quarter of 2018. According to Bloomberg, many of these strategists and portfolio managers see central bank policy as the lynchpin of their thesis, believing that years of easy-money policies have artificially inflated stock and bond valuations. By the beginning of 2019, US interest rates will have risen another 1.5 to 2 percentage points, and the central bank will have unwound at least part of the $4.5 trillion in Treasuries and MBS that the Fed purchased during the recession. Of course, this is hardly a coincidence, as Remi Olu-Pitan, who manages a multi-asset fund at Schroder Investment Management Ltd. in London, explains. Furthermore, it’s widely expected that the Bank of England, European Central Bank and the Bank of Japan will all have begun tapering asset purchases, raising interest rates – or possibly both. The Bank of Canada has already shocked market strategists by raising its benchmark rate for the first time in seve years, which it did earlier this month. “Consequences could be very painful,” Olu-Pitan said. “We have had a liquidity-fueled bull market. If that is taken away, there is a pressure point,” she said. Indeed, in a version of a chart that we’ve presented many times, there’s a tight correlation between equity gains and global central-bank stimulus. None of the poll’s respondents expect a 2007-2009 style meltdown. But as is depicted by Bloomberg in the chart below, the 2002 bear market in US stocks wiped out more than $7 trillion of value. To be sure, some Wall Street strategists believe a downturn in stock and bond markets could begin as soon as the third or fourth quarter of 2017. According to Bank of America strategist Michael Hartnett, risks for equities are set to multiply in the third and fourth quarters. Hartnett said in a note published earlier this month that "the most dangerous moment for markets will be when rising rates combine in three or four months’ time with an inflection point in corporate profits. In anticipation of this, we would use the next couple of months to buy volatility, and within fixed income slowly reduce exposure to IG, HY, and EM bonds." Atul Lele, chief investment officer at Nassau, Bahamas-based Deltec International Group, was the only respondent to the poll who ranked an economic collapse in China as his primary concern, followed by excessive Fed tightening. All eyes are on the Fed this week as it prepares to deliver its July policy update on Wednesday. Investors will be looking for clues about when the great balance-sheet unwind will begin, after New York Fed Governor William Dudley, along with a few other officials, said that process would begin later this year.
Authored by EconomicPrism's MN Gordon, annotated by Acting-Man's Pater Tenebrarum, A Great Big Dud Many of today’s economic troubles are due to a fantastic guess. That the wealth effect of inflated asset prices would stimulate demand in the economy. The premise, as we understand it, was that as stock portfolios bubbled up investors would feel better about their lot in life. Some of them would feel so doggone good they’d go out and buy 72-inch flat screen televisions and brand-new electric cars with computerized dashboards on credit. The Wilshire 5000 total market index vs. federal debt and real GDP (indexed, 1990=100) – mainly there is an ever wider gap between asset prices and the underlying economic output, and although federal debt has grown by leaps and bounds in the Bush-Obama era, it can’t hold a candle to asset price inflation either. If asset prices were an indication of how an economy is doing, we would have arrived in Utopia by now. Unfortunately that is not the case, as asset prices primarily reflect monetary inflation. Just consider the extreme example of Venezuela’s IBC General Index, which went from 40,000 to 120,000 points, while the economy contracted by 21% in real terms (officially, that is. If one were to apply private sector estimates of inflation, it would look a lot worse). It is certainly true that economic aggregates are benefiting from bubble conditions to some extent, but that is essentially phantom prosperity. If you burn all your furniture, your home will be warm – that this might be problematic only becomes glaringly obvious once all the furniture is gone, because then it will not only be cold, but there will be nothing left to sit on either. When the red line on this chart reverts to the mean (or the “other extreme”), there will be a lot of gnashing of teeth, as many of the mistakes made during the bubble era will be unmasked. [PT] – click to enlarge. Before you know it, gross domestic product would go up – along with wages – and unemployment would go down. A self-sustaining economic boom would follow. This fantastic guess, however, has proven to be a critical error in judgment. Asset prices bubbled up, flat screen televisions and new cars were bought in record numbers, and the unemployment rate – according to the government’s statistics – went down. On the flip side, real GDP growth only marginally lurched upward, never eclipsing 3 percent during a calendar year, and the great big economic boom that was supposed to save the economy from itself turned out to be a great big dud. At the same time, the general aura of the Federal Reserve Chair, once held up on high by Bob Woodward, has slipped into irreparable decline. No public relations exploit or press briefing can correct the damage. No policy adjustment or balance sheet modification can return the Fed to its former glory. Quite frankly, the state of disrepute of present Fed Chair Janet Yellen appears to be that of a larcener, near comparable to a United States Congressman. The transition from maestro to scoundrel in just over a decade has been a sight to behold. ZIRP, QE, operation twist… you name it. There’s been one absurdity after another. Consider how much attention is paid to central bankers and their policies these days, as exemplified by how many cartoons about them are drawn about them. In times past no-one thought much about central banks, they were considered boring. That has certainly changed after the introduction of the pure fiat money system in the early 70s and the massive bubbles and busts their policies have triggered in the wake of this event. [PT] – click to enlarge. Sanitized for Public Consumption No doubt, the Fed has brought their shame upon themselves. They’ve made their bed. But they don’t want to lay in it. Earlier this week the June FOMC meeting minutes were released. According to the minutes, some FOMC members acknowledged that “equity prices were high when judged against standard valuation measures.” Some are even “concerned that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability.” Unfortunately, the minutes are prepared and provided for public consumption in a cleanly sanitized summary form. Names are not tied to individual discussion points. Moreover, name calling and vulgarities are omitted from the official record. Perhaps, good manners and erudite etiquette have been preserved in the hallowed halls of an FOMC meeting. However, this is highly unlikely. Because over the last decade or so, in nearly all social dealings, both professional and public, good old-fashioned human decency has devolved to barroom decorum. We hope they haven’t removed the laugh track… (this is from an article we posted in 2014) [PT] – click to enlarge. Thus we’ve taken it upon ourselves to round out a brief excerpt of the FOMC discussion, adding back the warts to better demonstrate the meeting’s dialogue. What follows, in the best interest of reader edification, is a fictitious adaptation of true events that occurred at the June 14 FOMC meeting. Enjoy! The most recent laugh track chart we could find is from 2011 – and it is telling as well. The mood turned very somber in November of that year. We will have to hunt for a more recent update. Presumably the laugh track continues to mimic the trend in the stock market. [PT] Tales from the FOMC Underground “What should we do?” began Yellen. “A decade of easy monetary policies has turned financial markets into a Las Vegas casino while the economy’s lazed around like my smelly house cats. What the heck was Bernanke thinking?” “Hell, Janet,” remarked New York Fed President William Dudley. “He wasn’t thinking. He soiled his pantaloons and then he soiled them again.” “So now we must clean up his stinky pile while he promotes his revisionist courage to act shtick. The reality is we must orchestrate a take-down of financial markets, and we must do it by year’s end.” “Well, gawd damn Bill!” barked St. Louis Fed President James Bullard. “With the exception of Neel, the $700 billion dollar bailout boy, don’t you think we all know that?” “Hey, now!” interjected Minneapolis Fed President Neel Kashkari. “Don’t blame me. I was just carrying out Hank Paulson’s will, right Bill? Saving our boys’ bacon back at Goldman so they could continue doing god’s work.” “Besides Fish, it was you all who lined up behind Bernanke and tickled the poodle with his crazy QE experiment while I was busy chopping wood at Donner Pass and getting my fanny spanked in the California Governor’s race by retread Jerry Moonbeam Brown, of all people.” “Fair enough,” continued Bullard. “The point is, taking down the stock market will cause an extreme upset to the economy’s applecart. The mobs will come after us with torches and pitchforks.” “You see, the real trick is to do the dirty deed then disappear behind a fog of confusion. That’s what Greenspan would do. How can we pull that off?” The maestro is still up to his old tricks… [PT] After a moment of silent contemplation, and a licked finger held up to the cool political winds drafting across the country… “Eureka! We can pin it on President Donald J. Trump!” exclaimed Chicago Fed President Charles Evans. “Could our good fortune be any better? Not since Herbert C. Hoover has there been a more perfect scapegoat for an economic depression of the Fed’s making.” “Hear, hear!” approved Yellen. “Damn the economy,” they bellowed in harmony… minus Kashkari. “This one’s on Trump!” Blaming ye olde Trump asteroid should be easy, since he has made the grievous mistake of taking credit for the run-up in the stock market on Twitter. Now he “owns” the bubble he previously denounced – at the very least he has become its co-owner. [PT] “Bill, one last thing,” closed Yellen. “After the meeting, remember to give the public that shake n’ bake you dreamed up about crashing unemployment. We have to give off an air of being data dependent.” “That misdirection should twist them up until NFL football starts. Shortly after that, our work will be done…” “…and by the New Year, Congress and Joe public will be begging us to rescue the economy from the Fed’s… I mean… Trump’s disastrous economic program.” * * * [Ed. note: in the original version of this article Richard Fisher was used in the section about the fictional meeting. We replaced him with James Bullard, as Fisher has retired from the Fed. Besides, we always thought Fisher was one of the more thoughtful Fed presidents; inter alia he was one of the handful of FOMC members who regularly dissented from Ben Bernanke’s mad-cap money printing schemes]
Janet Yellen's Monetary Policy Just Eased 50 bps and She Can’t Be Happy - by Michael Carino - Greenwich Endeavors
Over the last two months, the Fed has tried to continue to communicate that they plan on raising rates up to at least 3% and reduce their balance sheet by trillions. They just raised the Fed Funds rate by 25 bps to 1.25%. However, long term rates rallied by 50 bps! And the short end of the interest rate curve is priced with yields on top of the Fed Funds rate. This implies that either the Fed is lying and does not plan to raise rates again (or even lower rates), or something is broken in the bond market. After a decade of manipulation in rates by central banks globally, bond markets are priced at some of the richest conditions ever. There could not be a greater disconnect with actual economic conditions. Globally, there is no crisis on the horizon and sovereign risks could not be lower. GDP is tracking close to above average 3% and inflation right on 2%. Spare capacity near or at a cycle low, increasing the probability that inflation is going to run too hot going forward. So why did long term rates recently rally 50 bps? Such a large move surely comes on the heels of a financial crisis or recession. No, this move comes from the excessive conditions built over the last decade in the bond market. When such extremely disconnected conditions exist, the probability of a financial crisis from an unwind of these conditions is extremely high. The latest move to lower rates, even as the Fed is trying to normalize rates is due to the manipulation of bond markets by a consortium of large balance sheets that trade Treasuries in high volume during low volume periods. This is the strategy pursued in 2006 and 2007 and led to flattening of yield curve and diminished volatility as Fed raised rates. These high volume strategies take advantage of a soft Fed that telegraphs every step and stretches out their policy moves over long periods of time. This leads to high volume strategies believing the Fed issued a put on rates and therefore excessive risks can be taken to profit in the short run. Mohamed A. El-Erian, bond market veteran and specialist wrote today that the Fed should continue to raise rates “and that policy makers should take seriously the growing risk of future financial instability, especially in the absence of a carful normalization”. Other Fed officials, including the Fed’s vice chairman, William Dudley has also been sounding the alarms of a bond market out of control and resulting future financial instability. The bond market has turned into a game of no limit poker played by the biggest balance sheets and finally the alarm bells are getting rung. When the Fed tightens, rates usually rise as markets prepare and adjust for the tightening cycle and resulting risks. Real rates can adjust to over 300 bps. Real rates today are close to 0%. Unlevered bond market losses can hit a staggering 50% if rates normalize. When rates are more normalized and the Fed raises rates, the yield curve usually flattens as short term rates converge with long term rates. However, this time, just like in 2008, conditions have been so easy, traders use high volume strategies to squeeze market participants hedging or holding off on future purchases and make yields actually rally lower. This leads to significant future financial instability with substantial volatility and potential impacts in the real economy. The Fed wants to avoid the same mistakes but at the same time does not want to be held responsible if history repeats with a financial crisis. They will try to talk rates to normalization and Fed officials are currently trying to do so. But with each speech, market starts to move in the direction of normalization only to be met with high volumes pushing market to even lower yields. The Fed has to get real and stop this habitually bad behavior. They need to increase volatility in the bond market and let the volatility regulate bad behavior. The Fed is too transparent and traders are using a lower volume period – summer months – and lack of economic releases to push markets around like poker players do. These traders are using the Fed’s proven misguided monetary policy (which is a repeat of 2006-2007 and we know how that ended up) as a perceived put option on rates and exercising it with a high volume long biased trading strategy. Janet Yellen speech today should acknowledges how broken the bond market is and disconnected from their policy path or any semblance of normalization. She, too, will try to talk a good game. However, the market is so embedded with large traders with gargantuan balance sheets too large to reposition for higher rates without hurting their positions, the manipulation of rates will continue. To avoid a significant self-made financial crisis, Yellen needs to walk the walk as well. Yes, a 50 bp hike will stop this behavior. Also, bringing forward sales from their balance sheet, or let the balance sheet run off faster would end the manipulative behavior in the bond market that monetary policy has incubated. This would also be a savvy way to take advantage of these lower rates instead of getting front-run by these markets. The sooner the bond market starts to truly normalize, the less severe the market impact will be from the overvalued global bond market normalization process. So to avoid the same policy mistakes of the last tightening cycle and creating a financial and economic crisis, Yellen should be a little less predictable, knock out that perceived put option on higher rates and let increased volatility regulate the markets keeping positions smaller and extreme risk taking at bay. Today’s speech will be a step in the right direction. by Michael Carino, 6/27/17 Michael Carino is the CEO of Greenwich Endeavors, a financial service firm, and has been a fund manager and owner for more than 20 years. He has positions that benefit from a normalized bond market and higher yields. Do you?
На минувшей неделе рубль в соответствии с нашими ожиданиями отступил по отношению и к доллару, и к евро. Давление на российскую валюту оказало отступление цен на нефть, которое продолжается уже несколько недель кряду. У инвестиционного сообщества возрастают опасения по поводу роста объемов добычи в США и ряде других стран, и хотя новость о надлежащем соблюдении соглашения о снижении объемов добычи в мае позволила котировкам "черного золота" во второй половине недели отжаться, это помогло рублю нивелировать лишь часть потерь. Тем временем, поддержку доллару оказывали комментарии отдельных представителей Федрезерва. В частности, президент ФРБ Нью-Йорка Уильям Дадли заявил, что рост зарплат в стране поможет оживлению инфляции, и это позволит центральному банку продолжать повышение ставок. Руководитель ФРБ Кливленда Лоретта Местер со своей стороны заявила, что американская э
Москва, 27 июня - "Вести.Экономика". Когда дело касается инфляции, то Федеральный резерв иногда напоминает ребенка, который только что посмотрел не подходящий для его возраста фильм ужасов: быстрорастущие цены члены регулятора, похоже, видят в каждой тени и за каждым углом.
Когда дело касается инфляции, то Федеральный резерв иногда напоминает ребенка, который только что посмотрел не подходящий для его возраста фильм ужасов: быстрорастущие цены члены регулятора, похоже, видят в каждой тени и за каждым углом.
Когда дело касается инфляции, то Федеральный резерв иногда напоминает ребенка, который только что посмотрел не подходящий для его возраста фильм ужасов. Быстро растущие цены члены регулятора, похоже, видят в каждой тени и за каждым углом.
Президент Федерального резервного банка Нью-Йорка Уильям Дадли в воскресенье заявил, что центральному банку США, вероятно, придется повышать процентные ставки более стремительными темпами, если финансовые условия не будут ужесточаться в достаточной степени в ответ на действия Федеральной резервной системы, передает Dow Jones.
Москва, 26 июня - "Вести.Экономика". Недавнее сужение кредитных спредов, рекордные цены на акции и падение доходности облигаций могут побудить Федеральный резерв продолжать ужесточать политику в США, сказал один из самых влиятельных чиновников ФРС в опубликованных в понедельник комментариях.
Перед открытием рынка фьючерс S&P находится на уровне 2,441.25 (+0.26%), фьючерс NASDAQ повысился на 0.47% до уровня 5,839.75. Внешний фон позитивный. Основные фондовые индексы Азии завершили сессию в плюсе. Основные фондовые индексы Европы на текущий момент демонстрируют позитивную динамику. Nikkei 20,153.35 +20.68 +0.10% Hang Seng 25,871.89 +201.84 +0.79% Shanghai 3,186.05 +28.17 +0.89% S&P/ASX 5,720.16 +4.29 +0.08% FTSE 7,471.97 +47.84 +0.64% CAC 5,318.50 +52.38 +0.99% DAX 12,818.73 +85.32 +0.67% Августовские нефтяные фьючерсы Nymex WTI в данный момент котируются по $43.12 за баррель (+0.26%) Золото торгуется по $1,239.70 за унцию (-1.33%) Фьючерсы на основные фондовые индексы США на премаркете умеренно повышаются на фоне роста нефтяных котировок и слабых данных по заказам на товары длительного пользования за май. Как показал отчет Министерства торговли, новые заказы на основные капитальные товары произведенные в США неожиданно упали в мае, тогда как поставки также снизились, что говорит о потере импульса в обрабатывающем секторе на полпути во втором квартале. Согласно данным отчета, заказы на необоронные капитальные товары, за исключением самолетов, внимательно отслеживаемого датчика для планов деловых расходов, снизились на 0.2%. Эти так называемые основные заказы на капитальные товары были пересмотрены, и показали увеличение на 0.2% за апрель. Ранее сообщалось, что они выросли на 0.1%. В то же время, поставки капитальных товаров, используемые для расчета расходов на оборудование в государственном измерении ВВП, снизились на 0.2% в прошлом месяце после роста на 0.1% в апреле. Экономисты прогнозировали, что основные заказы на капитальные товары в мае вырастут на 0.3%. Общие заказы на товары длительного пользования, товары от тостеров до самолетов, которые рассчитаны на срок службы три года или дольше, упали на 1.1% после снижения на 0.9% в апреле. Цены на нефть отскочили от семимесячных минимумов на прошлой неделе. Однако их дальнейший рост продолжают сдерживать данные, свидетельствующие о неуклонном ростом поставок в США и существенных глобальных запасах. Недавнее падение нефтяных котировок также вызвало обеспокоенность по поводу низкой инфляции в США, которая упорно остается ниже целевого показателя ФРС в 2%. Напомним, ФРС повысил ставки в этом месяце во второй раз в этом году и, как ожидается, снова поднимет их. Фьючерсы оценивают шансы повышение ставок к декабрю близко 50%. Глава ФРС Джанет Йеллен выступит в Лондоне во вторник, и инвесторы будут искать в ее словах подсказки относительно перспектив дальнейшего ужесточения политики центробанка, после того, как в последние дни другие представители ФРС высказали неоднозначные мнения. В понедельник президент ФРБ Сан-Франциско Джон Уильямс заявил, что регулятору необходимо постепенно повышать ставки, или экономика рискует перегреться. Глава ФРБ Нью-Йорка Уильям Дадли отметил, что недавнее сужение кредитных спрэдов, рекордные цены акций и падение доходности облигаций могут побудить ФРС продолжать ужесточать политику США. Важных сообщений корпоративного характера, способных оказать влияние на динамику широкого рынка, на премаркете отмечено не было.Источник: FxTeam
It's set to be a busy week with a a jam-packed agenda for central bank watchers, with speeches due from Janet Yellen, Mario Draghi, Mark Carney, Haruhiko Kuroda and more. Economic data may also drive momentum in financial markets, with closely watched reports due on inflation, employment, manufacturing and housing from China to the U.S. We also have GDP, durable goods and consumer confidence in US, industrial production in Japan and confidence indexes in EA Key highlights: In the US, it will be a busy week with durable & capital goods orders, pending home sales, core PCE inflation, personal income & spending and multiple Fed speakers on the agenda. In the Eurozone, key releases include money supply M3, CPI and confidence data. There will also be a central banking forum with ECB, BoJ, BoE and BoC speakers in the schedule. In UK, we wait for final GDP, credit & lending data, house prices and money supply M4. In Japan, main releases include retail sales, CPI and industrial production. In Canada, beyond GDP, we will hear from BoC speakers. In China, we will have current account balance and PMIs. The focus is on inflation releases in US (PCE), EZ and Japan. The attention on these releases should remain high given recent market action: declining oil and inflation was cited as one of the main reasons that supported the recent downward move in long-end rates. A breakdown of key events just in the US: A summary of all the key DM events in the coming week is below: In the US, Bank of America is looking for a flat reading for core PCE inflation, causing % yoy inflation to decline to 1.4% (1.411% unrounded) from 1.5% in April. In the Eurozone, the bank expects inflation to drop to 1.2% (1.15%) marking its inflation forecasts to market following the drop in oil prices: it now expects inflation at 1.5% in 2017 and 1.0% in 2018. In Japan, BofA forecast Nationwide inflation at 0.5% y/y in May. However, we think the June Tokyo CPI is key: we expect a +0.3% rise in June. * * * DB's Jim Reid breaks down the week's events on a day by day basis. This morning in Europe we’re kicking off in Germany where the June IFO survey is due out. In the US the most significant release is the May durable and capital goods orders reports, while the Dallas Fed manufacturing survey will also be released later this afternoon. Tuesday kicks off in China with industrial profits data. In the UK we’ll then get the CBI retailing sales data before we then get the conference board consumer confidence, Richmond Fed manufacturing index and S&P/Case-Shiller house prices readings in the US. Turning to Wednesday, the early data in Europe includes France consumer confidence and Euro area M3 money supply. Over in the US on Wednesday we are due to get the advance goods trade balance for May, wholesale inventories for May and pending home sales for May. Thursday kicks off early in Japan with the latest retail trade report. In Europe we’ll then get consumer confidence in Germany, UK money and credit aggregates and confidence indicators for the Euro area. The afternoon will then see Germany release its flash June CPI print while in the US we’ll receive the third and final Q1 GDP report revisions and initial jobless claims data. We end the week on Friday with Japan employment data and CPI along with the China PMIs for June. It’s a busy end to the week in Europe too on Friday with CPI in France, unemployment in Germany, Q1 GDP in the UK (final revision) and a first look at Euro area CPI in June. A busy day concludes in the US with personal income and spending in May, core and deflator PCE readings, Chicago PMI and the final University of Michigan consumer sentiment reading for June. Away from the data the Fedspeak this week consists of Fed Chair Yellen tomorrow evening along with Williams, Harker and Kashkari also at various stages tomorrow, and Williams again on Wednesday and Bullard on Thursday. China Premier Li Keqiang speaks early tomorrow morning. Meanwhile the ECB forum which kicks off today will see Carney, Draghi and Kuroda all speak on Wednesday. Other things to note this week is the UK PM May’s speech this afternoon, US Supreme Court decision on Trump’s travel ban today, BoE stability report on Tuesday, the result of the second part of the Fed’s bank stress tests on Wednesday and UK House of Commons vote on Thursday. * * * Finally, courtesy of RanSquawk, here is a preview of the main events in the US, where the key economic releases this week are the durable goods report on Monday, the Q1 GDP revision on Thursday, and the personal income and spending report on Friday. In addition, there are several scheduled speaking engagements by Fed officials this week, including a speech by Fed Chair Yellen on Tuesday. MON 26 JUN 2017 – 1330BST: US DURABLE GOODS ORDER (MAY, PRELIM) Forecast: -0.7% vs prev. -0.8%; ex-transport seen 0.3% vs prev. -0.5%. The headline weakness is likely to come on the back of softer orders from Boeing, which reported 13 orders in May, down from the 15 in April (note: this reading captures the pre-Paris air show data). Excluding transport, the picture should be more stable, and there is some risk of prior revisions upwards, Credit Agricole says: “Durable goods production excluding vehicles was reported to have decreased 0.6%, but we think that April’s unexpected decline was overdone and should put upward pressure on orders this month.” TUE 27 JUN 2017 – 1500BST: US CONSUMER CONFIDENCE (JUN) Forecast: 116 vs prev. 117.9. Lower confidence is likely to be driven by declines in the expectations index, which are forecast to fall by around 2 points to 100.6, analysts believe. “The usual drivers of confidence have all remained supportive in recent weeks,” says Capital Economics, “labour market conditions are still strong, gasoline prices have been trending lower and the stock market is at a record high.” But the consultancy wants that “the timelier Gallup and University of Michigan measures of confidence have both dropped back recently. And based on the past relationship, the Conference Board index also looks set for a fall.” THU 29 JUN 2017 – 1330BST: US GDP (Q1, 3RD RELEASE) Forecast: 1.2% Q/Q annualised, unchanged vs 2nd release; consumption expected to be revised up to 0.9% from 0.6%; price index seen unchanged vs 2nd release at 2.2%. No major changes are expected to the headline, though the composition of growth will be in focus, particularly the price index. FRI 30 JUN 2017 – 1330BST: US PCE, PERSONAL INCOME, PERSONAL SPENDING (MAY) Forecast: personal income 0.3% M/M vs prev 0.4%; spending 0.1% M/M vs prev. 0.4%. Core PCE 1.4% Y/Y vs prev. 1.5%. The Fed recently downgraded its view of PCE inflation in 2017 to 1.6%m and the core measure to 1.7%. The May data is likely to highlight the challenges the Fed faces as it normalises policy, with the PCE data once again moving away from target. Meanwhile, May’s employment report saw wages grow by 0.2% M/M, and “this should feed through to broad personal income growth of 0.3%,” ERBS says. “Spending growth is poised to come in lighter than income on the back of relatively soft retail sales on the month,” and the bank notes “that the retail number came with substantial back-month revisions, and accordingly, even with a flat read for May, real personal consumption is poised to clock in 3%+ for the quarter overall.” FRI 30 JUN 2017 – 1330BST: CANADA GDP (APR) Forecast: exp. 0.20% M/M vs prev. 0.50%. Following a strong March print, where utilities and manufacturing supported output, though utilities output is likely to come in flat in April, RBC’s analysts say. The bank also expects a 5% M/M drop in non-conventional oil extraction after fire-related shutdowns which may impact the headline. Meanwhile, RBC says solid retail and wholesale sales data should be supportive. “Taking a step back, the BoC’s hawkish shift is supported by an average of 3.5% annualized growth the last three quarters, with a strong April outcome incrementally adding to this trend,” RBS says. FRI 30 JUN 2017 – 1500BST: US: UNIVERSITY OF MICHIGAN (JUN, FINAL) The Prelim release came in at 94.5, down from 97.1, missing expectations, and printing the softest reading since October 2016, with weakness evenly spread between the current conditions and future expectations index. “All optimism generated by Trump’s Presidential victory has been reversed now, which presumably relates to the lack of action on fiscal stimulus, tax reform and healthcare changes,” said analysts at ING. “There was also a steep fall in business expectations for next year (again back to Trump election levels) and also business conditions over the last few months.” ING adds that weak wage growth was likely to have exacerbated the situation. “Nonetheless,” the bank says “most other spending related questions saw similar responses seen in recent months (be it buying a house, car or other items).” It is worth noting that the prelim data showed 1-year inflation expectations unchanged at 2.6%, but 5-year expectations rose by 0.2ppts to 2.6%. * * * Weekly G-10 central bank monitor The abundance of Fedspeak last week did little to persuade the market to shift towards the FOMC’s hiking trajectory – which has pencilled in seven additional 25bps hikes through the end of 2019; Fed Funds Futures, on the other hand, see just two more hikes over that horizon. An acceptance of the need to be patient was generally evident in the tone of the 2017 voters who spoke about monetary policy last week: while NY Fed’s William Dudley suggested that halting the tightening cycle might imperil the economy, Chicago Fed’s Charles Evans thought it prudent to ‘wait and see’, a sentiment echoed by the Dallas Fed’s Robert Kaplan as well as the usually hawkish Philadelphia Fed President Patrick Harker. Evans and Kaplan’s concerns stem from inflation (specifically, the apparent lack of it). Kaplan was sanguine, and believes that inflationary pressures will pick-up as labour market slack is eroded – which was also Dudley’s core argument. Evans, however, was more scathing, arguing that low inflation was a serious policy mess, and he expressed nervousness about the recent soft inflation data and the challenges about bringing up towards the Fed’s 2% target. “There is a growing rift among Fed policymakers,” write analysts at Jefferies. The bank notes that following the June FOMC rate decision “there have been public grumblings from a growing number of Fed officials who are becoming uncomfortable with the behaviour of the recent inflation data,” adding “predictably, policymakers with dovish inclinations have been outspoken. Yellen is finding herself in a new role as a hawk.” May’s PCE data, released this coming Friday, will be key for influencing the debate. The core measure is seen ticking down by 0.1ppt to 1.4%, and crucially, away from the FOMC end-2017 forecast of 1.7%. Morgan Stanley’s analysts point out that since the beginning of the year, US inflation expectations have fallen by the most in the G10 economies, with 10-year breakeven rates down by around 40bps, which subsequently pushed the 2s10s spread to the narrowest since end of 2007. And this curve-flattening – also evident in other curve spreads – has not gone unnoticed by Fed officials. Kaplan suggested that the Fed be cautious about hiking rates further with 10-year yields around these levels, arguing that it was indicative of the market’s sluggish view on future growth. Dudley was having none of it, however, attributing it to low overseas inflation, once again, highlighting the divergence of opinion among 2017 voters. Balance sheet normalisation, however, is one area where the Fed seems more unified in their endeavours to kick-start the process in 2017. The St Louis Fed President James Bullard said the Fed could announce the start in September, and even identified the ‘low $2 trillion’ level as an appropriate for the long-term size of the balance sheet (from the current $4.5 trillion mark, and for reference, versus around $900 million in Q3 2008). But once again, the link to inflation may prove the guiding factor: Kaplan said balance sheet reduction may have a ‘muting’ effect on inflation, and he was uncertain as to exactly how much. Expect more commentary around this theme in the weeks ahead. Source: Bofa, DB, Goldman and RanSquawk
Недавнее сужение кредитных спредов, рекордные цены на акции и падение доходности облигаций могут побудить Федеральный резерв продолжать ужесточать политику в США, сказал один из самых влиятельных чиновников ФРС в опубликованных в понедельник комментариях.
Недавнее сужение кредитных спрэдов, рекордные цены на акции и падение доходности облигаций могут побудить Федеральный резерв продолжать ужесточать политику в США, сказал один из самых влиятельных чиновников ФРС в опубликованных в понедельник комментариях.
Authored by MN Gordon via EconomicPrism.com, Dear Mr. Dudley, Your recent remarks in the wake of last week’s FOMC statement were notably unhelpful. In particular, your excuses for further rate hikes to prevent crashing unemployment and rising inflation stunk of rotten eggs. Crashing Unemployment Quite frankly, crashing unemployment is a construct that’s new to popular economic discourse, and a suspect one at that. Years ago, prior to the nirvana of globalization, the potential for wage inflation stemming from full employment was the going concern. Now that the official unemployment rate’s just 4.3 percent, and wages are still down in the dumps, it appears the Fed has fabricated a new bugaboo to rally around. What to make of it? For starters, the Fed’s unconventional monetary policy has successfully pushed the financial order completely out of the economy’s orbit. The once impossible is now commonplace. For example, the absurdity of negative interest rates was unfathomable until very recently. But that was before years of central bank asset purchases made this a reality. Perhaps, the imminent danger of crashing unemployment will give way to the impossibility of negative unemployment. Crazy things can happen, you know, especially considering the design limitations of the Bureau of Labor Statistics’ birth-death model. Secondly, muddying up the Fed’s message with inane nonsense like crashing unemployment severely diminishes the Fed’s goal of providing transparent communication. In short, Fed communication has regressed from backassward to assbackward. During the halcyon days of Alan Greenspan’s Goldilocks economy, for instance, the Fed regularly used jawboning as a tactic to manage inflation expectations. Through smiling teeth Greenspan would talk out of the side of his neck. He’d jawbone down inflation expectations while cutting rates. Certainly, a lot has changed over the years. So, too, the Fed seems to have reversed its jawboning tactic. By all accounts, including your Monday remarks, the Fed is now jawboning up inflation expectations while raising rates. Congratulations and Thank You! History will prove this policy tactic to be a complete fiasco. But at least the Fed is consistent in one respect. The Fed has a consistent record of getting everything dead wrong. If you recall, on January 10, 2008, a full month after the onset of the Great Recession, Fed Chair Ben Bernanke stated that “The Federal Reserve is not currently forecasting a recession.” Granted, a recession is generally identified by two successive quarters of declining GDP; so, you don’t technically know you’re in a recession until after it is underway. But, come on, what good is a forecast if it can’t discern a recession when you’re in the midst of one? Bernanke’s quote ranks up there in sheer idiocy with Irving Fisher’s public declaration in October 1929, on the eve of the 1929 stock market crash and onset of the Great Depression, that “Stock prices have reached what looks like a permanently high plateau.” By the month’s end the stock market had crashed and crashed again, never to return to its prior highs in Fisher’s lifetime. To be fair, Fisher wasn’t a Fed man. However, he was a dyed-in-the-wool central planner cut from the same cloth. Moreover, it is bloopers like these from the supposed experts like Bernanke and Fisher that make life so amiably pleasurable. Do you agree? Hence, Mr. Dudley, words of congratulations are in order! Because on Monday you added what’ll most definitely be a sidesplitting quote to the annals of economic banter: “I’m actually very confident that even though the expansion is relatively long in the tooth, we still have quite a long way to go. This is actually a pretty good place to be.” – William Dudley, June 19, 2017 Thank you, sir, for your shrewd insights. They’ll offer up countless laughs through the many dreary years ahead. Too Little, Too Late When it comes down to it, your excuses for raising rates are not about some unfounded fear of a crashing unemployment rate. Nor are they about controlling price inflation. These are mere cover for past mistakes. The esteemed James Rickards, in an article titled The Fed’s Road Ahead, recently boiled present Fed policy down to its very core: “Now we’re at a very delicate point, because the Fed missed the opportunity to raise rates five years ago. They’re trying to play catch-up, and yesterday’s [June 14] was the third rate hike in six months. “Economic research shows that in a recession, they [the Fed] have to cut interest rates 300 basis points or more, or 3 percent, to lift the economy out of recession. I’m not saying we are in a recession now, although we’re probably close. “But if a recession arrives a few months or even a year from now, how is the Fed going to cut rates 3 percent if they’re only at 1.25 percent? “The answer is, they can’t. “So the Fed’s desperately trying to raise interest rates up to 300 basis points, or 3 percent, before the next recession, so they have room to start cutting again. In other words, they are raising rates so they can cut them.” Unfortunately, Mr. Dudley, the Fed miscalculated. Efforts to now raise rates will be too little, too late. To be clear, there ain’t a snowball’s chance in hell the Fed will get the federal funds rate up to 3 percent before the next recession. You likely won’t even get it up to 2 percent. Nonetheless, you should stay the course. If you’re gonna raise rates, then raise rates. Don’t cut them. Raise them. Then raise them some more. Crash stocks. Crash bonds. Crash real estate. Crush asset prices. Purge the debt and speculative excesses from financial markets. Let marginal businesses go broke. Let too big to fail banks, fail. You can even consult with Dick “The Gorilla” Fuld, if needed. Then let nature do its work. In essence, bring the paper money experiment to a close and shutter the doors of the Federal Reserve. No doubt, the economy and millions of people will suffer a painful multi-decade restructuring. But what choice is there, really? Let’s face it. The Fed can’t hold the financial order together much longer anyway. Why pretend you can with utter nonsense like crashing unemployment? It’s insulting. Your credibility’s shot. Better to get on with it now, before it’s forced upon you. P.S. What’s up with Neel Kashkari? The man has gone rogue.
В руководстве Федеральной резервной системы рассматривают возможность использования отрицательных процентных ставок, в случае если американская экономика вновь столкнется с серьезным кризисом.