Posts tagged Fed
Is it over yet?

The new year has started like the old one ended; volatile and with confusion among punters and analysts with respect to the notional Narrative™. The volte-face in expectations for U.S. interest rates is a good example. In October, eurodollars were implying a Fed funds rate of just under 3.3% in December 2019 and 2020. At the beginning of the year, they had collapsed to 2.6% and 2.4%, respectively, effectively pricing in an imminent recession, and Fed rate cuts in 2020 to counteract that. Indeed, at some point, the Fed fund futures were even pricing cuts this year, a position that was stung badly on Friday by the hilariously bullish NFP report. Although neither the Fed nor markets know where the terminal/neutral rate—not to mention that this is a moving target—I reckon that the past six months have given us a decent clue. Anything close to 3.5% probably is too high, while sub-2.5% is too low, at least as long as the economy remains in a more-or-less stable expansion. Looking beyond the navel-gazing that is U.S. monetary policy, I am warming to the idea that (equity) markets will pivot towards cyclicals at some point this year, but we are not there yet. Over Christmas, I toyed with the idea that the next shoe to drop would be a downturn in the (hard) global economic data. The numbers have already deteriorated, but I reckon that they could slip further.

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A Great Story

We will probably spend a big part of Q4 deciphering the economic data through the murky looking-glass of U.S. hurricanes and Asian typhoons, so just to be clear. I am still not happy with the trajectory of global leading indicators. Narrow money growth has collapsed, and recent data suggest that the slowdown will worsen in Q3. M1 in China rose 3.9% year-over-year in August, the slowest pace since the middle of 2015, and the trend in the U.S. and Europe also is poor. In the U.S., M1 is growing just under four percent on the year, the weakest since 2008, and the EZ headline also has slowed, though it is robust overall. The crunch in narrow money chimes with central bank balance sheet data. My home-cooked broad index, which includes the SNB and Chinese FX reserves, is now falling on a six-month basis. These data don’t mean the same in all economies—M1 is not a good LEI in the U.S. for example—and the Chinese numbers will turn up soon to reflect recent efforts to ease financial conditions. That said, a slowdown in US dollar liquidity matters for non-US markets, and the Chinese M1 numbers lead by six-to-nine months. The overall story is clear: Global liquidity growth has slowed to a trickle, warning about risks of growth and asset prices.

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Is the Fed's Script Already Written?

I have a feeling that many readers didn’t like my conclusion last week, that the major markets and asset classes are a bit like watching paint dry. I concede that it was a lousy metaphor, but last week provided an excellent example that markets are still playing second fiddle to events elsewhere in the public sphere. The NATO summit in Brussels and Mr. Trump’s visit to the U.K. drew all the headlines*, once again forcing economists and strategists to take on the uncomfortable mantle as armchair political analysts. To the extent that Mr. Trump’s odd ways are the common denominator across most geopolitical risk these days, experience suggests that investors should ignore it. That said, I suspect the resurgence in the dollar has something to do with it. The U.S., and by extension Mr. Trump, wield extensive power in the global economy. The more that the White House throws its weight around—on the laughable premise that the U.S. is being short-changed as part of the post-WWII world order—the stronger the dollar gets. In other words, Mr. Trump can win the trade wars, and extract pounds of flesh from his allies, but if the dollar zooms higher, the end-result could be the opposite of what the president, and his base, set out to achieve in the first place. 

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Spread Em

One of the more enjoyable aspects of being an independent macroeconomic researcher—at least for a geek like me—is the road trips when you get to speak to clients and prospects. Sure, you see more airport lounges and hotel rooms than you need to. But there is no better way to gauge the zeitgeist than to spend a week in meetings with portfolio managers and asset allocators. I have done just that in New York, and I sense a cautious optimism that the positive trend in equities and credit and the economy will continue for a bit longer. In my capacity as a Eurozone economist, my central message to the wardens of our capital was that the European economy is just fine. But I also spent time floating the following proposition: Monetary policy divergence is back with a vengeance, and macro traders will make, or lose, their money on this theme in the next 12 months. The ECB and the BOJ recently have signalled to markets that they will be stuck with negative interest rates for a while. Meanwhile, the the Fed is on the move, a point highlighted by Friday’s robust advance Q3 GDP report, which suggests that growth in the U.S. economy was a punchy 3% annualised, despite a drag from two hurricanes.

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