Today, CNBC‘s Steve Liesman interviewed San Fran Fed President John Williams. In a swipe at Fed gallows humor, President Williams presented Liesman with a T-Shirt that said the Fed was DATA DEPENDENT. The humor part was Williams’s effort to cut-off Steve Liesman’s well choreographed question which amounts to: “Come on, John, share your inside view about the possibility of a RATE RISE at the next FOMC meeting (just between us, John).” So as to make sure that Liesman understands the consistent answer: It is data dependent. If the FED wants to create some jobs it can send everyone with a bank account a free “Data Dependent” shirt, compliments of their regional Federal Reserve. All sarcasm aside, President Williams’s view puts added importance now to the inflation data on Friday and of course the retail sales input on Wednesday. The consensus on the CORE RETAIL SALES is 0.3% increase so a strong number would be above 0.6%. If the theory of data dependence holds then it should be the SHORT END of the curve that gets sold and here is my reasoning: The 2/10 and 5/30 parts of the yield curve have steepened dramatically during the last two months as the market accepts the fact that the recent bout of weak economic data has pushed the FED further away from raising rates.
The market is worried that the FED will wait too long and the threat of inflation increase, thus there has been a great deal of selling of the long end of the bond market. If the DATA improves and the threat of an earlier FED rate rise increases, the curve OUGHT to flatten as the short-end bears the brunt of investor selling. The inflation issue will be tougher for the market to handle because the FED will maintain it has a DUAL MANDATE: concern for JOBS and INFLATION. The question is for the market: Which mandate should the Fed choose to most closely adhere. As I wrote last week, I believe that the FED would like to raise rates as soon as possible in order to test its mechanism of the O/N RPP/IOER to control overnight reserves. It is a difficult operation to thread the needle of getting off the ZERO INTEREST RATE floor. More on this issue will follow this week.
***China lowered the interest rates on bank loans and deposits, again. In an effort to ease pressure on Chinese borrowers the PBOC lowered rates by a small amount. Unlike previous times, the market response was MUTED. The Chinese YUAN barely moved and more importantly the precious metals failed to rally and even COPPER‘s response was barely unchanged. It seems that the PBOC will have to become ever more aggressive if it wishes to generate some enthusiastic market response. In the realm of currency, the Australian dollar, which tends to responds positively to any type of Chinese stimulus barely reacted. Just something to keep in mind.
***In an effort to prevent boredom about the media’s reporting on Greece and the EU, there were two letters to the Financial Times’ editors in Friday’s edition that shine light on the difficulty of the present Greek negotiations with the Troika. A large part of the current impasse is that the IMF maintains its bailout of Greece should be repaid in full for the IMF is not just any creditor and its covenants demand that it be repaid in full. Letter number one is by David Owen and Robert Skidelsky, both members of the House of Lords and Lord Skidelsky is the biographer of Keynes. In writing about the IMF‘s pushing for other creditors to absorb a Greek debt restructuring the writers note: “Greece was not that indebted to public entities before that. The mistake was the 2010 bailout of the banks, as part of which Europe imposed swinging austerity on the Greeks. Now at the eleventh hour it is imperative that the IMF takes action and the EU and other governments take their hit, while taking seriously the Syriza government’s alternative reform programme.”