At 8:00 a.m. EST, CNBC‘s announcer says, “From The Most Powerful City In the World, This Is Squawk Box.” What bothers me is the squawking about your importance. What irritates me even more is that Beijing has been the most powerful city when it comes to moving markets. Every other idea spewed this week has been about the impact of the Chinese authorities and the policy impact from the Politburo that “destroyed” trillions of equity market value. It even appears that the Chinese are dominating the discussion in Jackson Hole, Wyoming where the Kansas City Fed is hosting their annual symposium. Even New York Fed President Bill Dudley, aka Less Compelling, cites the Chinese as the reason to be less compelled to raise rates at the September meeting.
Yesterday, the markets were emboldened by Dudley’s comment about market turmoil and global uncertainty possibly delaying any action by the FED in the near future. The key phrase from the NY FED President was the Fed was indeed data dependent, “BUT DATA IS NOT JUST ABOUT ECONOMIC RELEASES.” Dudley explains that “international developments have raised downside risks.” So the NY Fed is aware of events in China and other emerging markets and will consider them in the context of the Fed’s dual mandate. Again, enveloping the Fed in the dual mandate allows the central bank a very wide reach in setting policy. In a world of free capital flows any action by the Fed can cause a negative feedback echo upon the U.S. economy. This certainty lends credibility to the Ben Hunt thesis on central bank omnipotence. The FED defines the rules of its beloved dual mandate and therefore can never be wrong.
The only objective force challenging the Fed’s omnipotence is the market, and the Fed’s QE and forward guidance have done much to emasculate the signalling power of the BOND, currency, precious metals as an opposing force. The equity markets act in concert to help the world’s central banks maintain the illusion of omnipotence. I have heard the rumor that the only way to get in the Jackson Hole Symposium is to follow the green brick road to the Lake Jackson Lodge, knock on the door, click your ruby slippers and pronounce your belief in the omnipotence of the all-knowing central bankers.
***Something to ponder: I have been wondering if the increased volatility and swings in all asset classes is a result of the PBOC actively trading markets. Because it is the Chinese actions moving equity markets, which result in wide swings across all investments, wouldn’t it be in the best interests of China’s central authorities to profit from their vast global influence?
Back in the late 1980s and early 1990s, the largest foreign currency trader in the world was the Monetary Authority of Singapore (MAS) and they could create all types of volatility through release of statements (the central bank of Singapore made huge profits from its ability to disrupt). There’s no proof to my thinking but if I ran a large sovereign wealth fund I would utilize the influence that the market lent to my nation’s credibility for as long as I could.The global-macro tapestry is always filled with pitfalls but the power of a government authority to impact trades is a very real possibility.
***BOJ Governor Kuroda made a strange statement. He said, “Abenomics has corrected excessive YEN appreciation.” Kuroda mentioned this during a speech and Q&A at the japan society in New York. This followed a statement from one of Prime Minister Abe’s lieutenants, who said after last week’s Chinese YUAN devaluation the BOJ could do more QE. Bloomberg News reported at the meeting that Kuroda said a “… Fed rate increase would be good for the World Economy. If Fed officials raise their short-term interest rate target that means that they are confident that the U.S. economy is strong and robust and that is not only good for the U.S. economy but also for the world economy, including the Japanese economy.” Of course if the FED raises rates the Japanese YEN would move down and the world could not blame the BOJ or ABE administration. A lower yen without responsibility.
If the Japanese were to initiate a policy of more YEN weakness, even with a very low print in tonight’s CPI and retail sales data release, the Chinese would PROBABLY respond in kind with a renewed bout of YUAN weakness. Be very attentive to YEN values in a world where financial power emanates from Beijing, even the hills of Wyoming alive with the sounds of Mandarin.
Tags: Abe, Bill Dudley, BOJ, China, Fed, FOMC, Janet Yellen, Japan, Kuroda, PBOC, QE, rate increase, Yen
August 27, 2015 at 8:41 pm |
NEVER LOOSE YOUR ASS ON FRIDAY…. what a week it’s been.
August 28, 2015 at 2:54 am |
“The only objective force challenging the Fed’s omnipotence is the market, and the Fed’s QE and forward guidance have done much to emasculate the signalling power of the BOND, currency, precious metals as an opposing force. The equity markets act in concert to help the world’s central banks maintain the illusion of omnipotence.”
In plain English, doesn’t this mean mean that there is market intervention by the Central Banks or their agents in ALL the markets, including the equity markets? The PBOC at least admits it. The Shanghai market rising over 5% minutes before the close a couple of days ago. The Dow on Monday falling over 1000 points before recouping 90% of that loss before another tumble. This was followed by a 1000 point rise in the next 2 days. Yen/yuan racing to the bottom and how much longer until the Won will follow.
The wild volatility reflects the thrashing of a mortality wounded financial behemoth who is staggering, attempting to pull out the arrow shot from Beijing that has pierced his neck. Hold on to your seats.
August 28, 2015 at 6:04 am |
Asherz–exactly which is why the reference again is –ben Hunt’s brilliant analysis of central bank omnipotence with the outcomes that you state—it is all good as long as you click your heels and believe.The TOTO this time could be the seat we all hold onto as we vomit in disgust and pain
August 28, 2015 at 6:57 am |
In the 2015 version, Dorothy is played by Janet, and the talking heads at CNBC are the personifications of the adorable Toto. For those who understand we are watching the Truman Show, it is amusing.
August 28, 2015 at 7:33 am |
It’s strange how bonds did not rally as much given the recent volatility in the market? Yra do you think this is because the Chinese are selling treasuries or that investors are just going to cash waiting to buy more equities and ignoring bonds given the pending rate hike?
August 28, 2015 at 7:47 am |
Mike–if the chinese are selling massive amounts I don’t know and will let others opine –I will continue to monitor market movements and look for opportunities in a short term basis—the bigger picture will reveal itself regardless of what the Fed does—but a 25 basis point rise in September will actually be a good thing for helping get a firm grasp on the global macro outlook—25 basis points is meaningless except it gets it out of the way.But as for the bonds I thought the curve steepening that took place after Dudley’s “less compelling” statement was more then of passing interest–that was a major move in the 5/30 curve
August 28, 2015 at 9:55 am |
Yra, love your work. Just looked at the 5/30 treasury curve and it looks like over the past month it has been a parallel shift and not as much of a steepening. am i looking at the wrong data? More importantly what does it mean for investors if there is a steepening? Thanks!
August 30, 2015 at 3:53 pm |
Michael—if the curves begin a steepening–an IF because the 2/10 remains well below its 200 day –the first stage is historically positive for equities because it reflects that the central bank is still behind the market thinks rates ought to be—a good test will be how the curve responds to a FED rate rise in September–the market has tended to flatten in anticipation of a Sept.rate rise but what actually takes place after the realization of a fed move will be far more important
August 28, 2015 at 10:54 am |
“In plain English, doesn’t this mean mean that there is market intervention by the Central Banks or their agents in ALL the markets, including the equity markets? The PBOC at least admits it.”
besides the PBOC the BOJ and SNB are the other CBs who are open about their activities in equity markets. when you look at the action in markets over the last years (last minute saves at critical technical levels, the ominous V-shaped bottoms, and of course this weeks action) the probability is very high that the FED is in this too. just my opinion.