The long-end of the U.S. Treasury curve steepened Monday and Tuesday as bond futures did some technical damage, closing under the 200-day moving average. It joined the 2-, 5- and 10-year Treasuries, which have been below the important technical level since September. U.S.Treasury yields rose as the ECB failed to lift European sovereigns. The BUNDS, FRENCH OATS and Italian BTPs all saw significant increases in their yields. BUT I ADVISE PATIENCE AND CAUTION BECAUSE THE ECB IS SUPPOSEDLY SET TO FINISH ITS MONTHLY PURCHASES BY DECEMBER 21. As of the close of last Friday the ECB had bought ONLY 33 billion of assets leaving it 27 billion EUROS of its QE quota. It has two days in which to push yields lower and we don’t know how much they have purchased over the past two days.
If the ECB is holding its fire in order to punish short sellers then the next two days can bring a great deal of pain to those short global bonds. That is why I warn traders to be patient even as the technical indicators have all turned negative. The December 21 date can be found in a Bloomberg piece by Paul Cohen titled, “EU Cupboard Remains Bare,” which said, “The ECB is due to pause all asset purchases from December 21 through 29 inclusive.” Just an important reminder that holiday markets can bring large gains but in a central bank manipulated market much pain.
***There was a very important article published on-line at Project Syndicate by the highly regarded William White. The piece, titled, “The Dangerous Delusion of Price Stability,” raises several important issues regarding the central banks belief that “low inflation is also a sufficient condition for sustained growth.” White cites the inability to acknowledge that there are many various sources for disinflation. Sometimes there are demand shocks while at other times supply shocks such as when previous controlled economies unleash a massive labor force on the global economy. The effort to fight disinflation keeps interest rates low even when the cost of capital ought to rise in order to prevent a situation of excess capacity on a global scale. By keeping borrowing costs too low the entire financial system increases borrowing which leads to a feedback loop of having to sustain low interest rates. As White said: “True, as a matter of arithmetic, deflation increases the real [inflation-adjusted] burden of debt service. But if debt levels are at ONEROUS HEIGHTS AS A RESULT OF EASY-MONEY MONETARY POLICIES, [emphasis mine] it is not obvious that the solution to the problem is still more easy money.”
Policy makers need to wean themselves off the inflation-targeting nature of global monetary policy. Please read the White piece as it sets the agenda for so much of what we will face in 2018. Along with White’s piece is the need to remind ourselves of the warning from Mr. Zhou from the Bank of China: There is far too much complacency as debt-to-GDP ratios rise, creating the environment for a Minsky Moment. As interest rates rise the massive increase in debt on corporate, government and personal balance sheets will have to be serviced. Will there be enough growth to satisfy creditors? The Bernanke FED was an experiment in preventing the onset of deflation as experienced in the 1930s but while the portfolio balance channel boosted asset values the Bernanke plan had no exit strategy. Enjoy the calm as we head into a new year.
Tags: Bill White, ECB, monetary policy, sovereign debt
December 20, 2017 at 2:02 am |
Higher European bond yields during the ECB hiatus later this month would be supportive of the higher Euro I discussed yesterday and expect for the closing of the year. This is supportive of the technical hypothesis that euro was in its final major rally of its maturing bull phase. Specifically, we get a big move up here, then a partial retracement and a final push into the 122-128 range, which cannot be refined until we see the preceding price action. Failure to break above that range will be quite bearish for euro and ultimately lead to new lows below 103 as I expect eventually, but there is no certainty in these uncertain markets.
Fundamentally, the narrative I hear now is that US tax cuts are bad for the dollar because the US twin deficits will soar and last time that happened the dollar collapsed. Yet, earlier this year, the narrative was that US tax reform would boost the dollar due to corporate profit repatriation, a boost in the US economy/shares, and relief that US politics is less dysfunctional than feared.
So which narrative is it? I’d say doesn’t matter and instead monitor the Euro technical levels above and 115.5 on the downside.
That said, any tax cuts (USA) are better than higher taxes (Europe). While I’m bullish EURUSD until 1H18 or so, I’m bearish after that.
December 20, 2017 at 10:12 am |
Update from Germany: the timetable for coalition talks between the CDU and SPD is set. They will hold PRELIMINARY talks from January 7 – 12. The results of these talks will be presented to a special SPD convention on Jan. 21. Delegates will then have to decide if the SPD will enter CONCRETE negotiations about a coalition.
If they approve, detailed negotiations will follow. BUT: the final results will have to be approved again, this time by the whole SPD PARTY!
So, there are at least two hurdles to clear. Sentiment in the party is still mixed at best. If Merkel doesn´t come with a big offer, the SPD might very well say NO.
December 20, 2017 at 10:47 am |
Green AB–as always thanks for the update as drama unfolds–
December 21, 2017 at 8:29 am |
Yra, any thought about Catalanonia’s election in Spain? Thanks!
December 21, 2017 at 9:10 am |
Arthur–no .It needs to play out for it seems not to want to go away—
December 21, 2017 at 9:37 am |
Hi Yra Have you seen the latest EU affront to sovereignty:
https://www.theguardian.com/world/2017/dec/20/eu-process-poland-voting-rights:
Judicial reforms in Poland mean that the country’s judiciary is now under the political control of the ruling majority. In the absence of judicial independence, serious questions are raised about the effective application of EU law,” Timmermans, a former Dutch diplomat, said.
By EU laws I assume these are not laws as we know them but dictates initiated by the unelected EU Commission and rubber stamped by the EU Parliament. One reason for this move that I have read is that Germany and France, aka the rotten heart of Europe, want Poland to take more immigrants. What are your thoughts on this development? Another leak in the EU dike or more? What happen if Poland leaves the EU?
December 21, 2017 at 7:05 pm |
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December 21, 2017 at 7:58 pm |
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