Notes From Underground: The Sounds Of Silence, as Sung by Hyman Minsky

Equity markets on Monday sustained their global rally as markets across Asia, Europe and the United States powered higher, even as the political backdrop continues to foment greater uncertainty. This week brings three key central bank meetings: The Bank of Canada, the Federal Reserve and the Bank of Japan.

The BOC kicks off the trifecta Wednesday morning when they’re expected to leave rates UNCHANGED at 1.75% as the Canadian labor market continues to create better than anticipated job data. The election is over and although Prime Minister Justin Trudeau failed to retain an outright majority he still remains the largest vote receiver and will be tasked with forming a minority government. The CANADIAN DOLLAR is relatively strong as it has gained against the major currencies — YEN, EURO, U.S. CAD/CHF chart is showing signs of increasing strength.

The Canadian yield is similar to the U.S. and yet Canada has never had to resort to a QE program. The LOONIE/U.S. DOLLAR last week closed above the 200-WEEK MOVING AVERAGE, which suggests that it has room to rally on a momentum basis. Low OIL prices have been a drag on the Canadian currency but if energy stabilizes and other commodities gain in price the Canadian dollar should reap some benefit. (Reminder, always do your technical work to find risk/reward levels that provide your comfort profile.)

The FED will release its interest rate decision at 1 p.m. CDT to be followed by Chairman Jerome Powell’s press conference at 1:30 p.m. The FOMC is EXPECTED to cut the target range of the fed funds rate to 1.5%-1.75%. The November FED FUNDS futures contract closed Monday at 98.387 for an effective yield of 1.61313% for the entire month of November. IF THE FED DOES MEET MARKET EXPECTATIONS THEN LOOK FOR JEROME POWELL TO ATTEMPT TO BE SOMEWHAT HAWKISH AT THE PRESS CONFERENCE IN AN EFFORT TO QUELL FURTHER MARKET EXPECTATIONS FOR MORE RATE CUTS.

I offer this advice: The actual rate cut is less significant than what Chair Powell states about the FED‘s recent plans the purchase Treasury bills, as well as upsizing the overnight and term REPO OPERATIONS.

The FED has been successful in stemming the YIELD CURVE INVERSION as the response to the recent REPO actions has resulted in the 2/10 and 2/5 curves trading ABOVE THEIR 200-day moving averages in a steepening response. IF I WAS JEROME POWELL I WOULD LEAVE RATES UNCHANGED in the face of the S&Ps making all-time highs. The FED CHAIR needs to stop being afraid of market reactions. Disappointment in equity prices is a necessary part of capitalism as it would keep investors off-balance.

CHEAP MONEY is the driving force of all equity markets, especially as GLOBAL BOND MARKETS are experiencing levels beyond Chuck Mangione’s “Land of Make Believe.” I’m not Jerome Powell and I cannot direct markets. More importantly, to quote Powell: “I don’t have a printing press.” Be patient as it would be consistent if Powell utilizes the press conference to moderate the impact of whatever the FOMC decides. A rate cut will be rationalized through the inflation mandate with the continued global uncertainties created by trade wars and BREXIT outcomes, but these, of course, will be diagnosed as TRANSITORY. Global headwinds indeed.

If the FED were to DO NOTHING after the initial selloff across asset classes I would expect a rebound as the key for the FED will be highlighted as the monetary additions to the front-end of the Treasury market. Be PATIENT! Remember when Powell used “MID CYCLE ADJUSTMENT” to redirect the market action. That about-face in market action on July 31 came 10 minutes into the press conference. You have been warned.

Closing out the cental bank-a-palooza, is the BOJ. Expectations are for the central bank to keep overnight rates at NEGATIVE 10 basis points as the YEN is steady against most currencies although it has experienced a bit of weakness versus the EURO and U.S. dollar, although it is basically unchanged for the year versus the DOLLAR while 4% stronger against the EURO. Governor Kuroda and others have maintained that QQE is still the policy of the BOJ but there has been some hints that the Japanese are looking to slow its purchases of 10-year JGBs.

The JGBs don’t trade much because the central bank owns such a large proportion but the JGB futures chart is looking like a correction in bond yields is possible. Using CQG data, the December JGBs are hovering above the 200-day moving average as the market is in a short-term down trend. This is after the futrues made ALL-TIME HIGHS IN SEPTEMBER. There may be a MINSKY MOMENT, even as the markets seem to be humming the Sounds of Silence. Oh complacency, where is thou sting?

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5 Responses to “Notes From Underground: The Sounds Of Silence, as Sung by Hyman Minsky”

  1. asherz Says:

    Yra,
    It seems to me that the Repo operation has not been raising the big red flags that it should. Most accounts mention it in passing. Someone has to explain to me why this isn’t a real big deal. From the middle of September when it caused some headlines but was explained away as temporary and being caused by the approaching quarters end and tax payments, it has continued unabated. And now a raise from $75 billion to $120 billion for overnight and $35B to $45B for term, to my ears are screams of big liquidity problems. Why is this happening? Could $Trillion deficits on top of current deficits requiring fresh money Treasury financings which will crowd out lower credit risks be a factor? And stock buybacks paid for by debt being another? Or a third I’m missing?
    New historic highs in equities with GDP Q3 now projected at 1.7% (what happened to the 3 handle) and in a downward slope, beyond the sovereign debt inanities leaves us in Never Never Land (not familiar with Chuck Mangione). The inmates (Quants) took over a long time ago. But fundamentals are the turtle (vs. hare) in this marathon.

    • yraharris Says:

      Asherz–well laid out and it just highlights how the finanical world of assets floats on a bed of liquidity in whatever fashion it is injected into the global financial system.The DEBT continues to grow and higher rates without increasing inflation will be a drag on any growth story going forward.Just wait for a BILLION Indians to provide greater pressure on wages—-Nehru and not Nairu

    • David Richards Says:

      Hi asherz. Good observations. The Fed explanation of Repo being temporary & technical is baloney like most of what comes from the Fed, because, quite the opposite of what they say, the problem is structural not temporary and, as you suggest, caused by havoc from surging budget deficits of the technically insolvent US government, which are being increasingly financed by debt monetization courtesy of the Fed. But you don’t really expect Powell to forthrightly state so. That the Fed is now the fulltime financier of the US government via debt monetization. Say, “Weimer style financing, with American characteristics.”

      As to your question about why Repo has been ineffective and has surged yet remained ineffective, the Institutional Risk Analyst explained recently how the Fed QE and Repo has had little US efficacy as the liquidity largely runs offshore:
      https://www.theinstitutionalriskanalyst.com/single-post/2019/10/25/Elizabeth-Warren-Wants-to-Crash-the-Global-Financial-Markets

      Look at the list of primary dealers; they’re mostly foreign banks.

      IMHO stay short USD against, well, almost anything. For example, income investors might consider those fat juicy yields in Mexico, with no need to hedge FX, as the real “peso” is the green garbage being printed at the rate of billions each workday by the Weimer Fed (with American characteristics).

    • David Richards Says:

      Re repo, per the IRA, “The spread differential between the dollar markets and other liquid offshore markets is thwarting efforts by the Federal Open Market Committee to restore liquidity in domestic money markets. When the New York Fed provides liquidity to the primary dealers, that cash does not necessarily trickle down to the rest of the money markets. Indeed, a good bit of it goes offshore seeking to maximize yield.”

      https://www.theinstitutionalriskanalyst.com/single-post/2019/10/29/China-Wags-the-Dollar

      The entire article is worthwhile and shows the folly of the Fed and the blinders worn by the FOMC’ers.

  2. Chicken Says:

    Long red ink! 😉

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