The unemployment data was not as robust as expected but not bad since hourly wages rose above consensus, the work week remained elevated and the jobless rate dropped to 5.8%. The headlines are always subject to severe review doing these tumultuous times. The question remains: Why did the BOND market experience a sizable rally even as the DATA was well within range of expectations. There is a great deal of pressure on the U.S. overnight market as vast amounts of liquidity searches for a home.
The FED had been searching for ways to keep short-rate from going negative so MAYBE the SOMA/FOMC are purchasing further out of the curve. If so, then any short positions in longer-dated debt will be subject to intense rallies as traders will be pushed to cover losing positions.
The recent steepening in the 2/10 and 5/30 curves due to increased concerns about inflation–which the FED insists is transitory—may have prompted some stealthy type of yield curve control. It is a new spin on the old rule: Don’t fight the FED. At this juncture we don’t know enough but BOND BEARS need to be cautious for a central bank bent on containing yields on longer term bonds can be a powerful force for resisting market sentiment.Do your technical work to apprise the bigger picture of FED desires.
The U.S. Treasury also wants to keep its borrowing costs as low as possible. One potential fundamental lifting bonds is if Congress does not agree on the massive stimulus package proposed by the Biden administration. But any failure of increased stimulus would see the stock market also correct as anticipation of stimulus gave way to disappointment. The S&P/BOND simple relationship, which has served us well over the last 25 years, should continue to be an important chart. DO YOUR WORK for the chart has been a key barometer of critical turns in the market — specifically October 2017 and October 2018.
***During the height of the pandemic-induced financial crisis, Bundestag President Wolfgang Schauble wrote an opinion piece in the Financial Times, which I referred to as a pivot away from his well ensconced fiscal frugality. I said that the pivot was an important moment because he opposed giving loans to economically stressed EU nations but rather providing large grants. The eminent austerian put it in poetic fashion: Giving loans was like providing rocks, while GRANTS would be equivalent to BREAD.
Now, one year later Schauble is pivoting again. This time in a Financial Times piece titled, “Europe’s Social Peace Requires A Return to Fiscal Discipline.” He acknowledged the need for a pivot for the fears of sovereign debt not being repaid causes the anxiety about inflation. He said, “Borrowing in times of crisis to stabilise the economy makes sense,as long as the question of repayment is not forgotten.”
The ECB and EU Commission were correct in their crisis management but as the pandemic recedes it is time to roll back the intervention. Schauble fears the societal consequences from the rapid rise in public borrowing that leads to ever increasing disparity between rich and poor. He went on, “Public borrowing increases their wealth,widening the gulf between rich and poor. Keynes once warned the profiteers would become the object of hatred. Now the gap between “haves and “have nots” poses a huge threat to social cohesion.”
This warning from Schauble carries weight as he is the President of the Bundestag and thus has a great influence on Germany’s budget process. Last year the Merkel Government was able to suspend the “Schwarz Null” or black-zero rules on on Germany’s self-imposed debt restrictions. In a recent German High Court ruling, the Karlsruhe decided that the actions of the Bundestag to oversee the necessity of ECB bond purchases based on “a proportionality assessment” and thus fulfilled the requisites of German law. Schauble has great standing in Germany so we need to keep an eye on this.
***In an appearance before the Economic Club of New York, Fed Governor Lael Brainard delivered a speech t”Remaining Steady As the Economy Reopens.” The speech provides more support to the transitory nature of the current rise in prices providing support for keeping rates lower for longer. While noting that the vast pool of savings is providing for consumption coupled with the robust fiscal stimulus. She said:
“The timing of household consumption out of the accumulated savings will be very important for the strength of demand not just this year, but as next. TODAY’S FISCAL TAILWINDS ARE PROJECTED TO SHIFT TO HEADWINDS NEXT YEAR. SO AN IMPORTANT QUESTION IS HOW MUCH HOUSEHOLD SPENDING WILL CONTINUE TO SUPPORT GROWTH INTO NEXT YEAR AS OPPOSED TO SETTLING BACK TO PRE-PANDEMIC TRENDS, WHICH WOULD BE AN ADDITIONAL HEADWIND RELATIVE TO THE STRONG MAKEUP CONSUMPTION WE HAVE SEEN SO FAR THIS YEAR,” (emphasis mine).
This is one of the FED‘s critical leading voices, carrying more weight than the chattering nabobs of regional presidents that fill the empty void of financial news. Brainard was the one pushing Yield Curve Control in 2020. Her position on lower for longer has stature. It seems that the Biden tax hikes are now the key to the inflation is transitory school of policy making. The differences between concerns of two policy makers — Schauble of Germany and Brainard of FOMC — cannot be more stark. The outcomes from the said policies will provide opportunities for traders in a myriad of assets. We will follow these discussions in a search for profitable trades and investment.
Tags: ECB, EU, Fed, Germany, inflation, Lael Brainard, Wolfgang Schauble
June 6, 2021 at 1:28 pm |
I keep wondering how anyone can trade these markets. In order to figure out markets you need FREE MARKETS. YCC is not a free market. Zero rates are not free markets. All you get is an ever expanding bubble. When they pop no one knows. So some play the momentum game. That’s Russian roulette.
June 6, 2021 at 3:32 pm |
This market seems sooo bizzare to me. On one hand you have central banks printing to eternity to support the stock market, on the other hand the G7 will be introducing a 15% tax on global companies. Robbing Peter to pay Paul, how long can that last? They should just pay off everyone’s personal debt and start over.
June 6, 2021 at 6:14 pm |
Bosko has a great idea. Paying off everyone’s debt would hurt the banks of course. Can’t have that.
Maybe next time a young couple goes to get a mortgage, the banker says to them I’d rather give you a grant, giving you this mortgage would be like giving you stones.
Mortgage- Old French, literally ‘dead pledge’, from mort (from Latin mortuus ‘dead’) + gage ‘pledge’. (Engagement to the death.)
My thoughts on the Global tax plan, if this goes through couldn’t corporations just raise what they charge consumers to pay for it?
Yra, this was a great post! I’m not a trader, but reading your work truly helps me position myself financially in these uncertain times.
Thank you.
June 6, 2021 at 6:24 pm |
Pierre –thank you and I am struggling to understand this base 15% and how it will do all they maintain.Also,let’s wait for the G20 where we will see Xi and Putin as well as the India tech people see how they react.The G7 as you can read in the Communique is an atavistic remnant of a different world: remembrance of things past.The 20 point communique contains more platitudes than an election platform –truly pathetic with all the issues plaguing the global financial system.Interesting that Biden’s negotiating tool for the infrastructure package was to give the Republicans what was being offered at the G7—-there are so many holes I will wait for the G20.The media was pathetic in running with this as headlines—-wow talk about a popular narrative —thank you Chair Powell for taking my question—-access over content–why I would rather read other non -mainstream media—Axios,Politico,SCMP–but thank you for taking my question.
June 8, 2021 at 3:47 pm |
Pierre–extra extra read all about it in tomorrow’s FT—-“UK PRESSES FOR CITY OF LONDON CARVE-OUT FROM G7 GLOBAL TAX PLAN”—sorry but you can’t make this up.UK pushing of exemption for financial services—and just as expected will make the case as talks move to G20 next month—wow the ink is not even dry.
June 8, 2021 at 6:55 pm
That didn’t take long. Seems to me they mainly just want to go after the big tech companies.
I think Yellen may have put the cart in front of the horse on this one.
First, we spend the money.
Second, we figure out a way to collect taxes (from the “World”) to pay off the debt.
Well, the “World” is saying: I was born at night, but it wasn’t last night.
June 6, 2021 at 10:20 pm |
The Fed is giving us a warning to pay attention with their decision to unwind their corporate credit book.
June 7, 2021 at 7:07 am |
AlexF—maybe but 13 billion over a protracted period into a market hungry for debt is not a resounding statement about the direction of FED policy.If that is really the case get on with itand stop the stop go rhetoric of real unemployment being 10%—it calls into question Fed credibility
June 7, 2021 at 9:19 am |
[…] Link Here to the Blog Post […]
June 8, 2021 at 11:58 pm |
Jun 9 Hong Kong’s house prices are only 1.5% below their peak in 2019, despite two years of protests and pandemic See Feb 18
http://www.geopoliticalcalendar.com
June 9, 2021 at 2:52 am |
From the Deutsche Bank report:
Ronald Reagan (1978): “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”
Joe Biden (2021): “A job is about a lot more than a paycheck. It’s about dignity. It’s about respect. It’s about being able to look your kid in the eye and say everything will be okay. Too many people today can’t do that – and it’s got to change.”
Janet Yellen (2021): “Neither the president-elect, nor I, propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big”.
Jerome Powell (2021): “During this time of reopening, we are likely to see some upward pressure on prices … But those pressures are likely to be temporary as they are associated with the reopening process.”
Larry Summers, (2021): “I think this is the least responsible macroeconomic policies we’ve had in the last 40 years.”
Asherz : As I’ve said before— what do Yellin and Powell see that they’re not saying—and with a BIden proposed budget of six trillion smackeroos)
June 9, 2021 at 4:06 am |
Yellen: “At the same time, ending the pandemic gives us the opportunity to shape our recovery and tackle our most pressing socioeconomic challenges”
https://home.treasury.gov/news/featured-stories/remarks-by-secretary-of-the-treasury-janet-l-yellen-on-a-better-deal-for-americans-to-the-us-chamber-of-commerce
Never let a good crises go to waste.
June 9, 2021 at 7:43 am
Pierre–Rahm Emanuel 101 and this has been her playbook —-now bring in Brainard and it will complete the ACT 2
June 9, 2021 at 11:46 am |
Yra- what do you make of the record # of RRPs the FED is doing?
June 10, 2021 at 8:05 am |
“it’s estimated by Moody’s Analytics that property owners are owed more than more than $70 billion by more than 10 million Americans who are behind on rent, but remain protected under the federal eviction moratorium set to expire on June 30.”
June 10, 2021 at 11:58 pm |
Yra & Co.
Black Swan: highly improbable, extreme impact event.
Coming Black Swans (2021-2030): … ???
Thanks
June 12, 2021 at 3:13 pm |
From a consumer’s POV I think covid changed priorities dramatically and anyone investing in consumer type stocks will get a true schooling in that category. It ain’t going to be the same as in the past.
June 13, 2021 at 11:30 pm |
I think EBAY offers a value proposition to all consumers.
Anyone looking to stretch their dollar or looking to sell their clutter for a few bucks. A valuable marketplace to a growing number of thrifty consumers for obvious reasons. An online forum that is more abundant & competitive than anything else of its kind.
I am not a stock picker, but Seth Klarman’s largest holding is my new favorite place to buy and sell random stuff.