Posts Tagged ‘Fed’

Notes From Underground: Can Jackson Hole Foster a “Dynamic Global Economy”?

August 22, 2017

This is the topic of discussion for this week’s meeting in Jackson Hole. For the Federal Reserve system, this is a statement, but I raise it as a question. A long-held theme of this BLOG has been that what the Federal Reserve, ECB, BOJ, BOE and other central banks promote as certainty supported by mathematical models I maintain IS NOT ROCKET SCIENCE.

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Notes From Underground: The ECB, FOMC Minutes and Dudley’s Speech

August 17, 2017

On Wednesday, I joined Rick Santelli for a chat, which was centered on the ECB and other central banks’ impact on global equity and debt markets. Just before the appearance, there appeared a Reuters story that said President Draghi would not speak about the ECB’s potential Quantitative Tightening, which my readers know supported what I have been steadfast in my conjecturing about possible ECB actions. IN A NOD TO A READER (hello, AGH), while it appears that all central banks pursue a common policy, THERE’S NO MONETARY EQUIVALENCE. Yes, they all purport to raise inflation the political variables each push for different outcomes.

(Click on the image to watch me and Rick discuss the central banks.)

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Notes From Underground: Recapping a Week of Notes

August 13, 2017

Lately, the primary themes in the media revolve around the bombastic rhetoric from the leaders of the U.S. and North Korea. Again, the key to a genuine possibility of warfare will be the beginning of the evacuations of Americans from Seoul, South Korea. The more important elements for global financial markets seems to be directed at ECB President Mario Draghi’s upcoming Jackson Hole speech. In Thursday’s Financial Times, Mohamed El-Erian asked the paramount question concerning the shrinking of central bank balance sheets: “… how many systemically important central banks can effectuate the policy pivot without undermining the over-all liquidity support that has been critical for decoupling asset prices from fundamentals.”

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Notes From Underground: Shelter From the Storm

August 9, 2017

Not a word was spoke between us,there was little risk involved
Everything up to that point ,had been left unresolved
Try imagining a place where it’s always safe and warm
Come in, she said, I’ll give you shelter from the storm

When Bob Dylan released this song 42 years ago it was on the album Blood on the Tracks. When the FED embarked on its QE1, QE2 and QE3 it was to respond to the blood coursing through the streets of the U.S. financial system. The U.S. banking system was threatened with insolvency and the FED‘s monetary injections sheltered the banking system from a storm of forced systemic liquidation of assets. QE1 coupled with a questionable TARP program did prevent a systemic liquidation but QE2 and QE3 I always believed were superfluous but in the land of counterfactuals it is an impossible point to prove.

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Notes From Underground: Jobs Report Gives the Fed the OK to QT

August 6, 2017

Friday’s unemployment report was on the strong side, although certainly not much stronger than market consensus. Yes, nonfarm payrolls were on the high-end but average hourly earnings were right on target, hours worked remained the same at 34.5 and the unemployment rate dropped to 4.3%, but that could be due to a slight rounding error. The markets traded as if the FED could possibly raise rates in September, but I believe the jobs report provides the impetus for the FED to commence with QT. The U.S. yield curves reacted in such a manner as the 2/10 curve actually rose 3.5 basis points, closing at 91.5.

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Notes From Underground: I Knew I Would Return

August 2, 2017

Last week’s FOMC meeting proved BORING and left me speechless … but not thoughtless. The only phrase of significance was the use of “RELATIVELY SOON” in placing some forward guidance to the beginning of quantitative tightening (h/t Boockvar). We have no idea what “relatively soon” means but I continue to ask: WHY WAIT? Yes, it may be because the FED is nervous about the potential of DEBT CEILING caused by a Congress filled with know-nothings and do-nothings clogging the day-to-day financing of government operations.

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Notes From Underground: Cleaning Out The Financial News Stables

July 24, 2017

Today, Rick Santelli and I offered insights into this week’s FOMC meeting, coupled with the recent ECB actions. I noted that the Italian BOND FUTURES Monday were trading above the June 27 close when ECB President Mario Draghi roiled global credit markets with his Sintra,Portugal speech, which suggested that the removal of a deflationary scare would allow the ECB to begin tapering its QE program. The fact that Italian 10-year yields are lower today than four weeks ago is indicative of the power of the QE bond purchases. Why?

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Notes From Underground: The BOJ and the ECB Provide the Recipe For … ?????

July 19, 2017

Before I preview the BOJ and ECB I want to expound on the piece that I mentioned in the previous post written by Bloomberg reporter Alexandra Harris, who cites the thoughts of JPMorgan strategists Alex Roever and Kim Harano. The piece lists four arguments for bringing forward the FOMC‘s announcement to shrink its balance sheet:

  1. Economic conditions are supportive of balance sheet run-off;
  2. The vast amount of discussion has already prepared the market and September won’t make it any clearer;
  3. Starting NOW buys a “few extra months” of the measurement of the market impact of normalization;
  4. Finally,September is an “awkward time” because of the murky outlook for addressing the debt limit before funding runs out in October.

I agree with all these arguments and would HOPE the FED announces its intention to start shrinking the balance sheet at next week’s meeting, press conference be damned.

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Notes From Underground: Brainard’s Speech Was So Significant She Delivered It Again

July 13, 2017

Yes, Fed Governor Lael Brainard actually delivered Tuesday’s speech, “Cross-Border Spillovers of Balance Sheet Normalization,” AGAIN. This time it was to the National Bureau of Economic Research Summer Institute in New York City. Of course I jest as to why she redelivered it. Brainard was overshadowed by Chair Yellen’s testimony to the Senate Banking Committee, even though the Fed Chair deviated very little from Wednesday’s House testimony. The interesting thing was that Yellen backtracked on her hubristic statement she made last week about not experiencing another systemic financial crisis in her lifetime. A brazen statement like that is Greenspanish but certainly out of character for the demure Janet Yellen.

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Notes From Underground: Brainard Delivers a Very Significant Speech

July 11, 2017

Tuesday, FOMC Governor Lael Brainard delivered what I deem to be a very important speech, which spoke to the necessity starting to shrink the balance sheet while halting further interest rate increases. The speech, titled, “Cross-Border Spillovers of Balance Sheet Normalization,” is packed with insight into FOMC thinking reminiscent of the powerful speeches of former Fed Vice Chairman Donald Kohn. I have noted that Brainard is Yellen’s confidant (mere conjecture on my part) similar to how Kohn served as Greenspan’s consigliere, providing great insight into FED policy. Governor Brainard puts forth the reasons for HOLDING fed funds steady while beginning the task of balance sheet shrinkage. Important points to consider:

1. Raising policy rates and reducing central bank balance sheets–appear to affect domestic output and inflation in a qualitatively similar way. This means that central banks can substitute between raising the policy rate and shrinking the balance sheet to remove accommodation;

2. Is there a difference between conventional policy hikes or shrinking the balance sheet on cross-border spillover effects? “Most prominently, the exchange rate may be more sensitive to the path of short-term rates than to balance sheet adjustments, as some research suggests,” (Stavrakeva and Tang, 2016). This issue is what I have discussed for eight years in NOTES FROM UNDERGROUND. Foreign exchange rates are more sensitive to the short-end of the curve than the long-end. A flattening curve has historically been positive for a currency as the interest rate market is signalling that the central bank is too tight for economic conditions. (Brainard cites the example of the FED‘s Operation Twist in the early 1960s.)

If a similar amount of tightening is achieved through the balance sheet reduction “… while keeping the POLICY RATE unchanged, the exchange rate would appreciate to a SMALLER degree, reflecting the lower assumed sensitivity of the exchange rate to the term premium than to policy rates.” Governor Brainard further supports this view by noting that other countries would not have to act as swiftly to raise rates in response and therefore allow other nations to pick up the slack if the U.S. economy was to slow down. Also, in the case of a managed exchange rate, she cites China in 2015-16 as China responded to the incipient rise in U.S. fed funds rate by squeezing liquidity and depreciating the YUAN.

3. If different monetary regimes are pursuing different policies in trying to contain demand shocks, the cross-border impact on the nation using interest rate policy versus balance sheet shrinkage in the other will probably result in greater foreign exchange rate movements. Brainard notes that the “… downward pressure on term premiums around the globe, especially in those foreign economies whose bonds were perceived as close substitutes.” Certainly this speaks to the BUND/U.S. 10-YEAR NOTE correlation. In this regard the Brainard suggests that the BOJ and ECB present programs provides an opportunity for the FED to reduce the balance sheet without as much disruption as the fungibility of global markets will provide some support to U.S. term premiums.

4. Inflation for Brainard will remain very important. She said, “I will want to monitor inflation developments carefully, and to move cautiously on further increases in the FEDERAL FUNDS RATE, so as to help guide inflation back up around symmetric target.”

I fully expect Chair Yellen to speak to this in her testimony this week. If I am right, the yield curve OUGHT to steepen further. The 2/10 curve closed at 98 basis points Tuesday after holding support levels. The SPOOS and NASDAQ should fine near-term strength as markets believe that FED FUNDS INCREASES ARE ON HOLD. Commodities should return to supply/demand fundamentals and the precious metals OUGHT to repel fears of rising short-term rates. Also, emerging markets should breathe a sigh of relief.

There is much to contemplate in Brainard’s speech, but if she plays Jiminy Cricket to Janet Yellen expect the Fed chair to support this outlook. The FED seems to have been shaken by the recent severe flattening in the yield curves. Other political factors such as the White House tweets and buffoonery cannot be accounted for in an algo-driven world. But I believe that Brainard did more to impact markets than the e-mails of Donald Trump, Jr.