One of the most important indicators for financial markets is yield curves. They are predictive as they have historically shown coming economic turmoil, or, more importantly, the end of a business cycle. The severity of any recession depends on the amount of debt that has preceded the onset of an economic slowdown. I will remind readers that before the 2007-08 financial crisis, the U.S. 2/10 curve actually INVERTED to NEGATIVE SIX BASIS POINTS. Some financial pundits like to cynically advise consumers that the STOCK markets have predicted 10 of the last 5 recessions, but that is not so with yield curves. The difficulty with the signalling mechanism of yield curves is predicting the time for even during the GREAT RECESSION equity markets continued to rally even as the curve flattened.
Posts Tagged ‘yield curves’
Yes, the day of decision is upon us and everybody is SURE of a 25 basis hike from the FOMC. IF I WAS IN CHARGE–NO, NOT JOSE CANSECO, WHICH WOULD BE MONETARY POLICY ON STEROIDS–I WOULD RAISE RATES 50 BASIS POINTS AND ISSUE A WARNING OF MORE AGGRESSIVE INCREASES TO COME. Alas, I am but ashes and dust. The FED has prepared the market for a certain 25 but here are the things to watch:
“When you’re in the shit up to your neck, there’s nothing left to do but sing.” This is what Samuel Beckett wrote and it was the way President Mario Draghi performed today. Never in the history of central banking has a policy maker spewed so much crap about monetary policy and the annals of central bank shenanigans is voluminous. The EURO CURRENCY rallied 1 percent on the headline of the ECB‘s desire to cut monthly purchases to 60 billion euros a month but announced that the duration of QE would be extended through December 2017. So tapering on a monthly basis, but not on a longevity measurement.
Increased volatility is not debatable. It will be the outcome of the uneasiness of global politics. It seems that the present state of affairs reflects the vast chasm between those who have benefited from GLOBALIZATION and those who have seen their lives and incomes being disrupted by a world experiencing dynamic change. Brexit was a vote of the nationalists versus the Davos crowd, or those seeking the comfort of the world they know versus those who have profited mightily from the first mover advantage of being prepared for the post Berlin-wall global economy. The central banks’ efforts to prevent a massive liquidation of global assets and harm that would have befallen the global economy as left many participants in a state of financial repression.
It is the end of the first quarter and it was an amazing time to be a volatility fabricator in the land of algo-driven headline readers. This quarter has seen a great deal of ebbing and flowing for the global equity markets as China, the Fed, the ECB and BOJ have created fear and greed in copious amounts. But as the SPOOS have ended 0.8% higher (after being up 11% in February), the world is well for U.S. domestic investors. The remainder of the developed world equity markets have not fared as well even as its central banks have been very involved in creating new rounds of liquidity and driving their lending rates into negative territory. The DAX and Japanese equity markets seem to be trapped by anemic growth, as well as appreciating currencies. The recent noise from the FED seems to have caused a REVERSAL IN LONG DOLLAR POSITIONS as the short dollar trade was every major investment bank’s favorite trade for 2016. So it goes.
Today was the proof positive that the FOMC is under the command and control of Chair Yellen. As they said about Maggie Thatcher, “This lady is not for turning.” Yellen is a lonesome dove–if we bother to listen to the chirping from the baby hawks (EYAS in the bird world). It is these EYAS who ultimately say YES to everything the Mother Dove asks. There have been very hawkish speeches from FED governors and presidents during the last six weeks but still the vote at the MARCH FOMC was 9-1. There may be many EYAS but Yellen rules the roost. If Stanley Fischer had any sense he would resign and head back to academia where he carries far more weight.
Tomorrow begins the semi-annual testimony of the Fed chair before the illustrious houses of legislature of the United States. Janet Yellen will testify before the House Financial Services Committee tomorrow and the Senate Banking Committee Thursday. Chair Yellen will read the same prepared speech before each Committee and then each member of the Committee gets a preset allotted time to ask questions. (Please note, Yellen’s testimony will be released at 7:30am CST tomorrow.) The chair will dodge predictions but will put forward the most recent DOT PLOTS and FOMC statement as the backdrop to her testimony. THE MOST INTERESTING ASPECT WILL BE WHETHER OR NOT THE FED CHAIR SOFTLY CRITICIZES CONGRESS FOR NOT DOING MORE TO PUT FORWARD SOME TYPE OF FISCAL STIMULUS. Chuck Schumer may believe the FED is the only game in town but Chair Yellen will plead that the FOMC cannot be the sole stimulant to a moribund economy, especially with the headwinds blowing around the globe.
The FED‘s upcoming FOMC meeting (September 16-17) is resembling the theatrics of the Greek debt crisis: Opinions abound about what do to and the entire world has voiced concerns about the outcomes from whatever decision Chair Yellen decides. The media is filled with articles advising the Fed to raise/don’t raise. However, we’ve come to the point, JUST DO IT. Unlike Nike, there will be no victory.
UPDATE: Congress has added a new mandate to the Fed’s responsibilities. Every Sunday during the NFL season the FED will have control of the official balls for all NFL games because the central bank has proved it will never let anything deflate.
Today’s trade was supposedly a risk on/risk off as all of July’s news that failed to impact the market became relevant today. Argentina, Gaza, Ukraine, Portuguese banks … all these issues became reasons for the 2 percent selloff in global equity markets. The problem with the pundits in search of a correlative rationale failed to find the traditional correlations. The SPOOS sold off forty points and the bonds actually closed lower. The YEN, which has been the safe harbor for global investors, remained unchanged for most of the trading session. GOLD, the ultimate haven, lost $14 and closed miserably for the month. Tomorrow’s GOLD action will be critical as we closed under the 200-day moving average. A CLOSE under 1276.50 after the unemployment report will be the end of my bullish outlook on GOLD until some other technicals provide support.