- FOMC minutes suggest the Fed is unhappy with market views of the pace of tightening.
- Language changes still on the table for the next couple of meetings.
- Draghi escalated the QE rhetoric once again but market not pricing it in.
- Where are breakevens, German rates, peripheral spreads and equities headed when QE gets priced in? Read More
Video Update: Why It Pays Off To Pay Attention – The Subtle (And Not So Subtle) Central Bank Messages
Draghi today once again escalated his rhetoric. But in spite of a crescendo of dovish talk on his part, markets still are not pricing in a large scale QE program. While the euro is moving in a direction consistent with QE beliefs, EZ breakevens, interest rates, credit spreads, and stocks are not. Markets are probably held back by doubts that QE in the EZ is feasible and by the risk of a deep recession. Both those concerns are exaggerated in our view. In the note we discuss how breakevens, German interest rates, peripheral spreads, and higher equity prices should evolve … Read More
The most important thing that could have come out of the minutes was some color on how close the FOMC is to changing the “considerable time” language. However, all the discussion on that topic in the minutes revolved around the decision not to change the language at the October meeting – there was nothing forward looking. One possibility is that the Fed had plenty on its plate in October and didn’t have time for a detailed discussion of language issues. But it’s also reasonable to think that, since there wasn’t a discussion about changing the language soon, and since only … Read More
The Fed will release the minutes of the October FOMC minutes today at 2pm EST. The subject that is most likely to contain some new information is whether or not there was a discussion about changing the “considerable time” language – that discussion should give us a better idea of the timing for such a change. Also important will be to get a better idea of how concerned the FOMC was about inflation declining further, breakevens having dropped significantly, and the impact of the stronger dollar and the global slowdown on the US economy. In the report we discuss what … Read More
After we wrote our note on inflation last week, the Michigan survey of long-term inflation expectations declined two tenths of a percent. Many investors asked us for our take on the effect the release will have on Fed policy, so in today’s report we address it. The Fed is unlikely to be alarmed by the modest decline in the Michigan survey because it was most likely due to the sharp drop in oil prices. The Fed likely reads inflation expectations as still stable. However, although June remains the most likely timeframe for the first rate hike, low inflation and inflation … Read More
The postponement of the second tranche of the consumption tax increase was already a given before the news that Japan is technically in a recession. After today’s news, the odds of even more stimulative policy are going up. Additional stimulus is likely in both the short and longer term. Japanese policymakers will double down on their policies before giving up. Independent of what it will do to the long-term Japanese growth outlook, this is a classic case where bad economic news is good policy news that should help support the markets at least for a time. Here is how I … Read More
- It’s just not the well-known labor market data that are good.
- Deflation risk seems small, according to different price measures.
- Fed leadership confirms June liftoff is base case.
- Biggest disconnect between market and Fed is expected pace of tightening. Read More
We keep hearing a lot of concern about deflation risk in the US. However, neither actual data nor market-based expectations nor survey-based expectations support such fears. In the report we look at data that go beyond the usual measures investors focus on in an effort to think in the same way as the Fed. We conclude that the available evidence suggests the inflation picture is evolving more or less in line with what the Fed had been expecting. As such, a June liftoff remains the base case. It would take a material deterioration of the inflation picture to induce the … Read More
Liquidity leadership is shifting from the US to Japan. QE in the US is over and likely won’t come back barring a clear risk of recession. The ECB’s balance sheet is likely to expand modestly. However, the BOJ’s balance sheet will grow very rapidly, especially after the recent expansion of the pace of QE. In the end, the BOJ’s balance sheet will prevail and global liquidity (which is largely determined by the three major central banks) will continue to increase at a fast pace, just like it has for the past several years. Global asset classes that benefited from Fed … Read More
News reports suggest the Japanese government is considering a snap election next month to gain a mandate to postpone the second installment of the consumption tax increase beyond next year. I thought the decision by the BOJ to increase the pace of QQE last week reduced the odds of a postponement of the tax increase, but apparently we should not underestimate the determination of Japanese policymakers to support the economy in the near term. Internal politics is just one factor that will determine the consumption tax decision. Another very important one is the market reaction. It is very clear that … Read More