- Fed’s message will steepen the short end of the yield curve – good for banks.
- The Fed is helping to hold down the long end – good for long-duration financial stocks.
- What are other factors pushing down the long end of the curve?
- ECB QE and a too low expected terminal funds rate could push long end up.
- Best guess on 10-year yield in 2015 is at or below 3%. Read More
I’ve already received a number of questions this morning regarding this Reuters story. Essentially the story says that the ECB is thinking of ways to avoid sharing the risk of purchases of sovereign bonds across all national central banks. There are many ways of accomplishing this, but an easy one would be to “segregate” QE by national central bank — the Bundesbank would buy only German bonds, the Greek central bank would buy only Greek bonds, etc. First of all, this doesn’t surprise me. In fact I wrote about this possibility earlier this week (see this report). But more importantly, … Read More
The FOMC yesterday moved a step closer to a June liftoff. In today’s report we focus on three points that we don’t think investors have fully internalized. First, the fact that the Fed is using almost exactly the 2004 language is not coincidental. Second, and this might be the most misunderstood point among investors, the Fed absolutely does not need to see inflation at 2% before raising rates. Third, virtually all Fed models, including optimal control models, suggest that the liftoff should have already occurred. All this supports the idea that June is the most likely liftoff timeframe.
The discussions within the ECB these days appear to be mostly around the details of a large-scale QE program, not on whether or not to start such a program. In other words, QE is very likely to happen; the question is when and how. In terms of “when,” the first quarter is a good bet, and in the report we discuss the odds of January vs. March. In terms of “how,” QE will likely involve sovereign bonds, in addition to ABS, covered bonds and probably nonfinancial corporate bonds. But there are other moving parts that we discuss in the report, … Read More
In yesterday’s report I said that I expect the Fed to change its “considerable time” language and therefore signal that it is on track for a June liftoff. Since then, however, the Russian ruble has collapsed in spite of the massive rate hike by the Russian central bank. The Russian situation now appears to be entering crisis territory. The Fed language decision appears now a closer call than it did yesterday morning. However, by a narrow margin (narrower than my 60-40% I mentioned yesterday), I still think the language will probably change. Here is why. 1. The US outlook remains … Read More
The base case scenario for the US economy seems solid and as a result we expect the FOMC to eliminate the “considerable time” language. However, there is some substantial uncertainty around that decision due to downside risks: Odds of a language change are no higher than 60%. A language change will be the most important thing to look for on Wednesday and the market may react to it, but probably only mildly. There are three more things investors should pay attention to: the description about the inflation outlook, the numbers contained in the new forecast, and the “dot chart.” In … Read More
Greek Prime Minister Samaras gambled that moving up the timeframe for the election of the president of the republic would help avoid early elections. It is still far from certain that the gamble will work, but the odds of a snap election seem a bit lower than before for two reasons that we explain in today’s report. If there are early elections and Syriza wins, Greek markets are likely to fare poorly, but other EZ markets should be insulated to a good extent by the ECB backstop. Investors should not count on ECB QE, which is very likely to be … Read More
A lot of attention has been devoted in recent days to how the drop in oil prices and a stronger dollar are hurting emerging market economies. Those factors are certainly important, but in today’s report we highlight another crucial risk factor that has not been talked about much of late – increasing expectations of rate hikes by the Fed. A language change by the FOMC next week, which seems increasingly likely, could be a catalyst for more volatility. Growing expectations of rate hikes by the Fed make a carry trade funded in US dollars a risky proposition – the more … Read More
- This morning’s employment report reinforces a June Fed liftoff and increases the odds of a language change this month.
- Yesterday Draghi telegraphed QE in Q1 – dissents don’t matter much.
- A close look at what European law says: QE is legal.
- Which asset classes, in the EZ and globally, will benefit from ECB QE? Read More
As expected, Draghi escalated the rhetoric again today. The press conference reinforced my view that a large scale QE program in the first quarter of next year is a solid base case. In that regard, a couple of things Draghi mentioned were especially interesting and revealing. First, he said that “early next year the Governing Council will reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments.” The ECB has good reason to reassess things: Not only the economic reality is weak; the ECB’s own forecast was also abysmal, with both growth and … Read More