Regardless of who wins the Senate, fiscal policy is likely to remain largely on auto-pilot during the next two years, with only modest changes in the level of discretionary spending. Most likely, Congress will pass another minimalist budget deal (similar to the Ryan-Murray deal from last year) that tweaks the sequester and makes other changes at the margin. If Republicans win a majority in the Senate, defense will do a little better than if they don’t. Under the next president, whoever it is, the sequester is probably not going to hold beyond 2016. This could have implications for defense, domestic … Read More
Press reports suggesting that the ECB might buy corporate bonds are credible and in line with our expectations. However, the December timeframe might be a bit aggressive – for now we would look at 2015Q1 for an announcement. Buying corporate bonds is politically less controversial than buying government securities. However, the size of a corporate bond QE program is unlikely to be very large. Certain constraints should limit the total amount the ECB could purchase to somewhere in the neighborhood of $100-150 billion per year. QE done with sovereign bonds is the only way in which the ECB can achieve … Read More
A Reuters story earlier this morning indicates that “the European Central Bank is considering buying corporate bonds on the secondary market and may decide on the matter as soon as December with a view to begin buying early next year.” I believe this report is directionally accurate and in line with my views (see this note for example as well as my slides from Cornerstone’s EZ seminar last month in NYC). Things will have to get better in order for the ECB not to move ahead with this program, which would be a QE program done with corporate bonds instead … Read More
Mel Watt gave a speech yesterday in which he said an agreement in principle has been reached to reduce the risk to mortgage originators of having delinquent loans moved off of Fannie’s and Freddie’s balance sheets and back to the banks. This should help demand for housing and is positive for homebuilders, banks and others who benefit from stronger housing demand (and fewer put backs). It’s likely the policy changes coming out of FHFA will be the only consequential housing-related policy moves during the next couple of years. In today’s report we also discuss the outlook for housing finance reform. … Read More
European stocks have obviously performed very poorly of late. In today’s report we disentangle how much of the recent move down in equities is due to a worsening macro outlook and how much is due to risk aversion. We find that a spike in risk aversion accounts for more than half of the decline in EZ stock prices this year. This is important because risk aversion typically diminishes when the odds of policy intervention (especially by the ECB) are seen as increasing. We discuss which ECB-related events are important to watch to gauge a potential reduction in risk aversion.
Roberto’s Video Update: No Signals of Persistently Weaker Growth – Why I Say That And What The Fed Might Do
- How to decompose the ten-year yield into growth expectations, inflation expectations, and term premium.
- The ten-year yield is NOT saying that growth will be lower for a long time or that recession is a risk.
- However, movements in the ten-year yield are not inconsistent with a short-term soft patch.
- Against this backdrop, how will Fed policy adapt? Read More
Of course, we’re following all the developments in the competitive Senate races. But if you want to watch just three Senate races, keep an eye on Colorado, Iowa, and North Carolina. We rate all three races as toss-ups, so they are close. They are important for two reasons. First, if Republicans win any of them, they are very likely to win control of the Senate. Second, if Democrats sweep these states, all of which were key swing states in 2012, Democrats will have good reason to feel confident about their chances of keeping the presidency in 2016. Also in today’s … Read More
It’s been a wild ride for investors for the past few weeks, but much less so for the average person. The recent market sell-off (and yesterday’s volatility) only marginally hurts Democrats, less because of the stock market losses and more because it may add to anxiety voters already have about the direction of the country. Regardless of who wins the Senate, we place low odds of any material policy response by Congress if the economy in the US weakens significantly (which is not our forecast). Also in today’s report, we take a look at how the Republican and Democratic election … Read More
We noted yesterday that the drop in the ten-year yield since the beginning of the month was for the most part due to a drop in the term premium. That suggests special or technical factors were at work. Examples include flight-to-quality flows, low EZ yields, and risk (but not expectations) of lower US growth. So far that pattern is confirmed today. Of the 21 bps drop in the ten-year yield today, the model attributes 14 bps to term premium (special factors) and 8 bps to a drop in inflation compensation likely due to plunging oil prices. That means that the … Read More
Recent data in the EZ, both on the inflation and growth fronts, have been abysmal. Yet the prospects for a coordinated response between the fiscal and monetary authorities are not encouraging. Politics dictates that Germany and other core countries insist on fiscal discipline even if that means slower growth for everyone (including Germany) and higher odds of QE by the ECB. In today’s report we discuss the odds of QE by the ECB and the likelihood that it would be effective in the absence of fiscal relaxation or structural reforms.