For the umpteenth time: oh what a difference a month makes.
There are hawks everywhere you look to start the week, which is more than a little ironic given what’s going on on the geopolitical front.
But incoming data and a creeping sense that everyone from Washington to Frankfurt to Tokyo is behind the curve has traders high on their own supply of hawkish confirmation bias.
“Is it three or could it be four?” “Could it be eleven?” “There aren’t that many meetings.” “Oh.”
“Are they going to hike before they taper?” “Who cares? They’re hiking from a negative f*cking rate.” “I care. Long euros!”
“Is Kuroda going to buy as many JGBs as he said he would? The schedule seems to say he’ll miss.” “Who cares, he’s buying basically everything. What’s the difference at the margin?” “I care!”
Here with some further color on those kinds of ridiculous exchanges is former FX trader turned Bloomberg contributor Richard Breslow.
Nothing happens in a vacuum. A week ago, we expected the Fed to tighten rates without a huge knock-on effect to the overall trajectory of increases. The ECB and BOJ were expected to stay the course for as far as the eye can see. Or longer. The dollar would rise with bond-yield increases tempered by continued quantitative easing elsewhere. A simple, fairly benign scenario that seemed to make perfect sense.
- And yet, we begin the new week with evidence that hawks are circling everywhere. It’s been quite the leap, but we hear forecasts of a Fed that’s not only going to go back-to-back, but supposedly multiple backs-to-back. And central banks in Europe and Japan allegedly laying the groundwork for tapering
- I’m not sure how many people really believe it, but this new world view has certainly caught people’s imaginations. And you can be sure it will affect positioning
- Had the mood been different, the solid non-farm payrolls report would have been taken as allowing the March hike to proceed, albeit with continued monitoring of average hourly earnings
- Not so now. Fed speeches, bubbly equity prices, dollar in the middle of its year-to-date range and better global economic numbers allowed analysts to focus only on the good and posit a sea change to the FOMC’s reaction function
- Look for the market to parse news for reasons the committee will continue to raise, rather than hold
- Can the Fed be so bold if the rest of the world isn’t feeling better, too? Apparently not, goes today’s story. The ECB’s Governing Council apparently broached the notion of reducing negative rates even as bond purchases continue. Where there’s smoke there must be fire. And it’s been lit under the euro. Expect this dog to be walked back. How successful they are at doing so will tell a lot about the reflation mood. Feels like the council got sandbagged by the hawks
- And now we see that the latest BOJ bond-purchase plan might fall short of their target purchases. Presto chango, they must be stealth tightening. Attention is right back on what they’ll do with the 10-year JGB target yield. All news is being interpreted through a hawkish prism. For now
- The abrupt about-face by the Fed has dealt a severe blow to the efficacy of forward guidance. Markets will understandably assume that central banks are now using commentary as a tactical device to control the moment rather than a way of describing a strategic plan based on long-term forecasts. It means we are in for a lot more false steps, conspiracy theories and greater volatility