SocGen’s Kit Juckes started the week “grouchy” amid all the talk about the Fed’s supposedly hawkish hike.
On Tuesday, he seems to be in better spirits and is out with a pretty interesting quick take on TIPS and the dollar called “A real test for the party mood?”
Do note the amusing (and poignant) bit about how, no matter what you want to say about the Fed’s decision and Yellen’s presser, it certainly hasn’t deterred all of the yield seekers nor has it derailed equities.
The yield on 10year TIPS is threatening to break above 50bp, which would take it above the downtrend formed by the three descending peaks we have seen in real yields since the US presidential election. The real yield move may be more important for the dollar than what is happening in nominal yields. 10yr TIPS at 50bp are a combination of nominal yields in no man’s land at 2.18%, and 10year breakeven inflation at 1.69%, back at pre-election levels.
As Larry Summers criticises the Fed for tightening too much, too soon in the absence of inflationary pressures, a debate is beginning to rage about how much slack there is in the economy. Bill Dudley came out on the opposite side of the debate from Mr Summers, expecting a tightening labour market to result in a rebound in inflation in due course. Meanwhile it has taken fewer than three trading days for the S&P500 to reach new highs. Whether the Fed is raising rates too fast given their inflation mandate or not, they are raising them too slowly to contain asset price inflation. And while the FX market was getting a bit nervous, with falls for the RUB, ZAR and the TRY yesterday, the emerging bond market community was getting excited about 100-year, dollar -denominated debt issued by Argentina.
It’s in the context of general yield-hunting investor behaviour that I think the rise in real yields is important, at least in the short term. There’s been a big de-correlation between the dollar and TIPS, which is also visible if I compare the dollar index to a weighted real yield spread. If the 50bp resistance level we are testing in real yields holds, I think the dollar’s mini-bounce over the last day or two is likely to run out of steam. A break, on the other hand, would make me worry about the FX market playing catch-up and the dollar staging a more sizeable bounce. There is no data of note due for release today but four Fed officials (Charles Evans, Stan Fischer, Eric Rosengren and Robert Kaplan) are speaking at a variety of functions.