And now back to your regularly scheduled recession predictions.
Last month, the 5s30s was on everyone’s radar screen when it dropped below 91.6bp for the first time since December 2007. A couple of fleeting steepening episodes notwithstanding, things haven’t really changed since.
Well now, with the Fed looking hell-bent on sticking to their near-term rate path irrespective of lackluster inflation, good ol’ Lacy Hunt (whose opinion on this is definitely not colored by his long-held outlook on yields) wants you to know that this experiment in normalizing the balance sheet isn’t likely to work.
“I’m very doubtful that they’ll be able to unwind the balance sheet to the extent they say they will,” Hunt told Bloomberg, in a new interview, adding that while “the long bond is notoriously volatile, what will determine the long-bond yield is inflationary expectations.”
As the Fed unwinds the balance sheet, they’ll end up curbing credit growth thus dampening inflation even further, Hunt contends.
Hunt’s conclusion: they’ll have to stop it with the balance sheet runoff within 5 short months.
What happens if they don’t, you ask? Well, according to Lacy, an inversion from 3 months out to 10 years, an event which is batting 1.000 when it comes to predicting the last 7 recessions:
Draw your own conclusions.
“within 5 short months”? — So that is when the problems with the economy will be revealed and the FED starts scrabbling and the the Administration starts pointing fingers? Unless they hold off the December rate hike or something else happens?…Not that market seems to be phased by anything…
Per my disjointed comment below, if the other big CB’s continue the pump priming, that will mitigate whatever tightening the Fed proposes. We have already seen so all year long.
Also, the plunging dollar more than offsets Fed tightening so watch to see if the dollar keeps falling, as that is equivalent to major loosening. I think the world economy isn’t bothered by Fed tightening alone, but it will be deeply troubled if the dollar turns around and soars again. Why? Because so many have borrowed in dollars, especially in EM, and a rising dollar effectively increases the cost of their debt repayment, which is deflationary. That’s what caused tremors in the global economy in 2015-16.
So watch the dollar IMHO. If I could have a crystal ball for just one metric, it’d be the dollar.
Just look at Japan to see what the future is for the US. The BOJ was the first to do QE and the first to attempt to unwind its balance sheet, last decade, and after a small reduction it failed and reversed course.
And the Fed is following in the footsteps of the BOJ, while the ECB is behind the Fed.
Lacy has been a broken record about bonds for many years, but he’s also been spot-on. Will he miss the pivot?
Anyway, you can’t look at just the Fed because the US is only 15% of the world economy and losing share. So you also have to look at the other CB’s and see that the ECB, BOJ, PBOC are all massively priming the money pump. Thus the big inflationary spiral in global asset prices continues.
As per Kevin Muir, the big elephant in the room isn’t the Fed anymore, isn’t even the US, but rather China.