Tom And Jerry.

There was no shortage of entertainment on Wednesday and undoubtedly, the quote of the day goes to Khamenei who said this about Trump:

Here’s the actual quote from his website:

All their plots have failed. You can compare the Islamic Republic now to forty years ago, and see that it is moving forward with various capabilities. So, all their plots have failed… just like Tom from the well-known Tom and Jerry cartoon; and they will fail again in the future.

We’ll anxiously await Trump’s rejoinder.

Speaking of Trump, and sticking with the characterization of people as animals, the President is going to go ahead and quadruple down on his characterization of gang members as sub-humans (apparently “9 times” isn’t enough):


That’s sure to win him more plaudits.

Meanwhile, Turkey is engaged in its own “Tom and Jerry” theatrics, as policymakers chase the lira around in a desperate attempt to arrest a currency slide that spiraled completely out of control overnight.

Ultimately, CBT finally stepped in, delivering an emergency 300bps hike to the late liquidity window which, while sufficient to catalyze a sharp rally on Wednesday, likely won’t be enough, as the fundamentals are unchanged.


Remember, they tried a 75bps LLW hike late last month and it was a miserable failure:


Erdogan was on the tape later in the session, with what amounted to a further effort to pacify markets.

“In the new government system, we’ll continue to abide by the global governance principles on monetary policy, but we will not let global governance principles finish off our country,” he said, adding that “Turkey will never abandon principles of open and free markets.”

As of Wednesday morning, the “free market” was tipping a rather egregious unwind in afoot in the carry carry trade, with 1M implied vol. on the lira spiking to its highest levels since 2009:


Sticking with “Tom and Jerry”, the Fed and the market are chasing each other in circles as everyone tries to come to terms with the new feedback loop/communication channel wherein a Powell-led FOMC is at least slightly more data dependent.

The reaction function for the Fed is hopelessly complex – they need to pull volatility back to the front end (normalizing the mode of the curve and thereby minimizing the risk of an unanchored long end/bear steepening that would risk catalyzing a disorderly unwind of the bond trade) without sparking some kind of dramatic whipsaw in short rates (i.e., panic covering of the Eurodollar short). Of course if they get too aggressive, they’ll bear flatten the curve further at the risk of inversion, more EM turmoil and, presumably, U.S. equity weakness.

It’s against that backdrop that we got the May Fed minutes, which were interpreted as dovish, at least in the medium-term as they clearly suggested the FOMC will be willing to tolerate inflation overshoot. That said, a June hike is baked in. The obvious risk to allowing above-target inflation is that it gets away from them, eventually forcing them to tighten aggressively, throwing the economy and markets for a loop. At that juncture, they’d be severely fucked – they’d have to start cutting to combat a downturn, but those cuts would come against a backdrop defined by a deteriorating U.S. fiscal position and amid inflation pressures, raising questions about who would sponsor the U.S. long end. Presumably, cuts would pull the rug out from beneath the dollar making the situation worse. This is “incubated steepeners” argument.

In any event, the “dovish” read manifested itself in a slight move lower in the dollar, which still held onto gains for the day:


Bull steepening in the curve as the 5s30s snapped more than 3bps wider on the day.

U.S. equities recouped losses following the “dovish” minutes:


Italy risk was back in play as 10Y yields spiked again amid renewed jitters about the newly formed populist government (Giuseppe Conte got a mandate). Yesterday’s rally is gone:


The euro fell early as German PMI data missed (more signs of deceleration) and then hit day lows on the Conte news:


I’m not sure that bodes well for BTPs tomorrow. This is shaping up to be the worst month for the euro since 2016:


Despite the FX weakness, European stocks had their worst day in two months, underscoring the notion that if breakup risk is back on the table and the econ is rolling over, a falling euro won’t help equities:


Oh, and as you might expect, the emerging market ETF was relieved with the Fed minutes, aggressively paring early losses to close flat:


Finally, for your moment of zen, do note that being the cat in Tom and Jerry isn’t the worst thing in the world…

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NEWSROOM crewneck & prints