eurodollar fed Macro Tourist

The Last Kiss

"I am much more worried about financial asset prices than I am about the real economy"...

By Kevin Muir of “The Macro Tourist” fame; reposted here with permission



Recently, it has become popular to believe the Fed has hiked into the next recession. I am seeing this idea repeated throughout my ‘fast money’ crowd feed.

Last week, Alex Gurevich tweeted a comment, that on top of being rather witty, also perfectly epitomizes this thinking.


Now I doubt Alex thinks the last rate hike is behind us – after all, the front end of the curve has at least a couple of hikes priced in between now and year-end. Yet, more and more market participants are discounting the Fed moving to neutral much sooner than was previously the case.

The 3-month Eurodollar futures curve (which represents the rate at which banks lend USD to one another) has flattened to the point where the March 2020 contract is trading at a slightly higher yield than all the contracts out to September 2022.


This flattening of the Eurodollar curve is signifying that market participants most likely believe the Federal Reserve is two or three hikes away from finishing their rate tightening.

Now, markets get it wrong all the time – so don’t assume this will definitely occur.

What I wanted to point out is that the consensus believes this to be the path of short-term interest rates.

Perceptions change all time. Six months ago, the market had assumed there would be 35 basis points of tightening in the two year period between March 2020 and March 2022


Yet today that spread has collapsed.

I don’t know if the market is now correct, or if it was more right last year. All I can do is observe how the market is interpreting developments and give my two cents.

And when it comes to the increasingly celebrated belief that the Federal Reserve has tightened into the next recession, I think the market is confusing the financial economy with the real economy.

The financial economy is precariously perched on a peak of financial asset price perfection. I have little doubt the Federal Reserve’s tightening campaign will cause a slowdown in financial asset appreciation. For the first time in a long while, forward rates for 3-month Eurodollar deposits of 3% will offer a compelling alternative for those willing to sit in cash equivalents.

Yet this doesn’t necessarily mean the real economy will suffer. The reality is that financial assets are up on a stick from the decade-long global quantitative easing program. Investors have been chased out the risk and credit curves, with those asset prices rising much more than what can be attributed to improvements in fundamental underlying economic prospects.

As liquidity is withdrawn, although financial markets will suffer, the economy might prove much more resilient than most market pundits anticipate. After all, easing through liquidity injections was far less effective at stimulating the real economy than most economists forecasted. Why can’t tightening through liquidity withdrawal be far less worrisome than these same economists fear? I am much more worried about financial asset prices than I am about the real economy…


5 comments on “The Last Kiss

  1. The problem we have here is the 60 something’s are very adverse to the idea that they may have to strap their boots back on.
    Promises broken! Who would have thought.

  2. i think the last sentence says it all.
    and yes this knocking on the door 60 something is dam worried.
    2.5 years to go assuming i survive the next down turn. the end game is clear.
    i am out of this country. think the roman empire. .gov/fed and banksters are criminals.
    thanks Mr. H for all your work.

  3. Lance Manly

    Keep in mind how many companies out there are living on a life line of junk or near junk debt and are already in hock up to their gills. Any asset correction that cause the real economy to blip could bring them down like a house of cards.

    • Exactly. Companies like Apple etc. buying back their own shares at all time highs is going to bite them in the ass.

  4. Bulls love to diminish high P/Es by pointing to inflated forward earnings. Low rates have enabled debt fueled buybacks to continue for an unprecedented number of years and we all know that will continue in perpetuity. About those forward earnings, what if the late cycle stimulus plus drastically reduced tax receipts and Fed QT and Asian retaliatory bond selling send rates through the roof? Sky high corp debt, consumer debt, gov’t debt and margin debt all become far more expensive. Well then you’ve got a 20% earnings boost coming from tax reductions. Yeah, well what if that has exactly 2.5 years of life left before the orangutan and his posse leave with their tail between their legs and Dems put the prior tax structure right back in place? Forward P/E assumes there will never be a recession or a negative policy event. Good luck with that.

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