‘What’s Not There’

The problem with the July Fed minutes is “what’s not there”, one rates trader said Wednesday afternoon, as Treasury yields rose with the dollar and gold dipped.

Apparently, market participants were looking for more in the way of color around the Fed’s flexibility when it comes to adjusting both the pace and duration of bond buying going forward.

There were also a handful of belabored attempts to spin the minutes as insufficient in terms of conveying a sense of urgency around delivering on expectations for the implementation of state- and/or date-dependent forward guidance.

Read more: Fed Minutes Sketch Contours Of Inflation Framework Change, New Forward Guidance

I say “belabored” — my own read was that the minutes were largely as expected. The view on the economy was cautious, there’s a clear intent to communicate something about the results of the policy framework review soon, and there was ample discussion about what character any changes to the forward guidance might take.

I’d argue that expectations for yield-curve control had already been pushed out indefinitely, and it’s not clear why anyone would have expected to see an explicit nod to maturity extension or stepped-up bond buying during what amounted to a placeholder meeting. But I suppose the rather cold shoulder given to YCC might have been interpreted as a sign that officials won’t rush into additional easing.

In any event, it doesn’t matter. The market reaction was a stronger dollar (after a five-day slide to the lowest since early 2018), a retracing of earlier gains in Treasurys, a steeper curve, and a big selloff in gold, which dropped more than 3%.

This marks a departure with the action seen earlier in the week, when yields fell, the curve bull flattened, the dollar extended losses, and gold recovered after last week’s slump thanks to optimism triggered by news of Berkshire’s stake in Barrick.

“The minutes… are not especially reassuring”, ING said, in a quick reaction piece. “The commentary suggests an ongoing weak economic backdrop whereby inflation remains persistently low yet there is little inclination to offer additional imminent support to the economy”.

With YCC seemingly out of the question (at least in the near-term) and no guarantee of stronger forward guidance in September, the long-end has some freedom of movement.

“The knee-jerk bearish steepening seen immediately after the Minutes release offered a glimpse at the balance of risks and reminded us that the reflation trade is still relevant”, BMO’s Ian Lyngen, Benjamin Jeffery, and Jon Hill said, in an afternoon note. “The one nuance we’ll offer is that discussions surrounding the prospects for yield curve caps indicated any such program has been put on the back burner for now — essentially not suitable (read: needed) in the current environment”.

Equities’ reaction (i.e., to give up gains) was a reminder that for all the hand-wringing over the demise of the dollar, the world is a much friendlier place when the greenback is on the back foot. Wednesday saw the biggest gain in months, and it weighed on risk assets.

This marked a rather unfortunate turn on a day when stocks were again poised for new records.

Headlines around Apple’s $2 trillion milestone served as a testament to the rally (counterpoint: and also to the fragility of the surge, considering the company’s weight), while results from Lowe’s and Target suggested the consumer is resilient (counterpoint: or that free money is effective when it comes to juicing spending).

It’s worth noting that while all global benchmarks have rebounded from the March malaise, the US stands alone when it comes to celebrating record highs.

Thursday brings the latest pseudo-real-time read on the US economy, as jobless claims will again command the attention of anyone who happens to be at the desk.

Last week found initial claims falling below 1,000,000 for the first time since the onset of the pandemic.

That’s what passes for “good” news these days in the US. Well, that, and a promise from the postmaster general that he doesn’t plan to “lose” any election ballots.