First Time For Everything And The ‘360-Degree Tapering Debate’

First Time For Everything And The ‘360-Degree Tapering Debate’

There’s a first time for everything, and Donald Trump was poised to become the first US president to be impeached twice, with the House set to vote as early as Wednesday afternoon on a resolution blaming the president for inciting a mob last week. He denies culpability.

In a scathing statement, Liz Cheney, the chamber’s No. 3 Republican, said Trump’s actions weren’t just beyond the pale, they constituted the “greate[st] betrayal by a president of the United States of his office and his oath” in the history of the country.

Meanwhile, Mitch McConnell is said to be privately pleased that Democrats are pushing the issue. The logistics and feasibility of a Senate trial were still up for debate, but Trump is also staring down possible criminal and civil actions for his role in last week’s Capitol siege.

Read more: Mitch McConnell Ponders Personally Relegating Trump To Dustbin Of Political History

At least some members of the National Guard will be armed in D.C. for the inauguration, apparently. In what should be a stark warning to anyone still pondering assaults on capitals across the country, Mark Milley and the Joint Chiefs of Staff issued a statement calling the events of January 6 “sedition and insurrection.”

“Any act to disrupt the Constitutional process is not only against our traditions, values, and oath; it is against the law,” the military said. I don’t want to get too far into that highly contentious territory, but amid all the chatter on platforms dedicated to fomenting domestic discord, we should all hope that reason (and, failing that, common sense) prevails. In the simplest, least abrasive terms I can conjure, this is not 1860 and America is not Iraq or Afghanistan. It is not feasible for private citizens or any kind of “militia” to counter the actual US military. That is clearly a non-starter.

Anyway, tensions are high. You know the story. And it’s a lamentable, tragic tale.

Markets seemed quiet, if ill at ease. The dollar is still the “decider” (to quote George W.) when it comes to pushing around risk assets. When it zigs, equities zag, and vice versa.

Fed officials now appear intent to talk back their own tapering rhetoric, perhaps worried it could add fuel to the fire in the bond market, which began to sell off in earnest last week, following the Georgia runoffs.

“We’ve only had seven business days this year and we’ve already had a full 360-degree tapering debate played out by the Fed,” Deutsche Bank joked.

Remember: Higher yields and a steeper curve can be a healthy development as long as rate rise is led by breakevens taking their cues from economic data and/or assumptions about a brighter future for the world thanks to the vaccines. But “too far, too fast” is bad, a disorderly bear steepener is destabilizing, and a rapid rise in real yields could be perilous indeed.

So, that’s the (fine) line Fed officials need to walk. It’s interesting that we’ve gone from pondering whether to immediately price in WAM extension just a month ago to now debating a taper (if only to walk it back), even as one assumes the odds of greater supply to fund bigger stimulus are now basically 100% given Democratic control of the Senate.

“I think real yields/rates matter more for FX than nominal ones in a low rate world, but that’s only true if the FOMC makes it clear that higher headline CPI won’t make them rethink their commitment to a long period of super-easy policy,” SocGen’s Kit Juckes said Wednesday.

Rabobank’s Michael Every had a good take on this. “Apparently the latest curve steepening is being led by markets listening to Fed muttering about when and how it might start tapering QE,” he remarked, adding that if you buy into the notion that monetary accommodation is somehow a virus-fighter, this conversation comes at an odd time. “This as the virus rages further and this as we all know how tapering worked out for a far less damaged US economy last time round,” he added, noting that after the usual “tantrum” that one can expect to accompany any serious discussion about the timing of a taper, actually removing accommodation could risk pushing yields lower.

“By removing financial froth at a time when there is no productive capital investment or wage growth you take money out of the economy, and that is deflationary, not inflationary,” Every wrote, adding that “the exception would be if Treasurys are now like certain EU bonds, where there is a huge bid provided the central bank backs them, and hardly a bid if they don’t. Is that really true for the US? Hardly.”


 

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