John Williams gave a speech Monday, which wasn’t news.
And, really, neither were his subsequent remarks to reporters.
But, if you’re looking for any hint of incremental information on the Fed’s reaction function, it was notable (if predictable) that Williams pushed back on the notion of tapering MBS before Treasurys, something that came up at the June meeting and a hot topic given the distinct possibility that the Fed contributed to a new housing bubble (familiar figure, below).
While chatting with the media following a virtual event hosted by the Bank of Israel, Williams delivered a take that was accurate and ridiculous simultaneously. “I don’t see one tool [as] particularly focused on housing and the other not,” he said, referencing MBS and Treasurys.
That’s the ridiculous part. If mortgage-backed securities don’t count as “particularly focused on housing,” then I’m not sure what does.
But the implication (if you read the quote again) is that Treasury-buying can also be construed as “focused on housing.” Both MBS and Treasury purchases “affect interest rates [and] therefore both of them affect the cost of housing,” he continued.
That wasn’t all Williams had to say. He also said it was “clear” that the US economy hadn’t yet reached the “substantial further progress” threshold, a contention he’s made before. That assessment is starkly at odds with the rhetoric emanating from other Fed officials, at least some of whom pretty clearly believe that if we’re all being honest (which we’re not) “substantial further progress” happened months ago, even as we still need to make “substantially” more progress to get where we need to be.
Williams then suggested Delta variant concerns are a contributing factor to the recent decline in long-end Treasury yields.
At this point, I think it’s useful to just dispense with that. It’s not accurate, in my opinion. It seems (painfully) obvious that the drop in yields was the result of a positioning shakeout which then fed on itself. There may indeed be concerns about “peak growth” and the flattening in the curve undoubtedly exacerbated those concerns. But the market didn’t just turn on a dime because everyone suddenly decided to reassess the outlook based on a more dangerous COVID variant. If that were the case, it would be showing up across assets. And besides, if yields were going to aggressively retrace lower on COVID fears, they’d have done it in late April, when the situation in India spiraled out of control. What we saw over the past two weeks was a squeeze, which in turn created the perception of growth worries as manifested in a flatter curve.
Weighing in on the variant, Goldman said any “drag on growth should be modest in countries with high vaccination rates and containment.”
“With the most vulnerable populations in the UK, the EU, the US, and Canada largely vaccinated, hospitalizations and therefore restrictions should remain much more limited than previously, even if infections rise substantially, as is already the case in the UK, Portugal, Israel, and Spain,” the bank wrote, in a 19-page piece dedicated to the possible growth implications of Delta.
“High infections alone can still modestly weigh on growth through travel restrictions, consumer risk aversion, and labor supply softness,” Daan Struyven said, before assessing that when it comes to the US, “states with low vaccination rates face higher risk of more hospitalizations [but] robust elderly vaccination rates, higher natural immunity, and a lower virus sensitivity of GDP should limit any economic impact.”
For what it’s worth, virtually nobody that I’m aware of (well, besides John Williams) is buying the notion that Delta variant worries are the culprit for falling bond yields.
The decline “appears to be exacerbated by positioning and technical factors, which may persist until the market finds a fundamental catalyst,” BofA said, adding that they “worry about a continued reduction of short positions and [a] re-assessment of neutral.”
The bond rally was “exacerbated by short covering,” Barclays wrote.
For JPMorgan, the Fed’s hawkish tilt at the June FOMC “kicked off the move to lower yields and has made it more difficult to hold bearish trades.”
Morgan Stanley recommended an outright short in 10s. The bank contended that short-covering and unwinds in steepeners created the same kind of “false optic” I’ve been warning about since the Fed meeting. “The recent positioning-driven moves remain unsustainable,” Morgan insisted.
Meanwhile, Monday’s 10-year sale stopped through. And coming full circle, Williams said that if you ask him, Fed hikes are “way off in the future.”
