The financial media was awash this week with headlines about flattening yield curves and what they might be telegraphing about the growth outlook.
At the long-end, crowded positioning could be setting the stage for an abrupt about-face, especially to the extent tightening expectations raise the specter of a policy mistake and attendant growth scare.
Ultimately, the result has been flatter curves and plenty of hyperbole. “The collapse in the global sovereign-debt yield curve accelerated, sending a foreboding signal to central banks about a slowdown in economic growth,” Bloomberg declared on Wednesday, for example.
JPMorgan’s Marko Kolanovic says fade it. All of it.
“Did the world change yesterday?,” he asked, in a Thursday note, before answering himself: “No.”
He cited the curve fireworks but noted there was “no new macroeconomic data that would explain such move[s], no change in COVID trends and no new surprise coming from corporate earnings.”
Instead, he suggested, “significant month-end rebalance flow[s] into bonds, CTA buying of bonds” and steepener stop-outs likely exacerbated the move in yields.
I’ve been on (at considerable length) about the prospect of central banks moving in the direction of preemptive rate hikes for risk management purposes, a direct challenge to post-Lehman behavioral patterns. On Wednesday, following the fireworks down under and wild moves at the Canadian front-end, I suggested central banks may be rebuilding the fourth wall.
For Kolanovic, what the BoE and the BoC do isn’t necessarily meaningful for the Fed or markets. At least not immediately.
“We think they are not leading the Fed and are much less relevant than the Fed,” he wrote Thursday, calling attention to Jerome Powell’s explicit efforts to de-link the taper from liftoff.
“In our view, it is unlikely that tightening will start early, immediately after the taper, and a few months before important elections,” he went on to say, referencing the midterms in the US.
Further, Kolanovic pointed out that should Powell not be reappointed (which still seems unlikely despite the trading fuss), potential replacements “are more dovish… indicating the current thinking of policymakers and the administration.” One assumes that’s a reference to Lael Brainard.
Finally, Marko reiterated that “historically, the Fed has not followed other smaller central banks” and in JPMorgan’s view, they won’t this time either.
What does all of that mean for markets? Well, he summed it up pretty succinctly on Thursday. “Month end flows will be mostly done today, and there should be a strong bounce in equities, yields, and commodities,” Kolanovic said. “Our view on cyclical equity recovery, continued decline in COVID, rising yields and the commodity super-cycle remain intact.”