A Wednesday headline described the Fed’s “tightening steps” as “unprecedented.”
I didn’t read the article. But it says something about the addiction liability Jerome Powell is attempting to manage when market participants employ adjectives like “unprecedented” to describe “steps” that haven’t even been taken yet. Rates are still at the zero bound. And the Fed is still buying bonds.
Merely talking about hiking rates four times in a year and allowing securities to naturally roll off a $9 trillion balance sheet is enough to “sow jitters” about markets and the economy, as the same headline put it.
“Today’s investors are grappling with an environment in which the speculation is that the Fed is so far behind the curve that it needs to raise interest rate 50bps, but simultaneously, the central bank continues to buy assets,” JonesTrading’s Mike O’Rourke remarked. “Someone should remind the Committee members that when you find yourself in a hole, the first step to getting out of it is to stop digging.”
The balance of the news flow reflected the usual mix of real angst among traders and feigned concern from financial journalists, who generally view markets the same way good undergraduate students (a species driven to the brink of extinction) approach their majors: Something interesting to study and observe for credit, but not something that directly impacts their lives. The only thing more rare than a trader byline is a trader who can actually write.
I digress. The world’s negative-yielding debt pile has been cut in half amid the global bond selloff, which extended Wednesday. Bund yields poked their head into positive territory for the first time in years (figure below).
2% on US 10s is increasingly seen as a foregone conclusion. Just like a 50bps March Fed hike. The former is much more likely than the latter, although at this juncture, it’s fair to suggest developed market policymakers are on the brink of something that feels like panic.
“With investors eager to see 10s trade with a 2-handle, the question is when, not if, this milestone will be achieved on the path toward an even more dramatic selloff,” BMO’s Ian Lyngen and Ben Jeffery said. “The pace and magnitude of the move thus far hasn’t provided any incentive to step in front of [it],” they added, noting that although “dip-buying will emerge, it’s still scarce at the moment which leaves us decidedly in go-with mode.”
Underscoring the urgency of the situation for DM policymakers, UK inflation printed an alarming 5.4% for December. Consensus expected 5.2%. Core was 4.2%, also hotter than expected. The figures piled more pressure on the BoE. An encore to December’s hike is now fully priced for February. 10-year yields in the UK jumped to the highest since 2019 (figure below).
“Inflation surprised higher (again) and that’s only likely to increase the temptation for policymakers to hike rates for a second consecutive meeting,” ING’s James Smith said. “But with inflation rates set to plunge in 2023, and the prospects of a severe wage-price spiral looking less likely, subsequent moves are likely to be more gradual.”
Rishi Sunak on Wednesday promised to “listen to people’s concerns” about rising prices. Somehow, I doubt that helps. Inflation in the UK is the highest in three decades. And all as Boris Johnson remains mired in controversy.
Meanwhile, US equities are looking to magic lines for support. Dip-buyers have been rewarded post-pandemic for stepping in around the 100-DMA (figure below).
It’s perilous from here. Earnings continue to roll in, and maybe that’ll help shore up sentiment. But, as noted here time and again over the past two weeks, the relentless rise in real yields is oppressive. Stocks trading on dot-com multiples simply can’t digest it.
The more palpable the sense of panic among policymakers, the more angst will seep into risk assets. The final straw would be a rebound in the dollar predicated both on the rise in US real rates and safe haven flows associated with ongoing pressure on equities.
And wait till that housing bubble pops. The destruction of this cycle is going to be epic.
Regarding Powell’s Fed being behind the curve and in panic mode, anyone else wondering why this guy was re-nominated to a position he clearly failed at? Arrogantly dismissing inflation as “transitory” only to completely flip around and panic adjust monetary policy all say to me this isn’t the right guy for the job.
huge Biden blunder imho per a recent comment of mine…he probably deferred to Yellen who doesn’t think in terms of political ramifications…
Would you not want him to change his mind if the stats warrant doing so? This is backwards logic – no way anybody can win.
“The only thing more rare than a trader byline is a trader who can actually write.”
Lol you sales guys.
Incidentally, has anyone claimed the headline “Tightening Tightrope,” because that totally slaps.
Supply chain problems are not likely to be rectified until 2023. No one saw that (the extent of the damage to supply chains and the amount of time required to stabilize) coming.
If the underlying cause of inflation is too much money handed out and supply chain problems- then the “cure” seems to be slow the handouts and fix supply chains.
If I was great at timing (I am not), I would jump out and get back in.
As I reflect on the actions of the Fed it has suddenly occurred to me that I have read comments from maybe 5000 people who clearly feel they could do a much better job of running this large and complex organization than Powell can. Rather than spilling their seed on blog sites they need to get agents so they can get chosen for the head job. That worked for Kudlow, eventually. I wonder if any of those who are so smart about all this have ever actually been to the Fed and seen the room in which the committee meets around its huge table. That table is a bit like an old school desk where the various people who have used it have carved their names in it. To see the names of those who have sat around that table at the Fed is to get a look deep into history. I don’t know about others, but that table, in that room, whose walls are covered with amazing examples of old currency, was one of the few places I’ve ever been that oozed quiet and civility.
Economics is, in fact, a “thing,” one which is impossible to resolve to every[any]one’s satisfaction. No matter what one does to tweak the economy to meet some goal or other results in uncontrollable unintended consequences. The economy will never be controlled or optimized to everyone’s satisfaction. In my undergraduate honors thesis I tried to prove that such optimization was theoretically possible but one of my profs who read the paper reminded me that politics will never allow such a result. Besides, we have a market economy and one of the main characteristics of all markets is that they turn on a 50-50 balance of disagreement. Some who sells 1000 shares of Intel may generally be assumed to believe a better use for the money they will get from the sale. The party who buys that stock is most likely convinced the purchase will create a better return for the money spent than other alternatives for that money. Markets are lubricated by differences of opinion, meaning the behavior of the folks in those markets will never agree on an ideal economic result from their personal perspective. If the Fed manages to slow inflation creditors will hate that result because it makes debt repayment more expensive. Business borrowers love low rates and a low cost of capital but pension funds, banks, and insurance companies hate low yields.
@Mr Lucky – some great points there, sir!
@MrLucky, good points. It’s easy to be right in hindsight. How many of those 5,000 were actually predicting high inflation a year ago, and betting their careers on it?
I know I have been surprised at 1) how vulnerable the supply chain has proven, 2) the many ways it has been disrupted, from Covid lockdowns in China to the Great Resignation in the US and shortages of normally plentiful components, and 3) the market concentration that has allowed companies in the chain to massively increase prices and margins (look at freight rates for truckers, for ex). I was on Team Transitory, my bad; fortunately I like boring names and believe in valuation disciplines so wasn’t on Team Ark, hence I’m still standing.
I, too, have been surprised at the weakness of the supply chain, although vulnerability to shock is the great fatal flaw of the “just-in-time” strategy. Probably, few will agree with me but I believe the coincidental price inflation is mostly opportunistic, a way for firms to raise prices and boost margins without appearing to be wartime style gougers. The supply chain was great cover for them.
H-Man, this market reeks of Panic. The VIX looks cheap based upon what is going on.
“The balance of the news flow reflected the usual mix of real angst among traders and feigned concern from financial journalists, who generally view markets the same way good undergraduate students (a species driven to the brink of extinction) approach their majors: Something interesting to study and observe for credit, but not something that directly impacts their lives. The only thing more rare than a trader byline is a trader who can actually write.
I digress”, no, by all means, digress more.