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$35 Trillion Was Enough (Pivot Point)
A year ago last month, the Norges Bank became the first central bank to raise rates in the pandemic era among countries with the 10 most-traded currencies.
The frantic hawkish procession that followed found developed market policymakers in unfamiliar territory: Raising rates in very large increments to catch runaway inflation. 2022 marked an unceremonious end to the four-decade bond bull market. "The Great Moderation" was over. The economic legacy of the pandemic, alongside the macro shockwaves
H-Man, I am going with “fleeting fireworks”. Treasuries were oversold, RBA is simply testing the waters, OPEC is adding fuel to the fire, while Britain is dancing in circles. Meanwhile Ukraine has become a Russian migraine. North Korea is lobbing rockets over Japan. Toss in a Red House in the mid-terms. And what you have is path forward to nowhere.
The Fed is the gorilla among CBs.
Has there been critical levels of stress in the US financial system – not that I see.
Has there been critical levels of stress in the US economy – hardly.
Will the Fed back off its US inflation fight because of stress in other countries’ financial systems or economies – I think things would have to be a lot worse before this FOMC will choose to go down in history as the Fed that presided over a repeat of the 1970s.
Years hence, no-one will say kind things about Powell because he helped out the UK, if it was at the expense of the US.
The UK, Japan stress episodes are in significant part due to their pro-inflationary policies, which the Fed may feel should be corrected by those who chose them. Why should Powell sacrifice himself for Truss?
The Fed also probably has confidence in its crisis intervention tools, given it was able to pull the world back from the Covid abyss.
If we get a few months of rapid improvement in US inflation signs – JOLTS, PCE, CPI, etc – then the Fed might be more willing to take a chance. Right now, I am pretty doubtful a Powell pivot is here or nearly here.
My bet is that this rally ends when 3Q earnings start, if not sooner; that earnings drive a retest of the June / Sep lows; that the ultimate low is sometime in 4Q or 1Q, by which time the Fed will indeed be ready to pause, or pivot, driven either by substantial progress on inflation, major deterioration in the US economy, or a US or global financial system breakage that can’t be handled by anything short of a Fed pivot.
Seems that BOE calmed the gilts market with a minimal amount of actual buying.
@jyl. You may not be looking hard enough. As per the Economist: “ the American Treasury market is as volatile and illiquid as it was at the start of covid19… Measures of liquidity in the Treasury market have deteriorated. “We are seeing what happened in March 2020 again. The same Treasury bonds are trading at different prices, bid-ask spreads are widening,” says Darrell Duffie of Stanford University. Strategists at Bank of America describe their index of credit stress as “borderline critical” .
Illiquidity in UST is a crisis that the Fed has very recently faced and capably handled, so the Fed is probably pretty confident in its tools and playbook. Infinite repo is already in place, Fed can flip the “buyer of last resort” switch faster than it did in 2020, and based on BOE/gilts Fed might think that it won’t actually have to do that much buying.
Not saying the Fed wouldn’t consider having to handle a UST liquidity crisis very serious, or would want to interrupt their QT trajectory – but I think that the FOMC takes the prospect of runaway inflation for a decade, abdication of their mandate, ruination of their reputations, and potentially the end of the central bank-stabilized world economic order (so they think) much more seriously.
Put another way, Fed is probably very confident in its crisis management powers.
Also, the 2020 UST illiquidity reflected not just volatility but also trades being huge and all one-way: everyone around the world suddenly force-selling trillions of UST to raise USD cash for massive redemptions, floods of FX needs, business survival, etc. Does Fed forecast that happening now?
I understand the response that Fed isn’t a good forecaster, but that doesn’t matter. Either they forecast no pending 3/2020 style UST liquidity crisis, or they don’t try to forecast but are reactive, either way they aren’t going to give in to 1970s-repeat-inflation for a fear of a UST illiquidity event that they do not forecast and that they know they can handle.
It is easy to make the case that over the medium & long terms, GBP/USD and EUR/USD should be decreasing with time (after smoothing out the volatility). Energy, Putin (& hot or cold war), Brexit, etc. from 1971 to 2022, the GBP has decreased, on average, by 1.7% per year compared with USD.
And add the fact that, despite our current political problems, the U.S. economy is (still) the largest and most innovative in the world.
Question: would a 0.5% interest rate-hike by the Fed in November be seen by markets as a “dovish pivot” then?