A long time ago, in a galaxy far, far away, there were physical newspapers. I’m quite sure of it. I was there.
As hard as this’ll be for anyone under, say, 40, to believe, people used to sit in public and read those physical newspapers. Sometimes for hours. I’m quite sure of that too. I was one of those people.
Somewhere — in the comics section, maybe — papers published a simple little game consisting of two cartoon scenes which, at first glance, looked identical. But they weren’t. There were subtle differences, and the game consisted entirely of spotting those differences. So, you’d sit there drinking your coffee and you’d look, and then… aha! There’s a cat in that one, but not in the other one! Entertainment was far simpler back then.
In the spirit of those simpler times, I’ll recreate that game here. Spot the difference in these two phrases:
- High for longer.
- Higher for longer.
They look the same at first glance but… aha! The second one says “higher,” with an “-er” at the end.
The reference, of course, is to the Fed and policymakers’ shifting focus. For the duration of the hiking cycle, officials asked “How high?” or, “Where’s terminal?” Now, they’re focused on “How long?” or “How long can we stay at terminal?”
Although everyone (including Jerome Powell) knows that 25bps isn’t going to make the difference one way or another, rates are still sensitive to Fed messaging around the final hike tipped by the dot plot. That is: One more hike isn’t going to be the deciding factor between controlling inflation or not, or between a soft landing and a hard landing. But officials’ rhetoric regarding the odds of a hike next month or in December has market-moving potential. Just ask long-end bond yields, which fell fairly sharply last week when Fed speakers indicated that the recent tightening in financial conditions brought about by the term premium repricing could stand in for the final hike.
The figure below is, I think, useful when it comes to visualizing the evolution of the Fed’s thinking and how the market priced that evolution.
Terminal rate pricing hasn’t moved in months. But, as SocGen’s Jitesh Kumar remarked, the timing for peak Fed funds has consistently been pushed back, from September (i.e., last month) to February of 2024.
This means different things for different kinds of market participants. For general audiences, the question is more around the proposition that the Fed can hold terminal for as long as they intend to, or for as long as markets are currently pricing. Put simply: Can the economy continue to hold up for another six months with rates at current levels (or possibly even a bit higher)?
The answer is ostensibly “Yes,” but it’s possible that our collective contemptuousness towards the “imminent recession” narrative after so many months waiting on the downturn that never came risks becoming tantamount to complacency.
For more “sophisticated” readers, it’s worth noting that despite the proximity to terminal, short-tenor intermediate vol hasn’t really moderated. The figure below illustrates the point.
Volatility has migrated out the curve recently amid the bear steepener and term premium repricing seen since late-July. If you ask SocGen, that’s likely to continue, and when set against low odds of central banks raising rates much (if any) further, selling short-term vol could be attractive.
“We believe that rates volatility should continue to shift to the longer-end, and that selling upside volatility in short-term rates may help investors finance hedges elsewhere,” Kumar went on to say. Equities is an example of “elsewhere.”
Coming full circle, I suspect the Fed will run out of luck sooner rather than later. The exploding powder keg in the Mideast is yet another reminder that this world of ours is highly unstable. And while I fully acknowledge that a defining feature of the post-pandemic, wartime macro reality could be volatile inflation outcomes with periods of persistently elevated price growth and higher rates, that in no way precludes (and might even guarantee) abrupt slowdowns and quick pivots from monetary authorities, whose capacity to lop off left-tails will be tested again and again.
That’s another way of saying that recession stories could find their way back above the proverbial fold sooner than most of us are currently inclined to believe. Or, for those of you who still read the physical paper, back above the literal fold.
At my partner’s insistence, we get a physical copy of the NY Times. Generally it sits in the driveway for 1-2 days, I move it to the porch, then its a 50/50 whether it actually comes inside.
My partner claims that the NYT customer service said our subscription would cost more to drop the physical delivery. The world is a terrible place.
My very small hometown still puts out a once weekly paper and it’s one of the small joys I get each week. It doesn’t typically talk politics except the local kind and helps me stay abreast of what’s happening there. I particularly enjoy the “From the archives” section that shows the highlights for that week from every prior decade going back 80 years. I’ll often run across events that involved family members, things I remember from my childhood, or other events that happened that I had no idea had occurred.
When I was a kid, we had to get our daily paper (which I also delivered) from another local town that was a bit larger, but still very small compared to what others would consider a city. I used to read that every morning, but it was also something I could do in 30 minutes with breakfast. Unfortunately, that paper is now a shell of its former self and only comes out once or twice weekly and the online version is bare bones.
I never liked getting a physical copy of the Times or other larger city newspapers because they are so thick. I miss the daily crossword though and it’s not the same doing one online or from a crossword book.
I miss the old Mad magazine
If you miss it a whole lot there is a very nice two volume slightly oversized book with every one of Don Martin’s cartoons and some other material in it. They still make me laugh.
I’m hoping to see the narrative shift to “lower but slower”. It’s a nervous world now and financial conditions are getting pulled plenty tight by a dozen different strings, with the Fed only holding some of them. Downshifting now while maintaining a fighting stance would calm markets and consumers both a bit, buying more time. Reals dropping a quarter or two from here wouldn’t be the end of the world.
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Very nice post. As a bonus it got me to notice that your coverage of the markets is very well balanced between the credit and equity markets. Most other analysts don’t acknowledge the existence of debt, although some do seem to know a bit about the Fed. Until recently I got three papers a day. I dropped the KC Star and USA finally but I still want to hold the WSJ daily.