As tipped here earlier this week and on several occasions last, Fed rate-cut pricing for 2024 has now effectively converged on the December dot plot.
Headed into Wednesday, the market was priced for around 77bps of easing from Jerome Powell and friends this year, not materially different from the last SEP. That might sound unexciting. But it’s notable. Notable enough, in fact, that the mainstream financial media found some space for it between stories about Joe Biden’s age (he’s old), Apple’s car (it’s dead) and the Magnificent 7 (it’s a “bubble”).
Notably, two-year yields are now the highest since December 12, which is to say since the session before the final FOMC meeting of 2023, when the Fed cemented the dovish pivot telegraphed by Chris Waller in late November. Waller’s tone regarding rate cuts has shifted markedly, although he probably wouldn’t concede as much. “What’s the rush?” he wondered, in a February 22 speech, without so much as a hint of irony. The rush is (or was) that markets were attempting to price Waller’s own ad hoc timeline for rate cuts, which he suggested on November 28 could come in “three months, four months or five months” contingent on inflation outcomes.
I’ve never practiced econometrics, so maybe I’m missing something, but I think it’s fair to say that three months from November 28 is roughly now, four months from the same date would be roughly the March FOMC meeting and five months would correspond to the May gathering. That timeline is dead. Like Apple’s car.
This has stymied the re-steepening. The 2s10s was -14bps late last month. Now it’s -40bps. The long wait on the re-steepener has frustrated some market participants just as the long wait on recession has frustrated forecasters. The two are, of course, related: You need rate cuts to get the bull steepener and you need a recession to get the rate cuts.
“The steepener has been delayed but not forgotten,” BMO’s Ian Lyngen and Vail Hartman said. “The shape of the 2s10s curve has been (and will continue to be) defined by near-term policy expectations,” they went on, adding that “this is only ‘new’ insofar as there is a growing probability that these expectations push the benchmark curve back toward -50bps, a move that was nearly unimaginable as recently as the late-January.”
Flatteners are back, and there’s been an unwind in steepeners as traders ponder a longer stay at (or very near) terminal. As most “serious” readers are probably aware, there’s also some scattered hedging out there against the possibility that the next move from the Fed is a hike.
The read through of all this for the dollar is straightforward: The greenback’s supported. What’s not to like? Europe’s in a recession (Germany’s struggling), so’s Japan and nobody knows quite what’s going on in Mao’s dystopia. The US economy is indeed “exceptional” and now rates are swinging back in favor of greenback strength consistent with economic resilience.
I cheated a little with the chart above: It cuts off at February 12, when dollar performance began to wane, but you get the point. Dollar strength ebbs and flows with rate-cut expectations. With easing wagers fading, the dollar’s supported.
But not for long, according to one Bloomberg blogger who this week fretted over imaginary red ink. “Large fiscal deficits are a long-term negative for the currency as they are inflationary, and considering the US deficit is one of the largest in GDP terms, it poses greater downside risk to the dollar versus other currencies,” Simon White said, after noting that “running pro-cyclical fiscal deficits has become the norm” following the pandemic, when “electorates’ expectations widened.” Now, White explained, “there is an unwritten pact between governments and voters that they will underwrite a growing itinerary of risks from job loss to disease.”
Yes, that’s correct: There is indeed a “pact” between voters and their governments, whereby the latter are expected to step in to “underwrite” risks to the public. Otherwise, what’s the point of government? The pact White described is an extension of that other pact: The social contract, and it’s how society should generally function. If not… well, “No arts, no letters, no society. Continual fear, and danger of violent death. And the life of man, solitary, poor, nasty, brutish, and short.”
I think the answer is to buy bitcoin, which is headed to the moon!
I am worried that a very significant portion of those buying bitcoin are doing so, in order to illegally move wealth from the currency where they domicile to USD.
This flow could be shut down almost overnight by the governmental decree. Having said that, I don’t know why the US Treasury would want to stop that flow of wealth into the US, they might just want to “tax” that flow into USD.
SeaTurtle – Indeed. That’s why the PRC has tried to crack down on cyber purchases. Might the flows reverse when Trump returns to power?
This morning I pondered why so many US politicians seek to shield the two best tools for cybercriminals, Crypto and now AI, from scrutiny and regulation. The SEC is the only agency that seems to foresee possible dangers from AI. Apparently they are doing info sweeps on AI use by investment managers.
…….and back, like love!
Interesting note. First, a leftover thought from the last thread. Every public thinker deserves to be read … Marko, Mike, Larry Summers, whomever. The thoughts of these folks represent the space that defines what is possible and a rationale for that space. Even if sometimes misguided, that space helps us form our own boundaries.
Econometrics is the word economists use to make them look like they are hard scientists. The first graduate econ course I took was basic econometrics. I’ll never forget the first day of class. The prof had full control of the room we used and every square foot of wall space was covered with yards and yards of those huge sheets of green-bar printer output so common back then. It soared up to the ceiling, covered with complex looking graphs which I never did completely understand. Initially, they scared me to death. Gradually they became simply annoying. It turns out those graphs were also ironic because for the next four quarters it turned out that my teaching assignment was to get hundreds of students through the required UG stat course. Of course, in that course I was busy telling them that forecasting was essentially futile, among other things. BTW, I did get an A in econometrics and never figured out how and I aced the comp question for the course on the MBA qualifying exam. Today, I suddenly wondered if perhaps the prof hung all that paper as a bit of a joke.
One other epiphany for the day. I was looking at the last chart in this post and it suddenly occurred to me how much visual similarity there is between the charts thrust upon us by the wizards of technical analysis and those arising from the pseudo-scientific genius of econometricians. Too much magic.
Just read your 2017 piece on “spirals.” I got there via Einhorn Dealmaker article. I wonder where we are in the spiral…I hesitate to say “upward spiral” b/c I associate that w/ spiritual growth (borrowed and adapted from Black Elk Speaks).
Government’s pandemic response was clearly necessary (to a point) and consistent w/ the “pacts.” But it also altered understandings of “risk” and life (YOLO). If each bubble-burst leads to higher prices followed by a bigger bust (“spiral”), the next one will be heart-stopping.
Surely it becomes a self fulfilling prophesy. Yields rise, $ gets stronger, inflation falls? It’s just a timing thing