Woha! Goodbye complacency and hello volatility! The US dollar jumped as markets suddenly freaked that the Fed might hike:
Other majors fell:
Commodity currencies were smacked:
Gold was hit:
Brent was pounded:
Base metals weakened:
Miners too:
US high yield was thumped and EM too:
Bonds sold everywhere including the US:
Europe:
And Japan (except at the short end):
And stocks hated it:
So what happened? You guessed it, central banks! RBC puts it nicely:
COMMENTARY: Markets don’t like getting hit four sides at once…
The “Draghi Disappointment / Brainard Bogeyman / BoJ NIRP-ier / IG Supply Tantrum” we shall call it—elegant right?! Global rates markets continue to bear-steepen on account of four “developments”:
- Draghi’s ECB presser disappointed the crowd with no increases, no extensions and no tweaks—“ECB did not discuss extension of asset purchases plan.” There also was a very slight “upgrade” to inflation as well, as the 2018 forecast was NOT dropped as expected, while stating the expected inflation will be more stable than before. Geez.
- The bizarre Fed / Brainard speech episode, where an (initially understood to be) “impromptu” scheduling of Fed’s Lael Brainard to give a speech next Monday evening—immediately before the Fed’s blackout period—was interpreted by the market (and conspiracy theorists) as a sign that Yellen was rolling out the increasingly high-profile and UBER-DOVE Brainard (remember, she was the “international factors are impacting US rates” proponent who helped start the R-Star discussion) to actually be the person with the best chance to communicate a HAWKISH message on the September meeting. In turn, by having the “person least likely to speak hawkishly” then make a case / at least say that the committee is confident on achieving its mandates, that you could get market probability north of 50% “required” to pull the trigger. From speaking with folks close to the situation, there is a real belief that the Fed is adamant on at least one-hike this year, data be damned. Apparently they are keenly aware that they could be driving financial asset instability. : / Nonetheless, it came out later in the afternoon that Brainard had been scheduled at the event in question for weeks…so head-scratching abounds.
- The point I made reference to in yesterday’s “Big Picture” w.r.t. the BoJ being equally adamant on going even MORE negative with rates while also investigating “curve tweaks” (from a change in the composition of their JGB purchases to the potential for a reverse operation twist) has gained steam, with multiple media outlets floating these “trial balloons” ( http://reut.rs/2c4zgi5). The concerns here are many: even more negative rates is an enormous risk after the way the market treated them post the initial move, which saw a counterintuitive strengthening of Yen and a flattening of the JGB curve which sent the Topix Banks index -25.5% to its current YTD performance. And again, as stated yday, an outright “reverse op twist” could be interpreted as a “backing-down” from a market that knows the BoJ is married-to the perma-stim / perma-easing path for the rest of its days. If markets smell weakness, “things could get weird” (flipside of course being a potentially very POSITIVE reaction to a steeper curve, esp w/ banking sector…I know it’s noncommittal, but we simply can’t gauge how mkts respond).
- A final factor driving the move in UST (absolute) yields (and as noted a few weeks ago as a risk to what had been low rate vol) is the insane supply being pumped out of both US IG corporates, now standing at $52B on the week….and then next week, with a HUGE calendar of Treasury issuance, with potential of ~$100B in bills, ~$50B in coupons and another $50B in more US IG! For those of you keeping track at home, that’s potentially ~$200B of supply. Per IFR, Monday alone could see $76Bt-bills at 11:30am, and then $24B 3s plus $20B 10s both at 1pm ET.
So here we go: BoJ seemingly ready to commit to go deeper negative rates and experiment with their curve, the Fed is seemingly locked-and-loaded on a hike as global growth rolls over, a deluge of supply into a suddenly wobbly rates backdrop (and a world ‘stuffed to the gills’ on duration via NIRP and QE forcing real money / AML community into deeper “yield seeking” / “yield compression” behavior), and a loaded-coil of synthetically low volatility across asset classes…as cross-asset correlations trickle back near multi-year / crisis extremes.
Get ya popcorn ready….
Who knows when the Fed bubble managers are going to hike next? Despite last week’s awful data flow, there are reasons to still contemplate September. US Q3 GDP is tracking well.
Fom the Altanta Fed: GDPNow
The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 3.5 percent on September 2, up from 3.2 percent on September 1.
From the NY Fed Nowcasting Report:
The FRBNY Staff Nowcast stands at 2.8% for 2016:Q3, unchanged from last week.
From Merrill Lynch:
We revise up our 3Q GDP forecast to 3% from 2.4% to reflect the recent tracking.
But, global growth is going to come under pressure as China slows over the next few quarters and at some point in this tightening cycle the Fed is going to go one step too far and bring down the whole box and dice. Is this it? My guess is that for now this is more post-Brexit bubble unwind than it is beginning of the end. As Deutsche shows, only about one quarter of 10+% stock market corrections presage a recession:
But if the Fed hikes as we shift into Q4 Chinese weakness, and oil falls, then the Mining GFC will roar back to life.
