It’s Time To Take Central Bankers’ “Calm Assurances” With A Pinch Of Salt
Posted by Tyler Durden on October 23, 2017 4:16 pm
Tags: Bank of Canada, Bank of England, Bank of Japan, BOE, Economy, European Central Bank, Mathematical finance, Monetary Policy, Options, Reality, Technical Analysis, US Federal Reserve, Volatility, Yield Curve
Categories: Bank of Canada Bank of England Bank of Japan BOE Economy European Central Bank Mathematical finance Monetary Policy Options Reality Technical Analysis US Federal Reserve Volatility Yield Curve
“It could be time to fire up your engines,” suggests former fund manager Richard Breslow, urging some life back into the seemingly oblivious markets…
There’s a lot of uncertainty out there and the response to it shouldn’t be an inability to trade. How about a little frenetic back and forth?
We could use some of the good kind of noise, as in, let’s show a little life. Markets are inching toward some really interesting levels and it’s time for them to show a little spirit and giddy up.
For once, try taking central bankers at their word that tapering and, eventually, rates, are on the move. And take all of these blithe assurances that everything during the process will be calm, cool and collected with a grain of salt. We need to stop saying global economic growth and trade are showing meaningful strength and then agree that everything is still horrible and we can’t afford to change.
Do you know why there’s no inflation? We measure it incorrectly. I can assure you it’s more expensive to live than it used to be. Which is the simplest and truest definition. Why isn’t wage growth higher? Because we’ve utterly skewed the relative bargaining power between capital and labor. Monetary policy will never be able to fix that. Nor the masses forever soothed by rolling out another reality show.
No matter who is selected as the next Fed Chair, rates are likely going up in December and will be in play for March. Tapering is beginning. The BOE is looking to pull back some stimulus and the ECB wants to as well. Even the BOJ has begun to include warnings about investor complacency in their comments. Yesterday’s Japanese election may seem like a strong endorsement of the status quo, but it has also changed the underlying discussion on a number of topics in a meaningful way. The Bank of Canada may be on pause, but they are among a number of banks waiting to pull the switch.
At whatever point along the Treasury yield curve you look, the charts suggest we have crept up to important pivot points. And it’s going to be even more apparent if the recent mini bounce in its steepness can generate some momentum. What a difference it will feel like if the 10-year can break above 2.40%. Not a big ask given we sit so close below. Yet, if it was so easy, we wouldn’t be having this discussion. Twos and fives are right where they will have to decide whether to fish or cut bait. Where they go from here matters. And if I wanted to be a starry-eyed optimist, I’d point out that while it remains low, option volatility has traced out a nice floor since July and has been trying to push higher in the last week.
The dollar, too, is showing some signs of life, even though the majors continue to see volatility selling. The dollar index traded at 94 this morning and if it can eke out another half-percent, there’s going to be a different narrative circulated.
Which countries’ set of woes will take center stage? Or to put it another way, how much of whose bad news is already priced into prevailing levels?
As Brewslow concludes, “I hope this all leads to something interesting… Because who wants to sit around watching the paint dry some more.”
In any case, at these prices, you definitely have something well worth watching. Volatility pricing can be backward looking as well as prescriptive.