Breslow: “The Answer To This Question Will Drive Just About Everything”
Having passed the first hurdle this morning (PCE did not drop further), The Fed’s December hike is now locked and loaded, but, as former fund manager Richard Breslow notes, at the end of the day, the real elephant in the room is if, when and how fast the big central banks shift toward policy normalization. Everything else is derivative. Get this one right and quibbling over some sector rotation or the relative prospects of the Australian versus New Zealand dollars pale in comparison.
The answer to this question will drive just about every other market.
It’s an interesting issue to contemplate as we wind down a year when sovereign yields, with the exception of China, have been moribund, at best.
All eyes have correctly been on the yield curves but it could very well be that the focus needs to change.
And if it does, it could happen quickly because, unlike previous episodes it’s likely to be a generalized phenomenon rather than country specific. It’s hard to discount one central bank’s normalizing steps should it come to pass that everyone is looking to join in.
We know that the Fed wants to get official rates up. Nothing in the latest communications should have disabused anyone of that notion, even as the market continues to discount the trajectory. Pooh-poohing the trajectory is only a viable course of action if the ECB and BOJ continue to soften the FOMC’s actions.
But what happens if traders begin to realize that these central banks are far less dovish and scared than their official communiques suggest? I’ve got news for you, their speeches don’t line up with the post-meeting press conferences. Especially as they introduce alternative theories on the externalities of negative rates. And they’ll have a pretty good case to argue that they warned us.
We talk a lot about trades for the new year. The risk reward of taking a bearish view on rates is tempting from a technical point of view quite aside from the fundamental fact that global growth rates keep being revised up. And let’s face it, the consensus love-fest with emerging markets is predicated on a long global-growth outlook.
Ten-year U.S. Treasury yields are pathetically low, having failed to even sustain above 2.4%, let alone take a run at 3%. That’s the glass half-empty scenario.
On the flip-side, from a purely technical standpoint, resistance at 2.3% looks unquestionably impressive.
It seems almost laughable to talk about Bund and JGB yield upside but the charts argue that 30 and zero basis points, respectively, look like much more formidable lines in the sand than comparable support.
And since we all love a good conspiracy story, check out today’s Eonia fixing which jumped 6 basis points. (implying rate-hikes)
Aberration? Probably. Canary? Unlikely. But how cool would that be? All we do know is it was verified by the EMMI and we need to wait for further data.
But one thing we do know is the fixing was followed by some heavy volume block selling of the December Euribor contract (rate-hike bets).
An inexpensive trade, to be sure, but someone big wants to see what’s up.
The U.S. isn’t the only place where unemployment continues to improve and, at some point, fixed-income prices just might try to match up better with the economic story we are buying into for the new year.