Your corresponding blogger has spent most of his time this week recovering from Covid, which has ruined some otherwise carefully laid plans for this week’s missive. I thought that I’d start slowly then, by dissecting the topic on everyone’s minds this week; the inverted U.S. yield curve. Albert Edwards is absolutely right when he says that: "Once inversion occurs a whole new industry emerges, devoted to dismissing the relevance of the signal.” Albert quotes Juliette Declercq of JDI Research for the argument that this time is indeed different for the 2s10s, mainly because the real yield curve—here the 5s30s TIPS vs the nominal 5s30s—is still upward sloping, even steepening. Albert looks to the Macro Compass—penned by Macro Alf—for the contrasting point that if you use forward 2y yields, the real yield curve is in fact very flat. Albert concludes, perhaps not surprisingly for the ice-age perma-bear that the "Fed funds won’t need to rise much before the Fed crashes the economy and the markets. It is as they say “déjà vu all over again”.
Read MoreEveryone has a plan until they get kicked in the nuts by a new virus variant, apparently. The speed with which markets deteriorated on Friday on the news that the B.1.1.529 variant—first detected in South Africa and Botswana, but now confirmed in both Europe and Asia—was telling. So is the swiftness with which many countries already are digging deep in the pre-vaccination toolbox of travel restrictions and, inevitably, domestic restrictions of some form. Indeed, even before the new variant, recently renamed ominously to Omicron, arrived on the scene, Europe was inching closer to new restrictions. Austria and Netherlands were in full or semi-lockdown before Friday, and given the direction of numbers in the major economies, it was only a matter of time before more widespread restrictions were introduced. So, here we are; 18 months of rolling lockdowns and travel restrictions, trillion of dollars in public support, and around 70% of the adult population double-jabbed—and shall we say another 10% with immunity from previous infection?—and we’re back to square one. Someone, somewhere, will soon have to start asking questions, but maybe not yet.
Read MoreIt’s been ages since I checked in on markets, but I am a happy, and a little dismayed, to report that investors and analysts are trampling around in the same weeds. Is inflation transitory or not? Will supply-side disruptions persist? And what about fiscal and monetary policy; will one loosen and the other tighten? In fairness, we have seen a shift in the economic outlook, for the worse. The reopening bump in economic activity, as virus restrictions were eased, is over, leaving economists to ponder what pace of growth to expect as the pandemic-induced macro volatility recedes. This moment was always coming, but almost on cue, we now have to contend with a litany of downside risks in the form of a real-income sapping rise in energy prices and a real estate crunch in China. These headwinds haven’t put much of a dent in risk assets, yet. The MSCI World and S&P 500 are down a paltry 1.5% and 2.5% from their highs at the start of September, respectively, and are still holding on to handsome year–to-date gains, 14.7% and 18.9%, respectively.
Read MoreAs my previous post can attest, my mind has been focused elsewhere in recent weeks—and I am also preparing a my next long-form essay to boot—but I thought that I’d have a peak at markets all the same. The Fed’s (non)decision on yield curve control came and went without any significant shift. The FOMC has now locked down the funds rate until the end of 2022, at least, more or less in line with what markets were already expecting anyway. That said, the shift to “time-contingent” forward guidance—over 30 months no less—is a significant step. It caps a remarkable transition from a Fed on auto-pilot in late 2018—with the 2-year yield aiming for 3%—to one now “not even thinking about thinking about raising rates.” A lot of water has gone under the bridge since then, but it’s difficult to escape the conclusion that the shift in U.S. and global monetary policy over the past 24 months is fundamental. The idea of a central bank put was born a long time ago, but it’s difficult to imagine a version stronger than its current form. Quite simply, policymakers wonʼt tolerate, and canʼt afford, tightening financial conditions, of any kind, and over any time horizon, however short and temporary. I have spent considerable ink on these pages arguing that this makes the rebound in equities, in the face of a crashing economy, more-or-less reasonable. In fact, it’s normal for equities to exhibit their strongest return-profiles early in the rebound, as a positive function of sharply rising excess liquidity as policy shifts, but also simply thanks to a low base. After all, it has to pay for those with the guts to buy at the lows.
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