I don’t have a definitive answer to the question posed above, but I think it is fair to say that markets traded last week as if the answer is: ‘yes’. In Europe, bund yields plunged below 1.5%, after touching almost 2% earlier in the month, and Dec-22 euribor futures are now pricing-in 50bp less tightening than immediately after the June ECB meeting. The catalyst: a below-consensus PMI report and news that Russia is slowly, but surely turning off gas supply to Europe. In the UK, bond yields have fallen too, in response to a below-consensus core CPI print. And finally, in the US, Jerome Powell’s comment, in a testimony to Congress, that a recession is ‘a possibility’ as the Fed embarks on a series of rate hikes, and QT, similarly drove down bond yields across the curve.
Read MoreFirst things first, the bull market and, predominantly retail driven, frenzy in cryptocurrencies, SPACs, NFTs, and BANG stocks—BlackBerry, AMC, Nokia, and GameStop—are to me all derivatives of the fact that the policy mandarins of the world are showering the real economy and financial markets with unprecedented levels of liquidity. To be clear, I do not mean to disparage traders who are able to extract value from these markets; all power to them. What I am saying is that if global monetary policymakers were not doing QE by the trillions, on an annualised basis, the bull market in many of these things would evaporate like mist on a hot summer morning. Meanwhile, in old-school assets—themselves beneficiaries of QE—the overarching theme at the moment seems that the vol-sellers are back in charge. The VIX has hurtled lower, to just over 15, and at this rate it will soon be in the low teens. The same is the case for the MOVE index for fixed income volatility, which is also now clearly driving lower, hitting a 13-month low of 53.4 in May.
Read MoreThe teaser from this week’s missive is posted below as usual, but I have a few housekeeping notes to start the year. First off, I know that I am doing less market-oriented stuff recently; I apologise. The good news is that I am diverting my energy towards a long-form essay on fiscal policy. It’ll be in the same type of format as my two previous essays on the Life Cycle Theory and the Balance of Payment. In short, I am appalled by the level of debate about economic policy these days, so I am trying to inject some context and colour on the current flurry about fiscal policy, what it is—as in what it really is—how economists think about it, and what it can and can’t do. This potentially covers huge ground, but I reckon that I have managed to distill the story into a coherent argument. It’s 80% done, and I hope it will be worth the wait. I expect to have the first draft done next month, and then it goes to the editor for a ruthless take-down. The final version should be done in March, with a bit of luck.
Read MoreFriday’s initial price action in response to the June U.S. payroll report provides a nice microcosm for investors’ mood and short-term expectations. The data themselves were so-so. The unemployment rate increased slightly, due mainly to a lower labour force participation rate, and wage growth slipped, albeit marginally. Markets, however, homed in on the above-consensus increase in headline payrolls, a 224K jump relative to expectations of a 160K gain, and immediately started selling equities and bonds. Running the risk of skipping several important steps in the argument, I reckon the story is relatively simple. Markets have been angling for a 50bp cut by the Fed in July, a position that was washed out, at least for the time being, by Friday’s above-consensus NFP print. Even if this interpretation is right—and it might not be—it doesn’t change the main thrust of the story, which I have been trying to describe on these pages in recent months. Markets have made their bet on further easing by monetary policymakers, and they’re now expecting central banks to deliver. Friday’s session suggests that the consensus is easily spooked, though as I type, Spoos are virtually flat on the day, and EDZ9 is still pricing-in two-to-three cuts between now and year-end.
Read More