The prevailing mood in global macro discussions seems to be as follows; inflation is past its peak, but it is set to remain a lot higher for a lot longer than initially anticipated, forcing central banks to continue hiking, keep rates higher for longer, or a combination of the two. The interest rate shock in the UK, as markets have adjusted their expectations for the BOE bank rate higher, and hawkish comments from the ECB are the two most obvious cases in point in developed markets. But a surprise hike by the Bank of Canada, and a larger-than-expected hike in Norway have added to the sentiment. We only really need the Fed to be forced into a hawkish turn to complete the narrative. This shift is important for investors. We are not just trying to calibrate when central banks will pause their hiking cycles—probably soon—but we’re also increasingly discussing, and pricing, how long rates will stay elevated, and whether central banks will have to resume hiking before they cut. Higher-for-longer, or #H4L, is already a trending hashtag on FinTwitter.
Read MoreSometimes in markets, everyone looks up the same price in the morning to get a feeling of where sentiment is. It’s often one of the big ones; the S&P 500, the long bond, the price of oil, DXY, or gold, or even Bitcoin. Recently, everyone has been following the bloodbath in short-term interest rate markets as implied rates in one developed market after the other have gone haywire. Things have settled down slightly in the past week following the FOMC meeting, and the hilarious unch-BOE decision in the face of a near-certainty of a rate hike only a few weeks ago. I reckon implied rates will fall a bit further in the near term. The U.S. 2y, for instance, seems like it wants to go down before it’ll try to snap back, implying that the violent decline in short-term interest rate futures—though not necessarily those for 2022—should ease a bit too. But it is difficult to escape the feeling that the genie is out the bottle. Expectations have shifted, and while central banks won’t have to meet them as priced, they will have to deliver something.
Read MoreThe chancellor of the Exchequer had sobering news for the UK public last month when he unveiled that the Treasury is on track to borrow almost 20% of GDP this year to plug the hole in the economy created by the virus, a move that will see the public debt-to-GDP ratio zoom past 100%. In a world governed by the rules of the now-defunct work by Rogoff and Reinhart—famously discredited by a spreadsheet error—these numbers would send chills down the spine of economists and public policymakers, but we’ve moved from on then, significantly. We now understand that the government does not operate under a budget constraint, and that it can, in fact, create as much (sovereign) money it wants to buy as much debt that it wishes to issue—via primary market purchases by the central bank—to finance whatever level of spending and investment—ostensibly to generate jobs for every able man and woman—that it wants. I treated these issues in a long-form essay on fiscal policy, but the elevator pitch is simple enough. Under the auspice of MMT, governments have the ability and duty to create jobs for everyone and to prevent financial and economic distress and harm. It must do so because the economic costs and constraints hitherto associated with such a policy strategy are figments of Neo-Classical economists’ imagination.
Read MoreIt has been clear for a while that Covid-19 would be a big shock to the global economy, but early predictions of a quick rebound, and a return to normal, now look fanciful. I am now inclined to believe that just about everything will change. My old colleague, and good friend, Jonathan Tepper is musing on a similar note in a recent piece on Unherd.com. I recommend that you go read it; it’s a great piece. For my part, I’ll split my arguments into two observations, not necessarily market-related, but both are key to understand the evolution of markets and the economy in the next few quarters, and I would suggest, beyond as well. We are not even through the first quarter yet, but it’s fair to say that the first chart on my next page already is the chart of the year. It portrays the “optimal” strategy to combat the virus relative to doing nothing, and a policy of loose mitigation. Leaving the Chinese and South Korean outbreaks aside—as well as the grim disaster unfolding in Iran—I think it’s fair to make two overall points. Firstly, there has been a significant debate about the correct strategy to combat the virus. The responses have been scattered on a spectrum ranging from (unconfirmed?) pictures of Chinese authorities welding doors shut to apartment blocks to halt the spread, over to “herd immunity”. Or, as former SAS soldier Ant Middleton’s suggests; “fuck Covid-19”, a statement that he, in fairness, has now retracted.
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