My main job on these pages is to distil the market Narrative™ for my readers, and recent events have made this week’s missive a layup. The debate on whether to fire, and how to arm, the fiscal bazooka has continued, and now monetary policymakers have joined the party. For a while, it seemed as if the world’s biggest central banks were sleepwalking into coordinated tightening, or in the case of the PBoC, failing altogether in the attempt to counter a sustained cyclical slowdown. To the extent that the Q4 chaos in equities was investors’ vote on this strategy, they should consider their message received. In Japan, signs of wage growth briefly alerted markets to the prospect that the JGB market would be un-frozen by further loosening of the yield-curve-control. But the truth is that Kuroda-san is stuck. With global headline inflation pressures now easing, manufacturing and exports struggling, and the looming consumption tax, the BOJ isn’t going anywhere fast; zero rates and (modest) balance sheet expansion will continue as far as the eye can see. In Frankfurt, the ECB recently downgraded its assessment of the economy—the convoluted shift from “broadly balanced” to “downside” risks—and expectations are building that the TLTROs will be extended, or even renewed and expanded.
Read MoreIt’s been a choppy start to the year, but last week’s price action added to the evidence that the bulls have regained control, at least temporarily. The MSCI World and HYG US equity are now about 8% and 5% higher, respectively, from their lows in December, and treasury yields are up across the board. The rebound has been broad-based, but European and EM equity indices have shown particularly promising signs, consistent with the fact that they have, after all, been much cheaper than their U.S. counterparts through the Q4 chaos. These headlines are good news, but at this point, I am not willing to treat them as evidence of anything but a reflexsive rebound in the wake of a horrific Q4. Short-term indicators suggest that a lot of fear already has been priced-out. The put/call ratio on Spoos it peaked at 2.7 SDs above its mean on December 27th, but has since plunged to -1.0 SDs. Normally, this would be a sign of complacency, at least in the very short run, but the put/call ratio looks more balanced on Eurostoxx 50, indicating that the picture for global equities as a whole is more neutral. Other indicators also suggest that the market can run a further. My first chart shows that that the crash in the U.S. stock-to-bond return ratio at the end of 2018 was similar to the plunge during the EZ sovereign debt panic in 2012, and well in excess of the Chinese devaluation scare in 2015/16.
Read MoreMarkets remain undecided on whether to treat the signs of intensifying global economic weakness in Q4 and a looming slowdown in earnings growth as the kitchen sink—a signal that the worst is over—or evidence that conditions are worse than anticipated. As such, I thought that I’d discuss the other macro story du jour: The likelihood of a grand global experiment in coordinated fiscal stimulus to take over from our tapped-out monetary policymakers. Laughable you say; perhaps, in the short run, but the signs are clear enough if you care to look. Fiscal discipline has become unfashionable, even to the point that it is deemed outright irresponsible for individual economies to pursue such a strategy from the point of view of global economic growth. These days, economies who show fiscal restraint with large external surpluses—the savers who finance the borrowing of others—are “leaches” on global aggregate demand. If they do not change their ways on their own, they should be coerced. The flirt with the idea of a big fiscal push diverges in intensity across the major economic regions, but I identify three common denominators.
Read MoreThe new year has started like the old one ended; volatile and with confusion among punters and analysts with respect to the notional Narrative™. The volte-face in expectations for U.S. interest rates is a good example. In October, eurodollars were implying a Fed funds rate of just under 3.3% in December 2019 and 2020. At the beginning of the year, they had collapsed to 2.6% and 2.4%, respectively, effectively pricing in an imminent recession, and Fed rate cuts in 2020 to counteract that. Indeed, at some point, the Fed fund futures were even pricing cuts this year, a position that was stung badly on Friday by the hilariously bullish NFP report. Although neither the Fed nor markets know where the terminal/neutral rate—not to mention that this is a moving target—I reckon that the past six months have given us a decent clue. Anything close to 3.5% probably is too high, while sub-2.5% is too low, at least as long as the economy remains in a more-or-less stable expansion. Looking beyond the navel-gazing that is U.S. monetary policy, I am warming to the idea that (equity) markets will pivot towards cyclicals at some point this year, but we are not there yet. Over Christmas, I toyed with the idea that the next shoe to drop would be a downturn in the (hard) global economic data. The numbers have already deteriorated, but I reckon that they could slip further.
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