Sept 22. It’s just unclear in a different way

–There’s a must-read piece out by Tad Rivelle titled ‘Twilight of the Central Bankers’.  Here’s the link:

The author thinks the Central Bank playbook of attempting to juice up asset prices to spur growth is running out of rope.  “The explanation is simple: growth is not a simple function of higher asset prices.”

–What did we get yesterday?  An expected pass by the Fed, followed by a dovish press conference with Yellen noting that some signs of inflation expectations may be slipping.  (What could possibly be the upside of making that statement?)  On the projections, Core PCE inflation was actually shaved down by 0.1 to 1.8 for 2017.  Thus, asset prices rose.  And the dollar declined.  Japan and Europe desperately want weaker currencies to pull up their own inflation readings, but Yellen was of no help to them.  Need a life line?  Let me toss you this anchor.

–Do you recall those mad scientist movies- in black and white – where an electric shock is administered to dead tissue and it jerks to ‘life’?  That’s the knee jerk reaction of both stocks and bonds rallying, with the curve flattening, in a dead market, courtesy of Yellen, who is paralyzed by her own analysis.  Can’t blame the dissenters, of which there were three.  Could the contrast between Yellen and Volcker be any starker?  He single-handedly raised rates against near universal objections to break an inflationary mindset.  Yellen just wants to make sure we have safe spaces.  And I don’t know what Japan is doing.  If you set the ten year rate, how and when do you exit from that policy?   At some point, if we are in the twilight of central banking, both stocks and bonds will fall together.

–In any case, October Fed funds instantly went from a trade of 9956 during the morning to a close of 9960.5.  The Nov/Jan Fed Funds spread settled at 13, indicating slightly better than 50/50 odds of a hike in December.  The euro$ curve flattened slightly.  5/30 treasury spread dropped 5.2 bps to 119.7.  Implied vol was simply crushed.

–Stanley Fischer tells a story about his time at the head of the Bank of Israel: (from Reuters)

He decided to keep the rate unchanged until the following month, he recalled telling his advisers, when the situation would be clearer. “It is never clear next time; it is just unclear in a different way,” came the response from his second-in-command.

And so, Fischer said, he learned his lesson: “don’t overestimate the benefits of waiting for the situation to clarify.”  Maybe he should pass that anecdote along to Yellen.


Posted on September 22, 2016 at 5:26 am by alexmanzara · Permalink
In: Eurodollar Options

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