“Clueless”, Reaccomodating Fed Spurs Epidemic Of Record Low Yields Around The Globe
“If it wasn’t obvious that Fed normalization was going to be difficult, it should be now. Risk assets don’t appear to be ready for significant removal of accommodation”.
So much for “the recovery” (in the US or elsewhere) and a mythical world in which a seamless handover from the Fed to the economy can ever take place.
As Deutsche Bank correctly summarizes, markets were left scratching their heads last night as to whether the FOMC minutes released were actually from the right meeting. They were certainly more dovish than that implied by the increases in the dots 3 weeks ago and the associated statement.
If there is anyone who goes postal in the Marriner Eccles building it will probably be a Fed Fund Futures/Eurodollar trader: “after the FOMC back on September 16th the market re-priced Fed interest rates notably higher with Dec 16 Fed Funds futures moving from 1.67% to 1.82%. However reading the minutes last night it’s clear that some members see risks more on the downside than they let on at the time. Indeed on the committee a number of participants said growth “might be slower than they expected if foreign economic growth came in weaker than anticipated,” and that “Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector.” This sounds like a committee that will clearly raise rates as they expect if everything is ok in the world but won’t if events turn out more negatively. The same Dec 16 Fed Fund Futures contract is now at 1.575% and has fallen fast in recent days.“
DB’s Jim Reid concludes it correctly, if tongue in cheek – the Fed has NO IDEA what it is doing anymore, ot what will happen next month, let alone next summer:
Overall we think the market pays too much attention to the dots which are based on economic forecasts that since the crisis have proved pretty unreliable. Fed funds will end up moving with the actually path of the global economy and asset prices rather than the forecast of them. For now we would happily take the under in any under/over game based on market expectations for Fed Funds over the next couple of years.
Translation: the Fed is absolutely clueless, however that is great news for risk assets as it means the Fed’s CTRL and P buttons are about to get some serious exercise, leading to hilarious overnight headlines such as:
- IRELAND SELLS 10-YEAR BONDS AT RECORD-LOW YIELD OF 1.63%
- GERMAN 10-YEAR BUNDS RISE; YIELD FALLS 2 BASIS POINTS TO 0.88%
- DUTCH 10-YEAR GOVERNMENT BOND YIELD DROPS TO RECORD-LOW 1.021%
- PORTUGUESE 10-YEAR BOND YIELD DROPS TO RECORD-LOW 2.942%
- FRENCH 10-YEAR GOVERNMENT BOND YIELDS DROP TO RECORD-LOW 1.214%
- U.S. 10-YEAR NOTE YIELD DROPS TO 2.296%, LOWEST SINCE JUNE 2013
- SPANISH 10-YEAR BOND YIELD DROPS TO RECORD-LOW 2.038%
- FINNISH 10-YEAR YIELD DROPS TO 1% FOR FIRST TIME ON RECORD
And that is all you need to know about the “global recovery” and the Fed’s 2015 “rate hike.”