| | | The Fed’s relatively dovish set of forecasts on Wednesday resulted in an immediate easing of US financial conditions. Here is the Goldman Financial Conditions Index.
Other indicators also show an ongoing easing trend. Here is the St. Louis Fed Financial Stress Index.
5. Risk premiums continue to contract across asset classes. Below is the Merrill Lynch Option Volatility Estimate (MOVE). It’s a commonly quoted Treasuries implied volatility index (similar to VIX). We see the same development in the currency markets (see the Eurozone section).
Source: Bloomberg
6. Some analysts continue to warn that the Fed will deliver more rate hikes than the markets are expecting. The projection from Capital Economics, for example, shows three additional hikes this year.
Source: Capital Economics
Related to the above, here is the Atlanta Fed’s Taylor Rule “prescription” for the fed funds rate. Just imagine what would have happened if the Fed pushed up rates to 2.5% in 2012.
Source: @ClevelandFed, @AtlantaFed; Read full article
7. The debt limit is back as the Treasury Department uses up cash and starts “raiding” the federal pension funds to keep the government afloat.
Source: Danske Bank, @joshdigga
There is nothing to worry about unless Congress doesn’t lift the lid before going into recess in mid-July.
Source: Danske Bank, @joshdigga
8. This chart shows the foreign holdings of Treasuries and a year-over-year change by country. Note that the drop in Belgium’s holdings represents selling by China (China uses Belgium for some of its Treasury transactions).
Source: @MattGarrett3
9. Finally, here is the debt-to-GDP ratio projection with and without the planned fiscal stimulus.
Source: Capital Economics
The Eurozone1. The ECB continues to talk about potentially raising short-term rates while the QE program is still in play. This approach will end up flattening the yield curve and seems difficult to justify. The idea of raising short term rates
while the QE program is in play tells me that the ECB is arriving at the same end of the road situation that the BOJ found themselves in when they crashed long Japanese Govt Bonds to almost negative 30 basis points last summer prior to the global turn in interest rates from their downward to upward trajectory. Gold topped out last summer on the day when the Japanese Long Bond bottomed in yield.
| o: John P who wrote (18355) | 8/8/2016 3:00:39 AM | | From: John P | Read Replies (2) of 18836 | | Japanese Bond Selloff Pushes Yields Near Positive
Investors have been shedding Japanese government bonds since Friday’s central-bank disappointment
By RACHEL ROSENTHAL and HIROYUKI KACHI
Updated Aug. 2, 2016 10:02 a.m. ET
A selloff in Japan’s 10-year government bonds sent these negative-yielding assets within a hair of positive territory.
Yields on the benchmark 10-year Japanese government bond rose Tuesday as high as minus-0.025%—the highest level since March 16—compared with minus-0.145% Monday. They were around minus-0.06% late afternoon in Asia. Yields rise when bond prices fall.
The 0.2-percentage-point climb in yields over three sessions is the biggest move since May 2013, a month after Bank of Japan Gov. Haruhiko Kuroda introduced his first “bazooka” of monetary easing.
Japanese government-bond prices have been falling since Friday, when the central bank announced what amounted to modest policy tweaks—dashing expectations of an interest-rate cut further into negative territory and an expansion of asset purchases. The central bank’s easing program has fueled the fantastic run in bond prices since it started three years ago, so any hints the BOJ might be losing its punch has spooked bond investors.
Selling accelerated on Tuesday in the run-up to a government auction of 10-year bonds, and continued when results showed that demand remains weak.
Beyond the pervasive sense that the Bank of Japan’s monetary policy has reached its limit, the market was rattled by the central bank’s saying it plans a “comprehensive assessment” of policy in September. The rare bit of guidance has stirred questions among investors and analysts about what the BOJ—with a rich history of surprising markets—could be up to.
“What caught the market off-guard and was shocking for us was not that [the BOJ] would postpone additional easing, but rather that they are reviewing the structure of the current market,” says Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments in Tokyo, who manages ¥80 billion ($782 million) in assets. “That means that potentially [the BOJ] might tighten rather than ease, and that’s a source of confusion.”
What shape any tightening could take is anyone’s guess. One option, for example, would be adjusting its ¥80 trillion annual asset-purchase target to a range, and reducing its lower boundary to ¥60 trillion but raising its upper boundary to ¥100 trillion, says Shuichi Ohsaki, a rates strategist at Bank of America Merrill Lynch in Japan.
Limiting asset purchases would damp the appetites of investors who have been buying shorter-dated Japanese government bonds, despite their negative yields, with the expectation of selling them later to the BOJ at even higher prices.
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Source: Reuters; Read full article
2. The ECB is proud of achieving “monetary transmission” as low policy rates feed into reduced borrowing costs in the “real economy.”
Source: Danske Bank, @joshdigga
3. The split between “soft” and “hard” economic data is not limited to the United States. Here is the divergence in the Eurozone.
Source: BMI Research
4. Marine Le Pen’s winning odds in the betting markets continue to slide – in part as a result of the Dutch elections ( discussed yesterday).
Source: @jsblokland
5. After the dovish FOMC announcement and as a result of the aforementioned political developments, the euro implied volatility is tanking.
6. The German Phillips curve seems to be “broken” as well (we saw a similar situation with the UK yesterday). Wages and service sector inflation (which is less sensitive to the global cycle) are not rising as much as the tight labor markets would imply.
Source: Danske Bank, @joshdigga
Source: Danske Bank, @joshdigga
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JapanCapital Economics predicts a sharp decline in the yen (to 130 yen to the dollar) by the end of the year as the rate differential between the US and Japan widens further.
Source: Capital Economics
Some of the fundamental metrics for the yen, however, point to the currency being already highly undervalued. the EUR is similarly fundamentally undervalued and is a big help for German manufacturers and exporters
Source: TD Securities |
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