Ex-Fed New York President Dudley says the Fed is fighting the last war on inflation

Says excess dovishness at the Federal Open Market Committee increases the risk of a major policy error at the Fed.

Bill Dudley is a past resident of the Federal Reserve Bank of New York (2009 to 2018) and is now at Princeton University’s Center for Economic Policy Studies.
Says Fed officials:
  • anticipate that inflation will fall back close to 2% in 2022 … even as supply chain disruptions, energy costs and rising rents threaten to make the current price surge bigger and longer lasting than expected. 
  • And they expect inflation to keep decelerating in 2023 and 2024
  • if inflation proves more persistent than anticipated and even accelerates as the economy pushes beyond full employment, they’ll have to tighten much more aggressively than they expect. 
  • The result could more resemble what happened from 2004 to 2006 – when the Fed raised its short-term interest-rate target by 4.25 percentage points, to 5.25% from 1%, with quarter-percentage-point increases in 17 consecutive policy-making meetings – than what they currently have pencilled in. 
Here is the link to the Bloomberg piece (may be gated)  for much more.
Dudley, Yellen and Fischer, all since departed from the Fed:
Says excess dovishness at the Federal Open Market Committee increases the risk of a major policy error at the Fed. 

There were four big hints in Asia that Evergrande’s restructuring is a done deal

PBOC is talking with other central banks

RBA Debelle
Phones have undoubtedly been ringing at the PBOC with other global central bankers on the line. They all have contacts at the PBOC and all global central banks coordinate and share information.
In a system like China’s where the PBOC isn’t independent, they would be on top of government plans. In a situation like Evergrande, they would be in every briefing and at the heart of the decision-making.
I strongly suspect that decisions have now been made and the need-to-know parts of those decisions have been communicated to other central bankers. Here’s why:
First of all, we saw that Evergrande today made an announcement about making an interest payment on domestic debt after negotiations with bond holders. The company is obviously done but that’s a sign that some kind of plan has been decided on’ and it’s not a disorderly collapse.
The second clue was a net 110 billion yuan in 7/14-day reverse repos. That’s the biggest injection since January and it’s a sign the PBOC is adding liquidity as a buffer because there will be some pain from the restructuring.
The third clue was in comments from the RBA’s Debelle earlier.


What the rout in Afghanistan means for markets

Not much impact

Not much impact
The swift fall of Afghanistan caught the world off guard with President Ashraf Ghani fleeing the capital as it fell.
It will certainly be the major geopolitical story this week but I don’t see any angles where it will affect markets. Afghanistan’s economy is tiny by any standard (except perhaps the opium trade). For example, Afghanistan uses only 30,000 barrels per day of oil.
What will happen is a human tragedy and an embarrassment for the US and the coalition that fought for 20 years to overthrow it but I don’t see how it moves the needle in markets in any way.
Some point to potential gold demand with people fleeing but even there, the minuscule wealth of Afghanistan is negligible.
The UN security council will meet on Monday.

Responses to the Federal Reserve FOMC continue

Responses continue to flow in, this via Westpac, brief summary comments:
  • The FOMC left its policy settings unchanged, and repeated its key guidance messages, as was widely expected. 
  • The statement was a little more upbeat, noting “progress on vaccinations and strong policy support” are helping strengthen economic indicators, including employment. The rise in inflation was acknowledged, but seen as transitory. 
  • The Fed reiterated :”the path of the economy will depend significantly on the course of the virus, including progress on vaccinations.” QE purchases will remain at at least $120bn per month “until substantial further progress has been made toward” the maximum employment and price stability goals. In Q&A, he said it’s not yet time to start talking about tapering asset purchases.
Response via National Australia Bank:
  • The latest FOMC meeting and press conference from chair Powell has come and gone with no big fireworks, though Treasury yields are lower, as is the USD, after Powell made clear that it was ‘not time yet’ to have a conversation about tapering its $120bn monthly QE bond buying programme and that we ‘are not close to’ the substantial progress toward its employment and price stability goals, that has been set as a conditions for contemplating doing so. 
  • This is despite the FOMC upgrading its economic assessment in the formal post-meeting Statement. This says that ‘indicators of economic activity and employment have strengthened (an  upgrade from ‘ have turned up’ in March) and that ‘sectors most adversely impacted by the pandemic have improved’ (versus ‘remained weak’ in March). 
  • The Statement also removed the adjective ‘considerable’ previously placed in front of the comment, repeated, that  ‘risks to the outlook remain’. The Fed chair also continued to stress the expected transitory nature of the pick-up in inflation that currently looks to be underway

US President Biden says he will not be telling the Federal Reserve what to do

US President Biden says he has not spoken with Fed Chair Powell

  • “I’m not going to do the kinds of things that have been done in the last administration, either talking to AG…or the Fed telling them what they should and shouldn’t do”
  • “The Federal Reserve is an independent operation.”
The end of an era …   🙁
US President Biden says he has not spoken with Fed Chair Powell

US Q4 GDP (second reading) +4.1% vs +4.2% expected

Fourth quarter 2020 GDP estimate

US Q4 GDP (second reading) chart
  • First reading was +4.0%
  • Final Q3 reading was +33.4%
  • Personal consumption +2.4% vs +2.5% expected
  • GDP price index +2.1% vs +2.0% expected
  • Core PCE +1.4% vs +1.4% expected
  • Deflator +2.0%
  • Full report

  • Ex motor vehicles +4.7% vs +4.5% prelim
  • Final sales +3.0% vs +3.0% prelim
  • Inventories added 1.11 pp to GDP vs 1.04 in prelim report
  • Business investment +14.0% vs +13.8% prelim
  • Business investment in equipment +25.7% vs +24.9% prelim
  • Exports +21.8% vs +22.0% prelim
  • Imports +29.6% vs +29.5% prelim
  • Home investment +35.8% vs +33.5% prelim
The consumer was a tad weaker in Q4 than initial reports while business and home investment was a bit stronger. Overall, I don’t see anything here that will bleed into Q1 2021.

US 10-year yields reject the break of 1%

Yields quickly move back higher

Yields quickly move back higher
The chart of 10-year yields is an interesting one. There was the consolidation pattern at the top that broke down this week but now it has rejected the first test of 1% and bounced 6 bps to 1.06%.
It’s now testing the bottom of the old range and we’ll soon find out of there will be a broader range of consolidation or it will range from 1.00%-1.06%.
Notably, the bond market was a step ahead of stocks this week and that break lower came well ahead of the rout in equities yesterday. There has been a great pass-through to FX, but keep an eye on yields from here.

Hedge fund manager Ackman says markets too complacent about the coronavirus

Founder of Pershing Square, hedge fund manager Bill Ackman speaking on Tuesday at the Financial Times’ Dealmakers conference

  • markets once again have become too complacent about the coronavirus.
  • is hedging his equity exposure with insurance against corporate defaults
  • “We’re in a treacherous time generally and what’s fascinating is the same bet we put on eight months ago is available on the same terms as if there had never been a fire and on the probability that the world is going to be fine.”
(Ackman referring to his similar trade earlier in the year that paid off big time).
FT link is here for mote (may be gated)
(This pic for a while back)
Founder of Pershing Square, hedge fund manager Bill Ackman speaking on Tuesday at the Financial Times’ Dealmakers conference

Moody’s downgrades UK credit rating to Aa3 from Aa2, outlook stable

Moody’s cuts the United Kingdom

Boris Johnson
This isn’t entirely unexpected but you hate to see it. Fitch recently affirmed the UK at AA-, which is the equivalent of Aa3. S&P remains one notch higher at AA but it’s under review.
Moody’s cited three reasons for the sovereign downgrade:


Moody’s on UK banks outlook

Via reuters

Via reuters
  • UK large domestic bank’s assets quality will take hit from COVID-19
  • UK’s bank capital to remain strong
  • UK domestic banks profitability to recover from 2021
  • Capiltilization will remain robust
  • Negative impact of COVID-19 will impact creditworthiness in line with duration and extent of crisis
  • Capital levels will remain stable over the 2020-2022 period broadly in line with end of 2019 levels.
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