Central banks doing now what they should have been doing a decade ago
The last half of the 2010s was characterized by central banks trying to get back to ‘normal’ or to ‘home’ on interest rates. They were obsessed with getting away from the zero bound, just so they could cut again in the future.
They were slaves to the Phillips Curve and few of them emphasized (or realized) that technology, globalization and deunionization were putting downward pressure on prices.
Now we arrive in the 2020s and they’ve seen the light. They’re pledging to keep rates low and goose inflation above target. Kaplan today highlighted technology-enabled disruption as justification.
The problem is that the game is likely to change again. It’s all like a general investing in trench-digging equipment after the first world war. China is now exporting inflation.
I believe that the layering on of leverage should be one of the big takeaways from the market blowup in March. Central banks should be tackling that but instead, they’re building an even-larger tower of leverage in the belief that if anything goes wrong, they can always pump in enough money to make it better. That’s a mistake.
The real danger though is inflation. Yields moved up yesterday and in Asia today before correcting back lower. If they start to move up, bond investors are going to be sitting on massive paper losses.
Already, parts of the market are signaling that inflation is coming.Note that 5y5y forward inflation rates today are at 2.13%; a level that would crush today’s 10-year note bond buyers at 0.73%.
That’s a long way from even the post-crisis era but you can see which direction it’s moving.
I’m the furthest thing from an evangelical on inflation but you can see the way that house prices, commodity prices and government spending are going.
Risks are tilted to the downside for prices, economic growth
BOJ won’t hesitate to ease further if needed
Will continue to support corporate financing, markets
Kuroda is still maintaining a more subdued take on the economic situation but that is hardly a surprise. The recent economic data from Japan have been rather poor and a possible virus resurgence only adds to more risks surrounding the outlook.
But Kuroda stands firm in assuring that the BOJ policies since March are having an impact, though I’m sure they pretty much lucked out on this one with the Fed and ECB doing most of the heavy lifting to appease financial risks in the market for the most part.
The last time the central tendencies and dot plot was released was way back in December 2019. At that time, the world was different place.
At the time in December, the Central tendencies saw 2020 numbers at:
unemployment rate 3.5%
PCE inflation 1.9%
The 2021 projections saw:
PCE inflation 2.0%
The projection for the Fed funds rateat the end of 2020 was 1.6%. For 2021 the rate rose to at 1.9% with the 2022 rate at 2.1%.
The current median estimate for central tendencies shows 2020 numbers at:
PCE inflation 0.8%
The projections for the Fed funds rate at the end of 2020 comes in at 0.1%. For 2021 the rate targets 0.1% with the 2022 rate targeted also at 0.1%.
Below is the chart of central tendencies from the Federal Reserve
Below is the dot plot with all participants keeping the rate at 0.1%. In 2022, there are two voting members to forecast day higher rate. The market was looking for the Fed to keep rates low through 2022
Japanese economic growth in the January to March quarter of 2020 – this the preliminary release
GDP -0.9% sa q/q
expected -1.1%, prior -1.8%
GDP -3.4% annualised sa q/q
expected -4.5%, prior -7.1%
GDP -0.8% nominal q/q
expected -1.3%, prior -1.5%
GDP deflator (an inflation indication) %
expected 0.7%, prior 1.2%
Private consumption -0.7%
expected -1.6% q/q, prior -2.8%
Business spending -0.5% (capex)
expected -1.5%, prior -4.6%
2 consecutive quarters of contraction for the Japanese economy, the economy moves into recession for the first time since H2 of 2015
Q1 exports had their biggest drop q/q since the 2nd quarter of 2011, down 6%
January and February were stable to slowly picking up for Japan but the outbreak in March hit economic growth. The April to June quarter is likely to be even worse, with a more prolonged impact. Restrictions were imposed by the April 7 national emergency declaration shutting many restaurants, large retail outlets, hotels and more. The restrictions were partially lifted on May 14, but are still in place for Tokyo and Osaka, the two largest cities in Japan.
Paul Tudor Jones is one of the great investors of all time and he’s renowned for macro calls. His latest market outlook highlights the coming waves of direct debt monetization that will reshape the economies and financial markets of the world.
“There will be many assets that will move as a result of this money creation. So what is an investor to do? Traditional hedges like gold have done well, and we expect investors to continue to seek refuge in this safe asset. One thing I have learned over time is the best thing to do is let market price action guide your decision-making and then try to understand the fundamentals as they become more evident and comprehensible,” he writes in a note with Lorenzo Giorgianni.
That’s an odd thing for one of the great macro traders of all time to say, but if you look back over his (rare) public comments, it’s a familiar theme. Here’s what he said back in 2009:
Paul Volcker has died of cancer at 92, the New York Times reports.
Volcker led the Fed from 1979-1987 in a particularly difficult time characterized by runaway inflation and currency instability. He began working at the Treasury Department under JFK and was chairman of Obama’s Economic Recovery Advisory Board.
Late in his life he was known for the ‘Volcker rule’; a measure that prohibited banks from making risky trades with their own funds, something that contributed to the financial crisis and bank bailout of 2008.
However his defining legacy was tackling the persistent and runaway inflation of the 1970s and 1980s by raising interest rates as high as 20.0% in 1980. That triggered a recession the next year but ended the era of double digit inflation and kicked off the great moderation — a +30 year period of generally falling borrowing costs and interest rates.