The Dreaded ‘Flattening Yield Curve’ Meets QE Unwind

During prior incidents of an ‘inverted’ yield curve, the Fed had no tools to get the market to push up long-term yields. Today it has one: the QE Unwind.
The price of three-month Treasury securities fell and the yield – which moves in the opposite direction – rose, ending the year at 1.39%, after having spiked to 1.47% on December 26, the highest since September 12, 2008. This is in the upper half of the Fed’s new target range for the federal funds rate (1.25% to 1.50%). Back in October 2015, the yield was still at 0%:

This post was published at Wolf Street by Wolf Richter ‘ Dec 30, 2017.

From Crypto To Qatar – These Were The Best & Worst Assets In 2017

2017 saw global central bank balance sheets explode almost 17% higher (in USD terms) – the biggest annual increase since 2011 – and while correlation is not causation, one can’t help but see a pattern in the chart below…
Global stocks up, Global bonds up, Global commodities up, Financial Conditions easier (despite 3 Fed rate hikes), and Dollar down (most since 2003)…
As we noted earlier, Craig James, chief economist at fund manager CommSec, told Reuters that of the 73 bourses it tracks globally, all but nine have recorded gains in local currency terms this year.
‘For the outlook, the key issue is whether the low growth rates of prices and wages will continue, thus prompting central banks to remain on the monetary policy sidelines,’ said James. ‘Globalization and technological change have been influential in keeping inflation low. In short, consumers can buy goods whenever they want and wherever they are.’
Still, the good times may not last: an State Street index that gauges investor risk appetite by what they actually buy and sell, suffered its six straight monthly fall in December, Reuters reported.
“While the broader economic outlook appears increasingly rosy, as captured by measures of consumer and business confidence, the more cautious nature of investors hints at a concern that markets may have already discounted much of the good news,’ said Michael Metcalfe, State Street’s head of global macro strategy.

This post was published at Zero Hedge on Fri, 12/29/2017 –.

US Dollar Has Worst Year since 2003, Defying the Fed

Where will it go from here?
Today is another down-day for the US dollar, the third in a row, capping a nasty year for the dollar, the worst since 2003. In 2017, the dollar dropped 7% against a broad basket of other currencies, as measured by the Trade Weighted Dollar Index (broad), which includes the Chinese yuan which is pegged to the US dollar. It was worse than the 5.7% drop in 2009, but not as bad the 8.5% plunge in 2003.
Here are the past four years of the dollar as depicted by the Broad Trade Weighted Dollar Index, which tracks 26 foreign currencies. The index is updated weekly, with the last update on December 26, and has not yet captured the declines of past three days:

This post was published at Wolf Street on Dec 29, 2017.

The Great Recession 10 Years Later: Lessons We Still Have To Learn

Ten years ago this month, a recession began in the U. S. that would metastasize into a full-fledged financial crisis. A decade is plenty of time to reflect on what we have learned, what we have fixed, and what remains to be done. High on the agenda should be the utter unpreparedness for what came along.
The memoirs of key decision-makers convey sincere intentions and in some cases, very adroit maneuvering. But common to them all are apologies that today strike one as rather lame.
‘I was surprised by the sudden crisis,’ wrote George W. Bush, ‘My focus had been kitchen-table economic issues like jobs and inflation. I assumed any major credit troubles would have been flagged by the regulators or rating agencies. … We were blindsided by a financial crisis that had been more than a decade in the making.’
Ben Bernanke, chairman of the Fed wrote, ‘Clearly, many of us at the Fed, including me, underestimated the extent of the housing bubble and the risks it posed.’ He cited psychological factors rather than low interest rates, a ‘tidal wave of foreign money,’ and complacency among decision-makers.

This post was published at Zero Hedge on Dec 27, 2017.

The Fed Plays the Economy Like an Accordion

We talk a lot about how central banks serve as the primary force driving the business cycle. When a recession hits, central banks like the Federal Reserve drive interest rates down and launch quantitative easing to stimulate the economy. Once the recovery takes hold, the Fed tightens its monetary policy, raising interest rates and ending QE. When the recovery appears to be in full swing, the central bank shrinks its balance sheet. This sparks the next recession and the cycle repeats itself.
This is a layman’s explanation of the business cycle. But how do the maneuverings of central banks actually impact the economy? How does this work?
The Yield Curve Accordion Theory is one way to visually grasp exactly what the Fed and other central banks are doing. Westminster College assistant professor of economics Hal W. Snarr explained this theory in a recent Mises Wire article.
The yield curve (a plot of interest rates versus the maturities of securities of equal credit quality) is a handy economic and investment tool. It generally slopes upward because investors expect higher returns when their money is tied up for long periods. When the economy is growing robustly, it tends to steepen as more firms break ground on long-term investment projects. For example, firms may decide to build new factories when the economy is rosy. Since these projects take years to complete, firms issue long-term bonds to finance the construction. This increases the supply of long-term bonds along downward-sloping demand, which pushes long-term bond prices down and yields up. The black dots along the black line in the figure below gives the 2004 yield curve. It slopes upward because a robust recovery was underway.

This post was published at Schiffgold on DECEMBER 27, 2017.

Demand Tumbles For 5Y Treasuries As Tailing Auction Leads To Highest Yield Since 2011

After yesterday’s ugly, tailing 2-Year auction, it is probably not a big surprise that today’s sale of $34 billion in 5Y Treasurys was just as ugly.
The auction printed at a high yield of 2.245% – the highest since March 2011 – and well above last month’s 2.066% largely thank to the recent Fed rate hike. More troubling is that the auction tailed the When Issued 2.228% by a whopping 1.7bps, the biggest tail going back at least 2 years.

This post was published at Zero Hedge on Dec 27, 2017.

It’s Official: Government Report Says Market Risks are ‘High and Rising’

During Fed Chair Janet Yellen’s press conference on December 13, she had this to say about financial stability on Wall Street: ‘And I think when we look at other indicators of financial stability risks, there’s nothing flashing red there or possibly even orange. We have a much more resilient, stronger banking system, and we’re not seeing some worrisome buildup in leverage or credit growth at excessive levels.’
Where does Fed Chair Janet Yellen get her information on financial stability risks to the U. S. financial system? A key source for that information is the Office of Financial Research (OFR), a Federal agency created under the Dodd-Frank financial reform legislation of 2010 to keep key government regulators like the Federal Reserve informed on mounting risks.
On December 5, the OFR released its Annual Report for 2017. It was not nearly as sanguine as Yellen. In fact, it flatly contradicted some of her assertions. The report noted that numerous areas were, literally, flashing red and orange (OFR uses a color-coded warning system) – raising the question as to why Yellen would attempt to downplay those risks to the American people.

This post was published at Wall Street On Parade on December 27, 2017.

Hysertianomics: S&P 500 Index UP 25% Since Trump Election As Fed Keeps Raising Rates (Krugman Said Markets Would Never Recover)

This is a syndicated repost courtesy of Snake Hole Lounge. To view original, click here. Reposted with permission.
Nobel Laureate Economist Paul Krugman said on November 8, 2016 that markets will never recover from the stock market decline that occurred on November 7th, the day before the Presidential election.

This post was published at Wall Street Examiner by Anthony B Sanders ‘ December 26, 2017.

Stockman: US Fiscal Path Will Rattle the Rafters of the Casino

As we’ve reported, the US government is spending money like a drunken sailor. But nobody really seems to care.
Since Nov. 8, the US national debt has risen $1 trillion. Meanwhile, the Russell 2000 (a small-cap stock market index) has risen by 30%. Former Reagan budget director David Stockman said this makes no sense in a rational world, and he thinks the FY 2019 is going to sink the casino.
In a rational world operating with honest financial markets those two results would not be found in even remotely the same zip code; and especially not in month #102 of a tired economic expansion and at the inception of an epochal pivot by the Fed to QT (quantitative tightening) on a scale never before imagined.’
Stockman is referring to economic tightening recently launched by the Federal Reserve. It’s not only the increasing interest rates. By next April the Fed will be shrinking its balance sheet at an annual rate of $360 billion and by $600 billion per year as of next October. By the end of 2020, the Fed will have dumped $2 trillion of bonds from its books. Stockman puts this into perspective.

This post was published at Schiffgold on DECEMBER 26, 2017.

Demand Slides For 2Y Treasuries As Yield Surges To Highest Since Sept 2008

The last time the yield on a 2-Year TSY auction was as high as it was today – 1.922% to be specific, tailing the When Issued 1.899% by 0.3bps – was just a few days after Lehman Brothers failed, with one difference: back then it was sliding, while now the rate on 2Y paper is surging, up from just 1.21% at the start of the year, and up from 1.765% just last month thanks to the latest Fed rate hike.

This post was published at Zero Hedge on Dec 26, 2017.

2017: A Review Of The Fed, Treasuries, Mortgages and Housing (Volatility and Velocity)

This is a syndicated repost courtesy of Snake Hole Lounge. To view original, click here. Reposted with permission.
2017 has been an interesting year. Donald Trump was elected President and seated in January 2017. The Federal Reserve kept rates near zero with a massive balance sheet for almost all of Obama’s 8 years as President, then started to raise rates and unwind their massive balance sheet AFTER Trump was elected. Note the decline in M2 Money growth after Trump’s election.

This post was published at Wall Street Examiner by Anthony B Sanders ‘ December 23, 2017.

Doug Noland: Epic Stimulus Overload

This is a syndicated repost courtesy of Credit Bubble Bulletin . To view original, click here. Reposted with permission.
Ten-year Treasury yields jumped 13 bps this week to 2.48%, the high going back to March. German bund yields rose 12 bps to 0.42%. U. S. equities have been reveling in tax reform exuberance. Bonds not so much. With unemployment at an almost 17-year low 4.1%, bond investors have so far retained incredible faith in global central bankers and the disinflation thesis.
Between tax legislation and cryptocurrencies, there’s been little interest in much else. As for tax cuts, it’s an inopportune juncture in the cycle for aggressive fiscal stimulus. And for major corporate tax reduction more specifically, with boom-time earnings and the loosest Credit conditions imaginable, it’s Epic Stimulus Overload. History will look back at this week – ebullient Republicans sharing the podium and cryptocurrency/blockchain trading madness – and ponder how things got so crazy.
From my analytical vantage point, the nation’s housing markets have been about the only thing holding the U. S. economy back from full-fledged overheated status. Sales have been solid and price inflation steady. While construction has recovered significantly from the 2009/2010 trough, housing starts remain at about 60% of 2004-2005 period peak levels. It takes some time for residential construction to attain take-off momentum. Well, liftoff may have finally arrived. As long as mortgage rates remain so low, we should expect ongoing housing upside surprises. An already strong inflationary bias is starting to Bubble. Is the Fed paying attention?

This post was published at Wall Street Examiner on December 23, 2017.

“In The End, There Was Absurdity” – The Great Crash Of 2018?

Crises always take longer to arrive than you think, and then happen much quicker than they ought to.
– Rudiger Dornbusch
An eerie calm has taken over the world markets. Volatility is crashing, and economic and political shocks come and go without any noticeable effect on the asset markets. Inflation and interest rates are also low. So ‘Goldilocks’ is here, right?
Well, no. I have written a collection of dark pieces about the world economy this year. They have followed the tone set in our business cycle forecasts. In March, we took a deep dive behind the faade of the economic expansion to discover the sources of growth. We found them to be unstable, depending on political decisions and thus prone to crash.
In our latest forecast, we envisaged how the world economy would respond if the foundations of global growth would break. It was not pretty. Here I present the main takeaways.
I consider the Figure 1 (below) to give the most compelling picture on the absurdity we have arrived to. It presents the yield of the US 10 year treasury bond, the yield of Italian 10 year bond and yields of junk bonds of European and US companies as well as the QE:s of the ECB and the Fed. It implies that the default probability of an average European junk-rated company is smaller than that of the US government. This, naturally, is just absurd and it only tells the tale of a massive central bank induced market distortion. The pricing of risk in the normal sense does not exist in the capital markets anymore.

This post was published at Zero Hedge on Dec 20, 2017.

Don’t Just Do Something, Sit There!

Have you heard of the depression of 1920-21?
Unless you’re a pretty hard-core economics geek, you probably haven’t.
The most striking aspect of this depression was its duration. It lasted just 18 months. And how did the US get itself out of this sharp economic downturn?
By essentially doing nothing.
A collapse in GDP and production led to a sharp spike in unemployment to double-digit numbers. Modern policymakers would immediately launch economic stimulus. Consider the 2008 crash. On top of government programs such as the $700 billion TARP and $800 billion in fiscal stimulus, the Federal Reserve pumped $4 trillion in new money into the system. For 165 out of 180 months, the Fed pushed interest rates down or held them at rock-bottom levels.
The result? A tepid recovery at best with 2 million fewer ‘breadwinner’ jobs than during the 1990s. Oh. And a whole slew of bubbles waiting to pop.
Lew Rockwell compares this to the how things played out in 1920.

This post was published at Schiffgold on DECEMBER 20, 2017.

Are Bonds Really On The Run? Why One Trader Is Skeptical

Yesterday we observed the biggest 2-day steepening in the 2s30s yield curve since the Trump election, following a confluence of events which we discussed in this post, and which resulted in a generous payday for at least one rates trader.
***
So has the long-awaited moment of a long-end selloff arrived? Or, as SocGen’s FX strategist, Kit Juckes, put it, are “Bonds on the run?” Maybe not so fast, especially since much of the recent increase in yields has been for breakevens. Here are his thoughts.
Bonds on the Run?
The Tax Bill is still moving towards the Oval Office, and even critics concede that it boosts
growth a bit (more from the corporate tax cut than from the income tax cuts). While the
relationship between growth, economic slack and inflation remains as much a mystery as how
Father Christmas gets down the chimney, an uptick in breakeven inflation and in 10-year Note
yields isn’t shocking. The more breakevens rise, the less real yields rise, the less this affects the
dollar, unless or until it triggers a wholesale rethink on where Fed Funds are headed. So far, the
market remains convinced the destination is 2-point something. Bearish bond bets may make
sense, but FX conclusions are messier. We like short yen trades for now, but as with any carrybased
FX trades, it feels a bit like picking up pennies in front of a present-loaded sleigh…

This post was published at Zero Hedge on Dec 20, 2017.

What to Expect From Equities in 2018

Summary: US stocks will likely rise in 2018. By how much is anybody’s guess: the standard deviation of annual returns is too wide to get even close to a correct estimate on a consistent basis. Earnings growth implies 6% price appreciation, but tax cuts could boost that to 13%. Investor psychology could push returns much higher (or lower).
While it’s true that investors are already bullish and valuations are already high, neither of these implies a likelihood of negative returns in 2018. That the stock market rose strongly this year also has no adverse impact on next year’s probable return.
A bear market is always possible but is also unlikely. That said, the S&P typically experiences a drawdown every year of about 10%; even a 14% fall would be within the normal, annual range. It will feel like the end of the bull market when it happens.
The Fed will likely continue to raise rates next year, which normally leads to higher stock prices. While political risks seem high, the stock market usually ignores these. The “Year 2” presidential cycle provides no investment edge.
This article highlights 11 key ideas to explain what to expect in 2018.

This post was published at FinancialSense on 12/19/2017.

Economic Stimulus Alive and Kicking in EU

Janet Yellen and company pretty much followed the script during last week’s Federal Open Market Committee meeting, raising interest rates another .25 percent and signaling three rate hikes in 2018.
We tend to focus primarily on Federal Reserve actions, but it’s important to remember the Fed isn’t the only central bank game in town. While it nudges interest rates slowly upward, the European Central Bank is standing pat on economic stimulus. And there’s no indication that is going to change in the near future.
With its latest rate hike, the Federal Reserve has pushed the Federal Fund Rate to 1.5%. That’s the highest we’ve seen since 2008. Even at that, we’re still well below the 5.25% peak hit during the last expansion.
Meanwhile, ECB chair Mario Draghi announced back in October that quantitative easing would live on in the EU.

This post was published at Schiffgold on DECEMBER 18, 2017.