Powell & Goliath – Riding Out The Jay CurveDanielle DiMartino
How goes the business of “watching the paint dry”? As boring as the Fed planned? Maybe the stormy markets and Mother Nature are in cahoots and scheming to keep winter alive and as vicious as she’s ever been. From my snowy perch in New York, I can certainly report that Mother Nature sure as heck hasn’t received the memo that Spring has arrived. And neither have the markets.
Call it the risk parity unwind. Pin it on Bitcoin’s downfall. Blame Facebook and trade tensions. But for my money, it’s all about Quantitative Tightening. Or as Nomura’s George Goncalves rightly identifies, what’s really got the markets on edge, is the triple tightening of rising LIBOR, rate hikes and QT. Tack on the European Central Bank’s intentional taper and the Bank of Japan’s inadvertent taper and it’s anything but watching paint dry.
But then, it was always naïve to assume that the diametric opposite of Quantitative Pleasing would be any fun, and foolish to believe the “watching paint dry” meme. For now, the markets are largely unconvinced that all of this tightening will come to pass, or at least that’s what surveys and stocks’ relatively good behavior convey.
The short rate market remains a might bit more skeptical. The LIBOR-OIS spread is on everyone’s radar just like the bad old days of the Great Financial Crisis. For any of you who need a refresher, just think of it as the difference between one interest rate that incorporates credit risk and the risk-free rate, as in the fed funds rate.
Wide is bad, narrow is good. At over 100 basis points, a full percentage-point-plus, the spread is at the widest since the 2007-2009 bloodbath in credit markets. The financial sector is sniffing out risk in the air. Now, some of this has to do with repatriation and a funding shortage, a technical issue that should resolve itself.
But as Citi’s Matt King points out in a short report you should try to get your hands on, the relative calm will soon be disturbed. As King explains, as soon as the Treasury stops paying out tax refunds, continued T-bill issuance will lead to an increase in the Treasury General Account at the Federal Reserve. This will in turn deplete bank reserves by the same amount. And that will reduce the available capital to conduct currency swaps, a decidedly bad thing.
Speaking of the Fed, today is a very important day for one Jerome “Jay” Powell. He will take to the podium at his first post- Federal Open Market Committee press conference. Buoyant stock markets are said to reflect rumors that Powell will wax dovish.
One thing is for sure. Much to the disappointment of those who want to exact revenge on the speculators and a special class of degenerates they refer to simply as “banksters,” Powell will not be pushing through any half-point rate hikes. He may be hawkish, but he isn’t reckless. That is not to say Powell is a pushover. As we heard him say and repeat in his recent Congressional testimonies, it is not the Fed’s duty to put a floor under stock prices.
What Powell should do is announce that press conferences will henceforth follow every FOMC meeting. This simple and elegant move would send shudders through the market but it would also give Powell the flexibility afforded by having every FOMC meeting be “live.” Besides, it’s time for the Fed to grow up. Hiding behind four meetings a year has long since outlived any utility.
For more on the challenges awaiting Powell, please enjoy this week’s installment, Powell and Goliath: Riding Out the Jay Curve
Hoping you’re enjoying Spring weather somewhere and wishing you well.