We’ve already had the most important piece of data

God bless us all for trying. Today’s non-farm payroll number is awaited with excitement by banks who have seen the quietest August in years; by hedge funds desperate to turn a difficult year around; and by journalists keen for copy. More kindly, we might add central banks to the list, given they are data dependent and the data thus far has proven unhelpful. That’s what has become so trying for all of us: we are not in a normal economic cycle, so we can’t be in a proper hiking cycle. We can’t talk sensibly about inflation/unemployment trade-offs, or consumption vs saving, when the world just doesn’t work like that at the moment. Perhaps it doesn’t work like that full stop any more. The severe debt blow-up caused by the credit crunch has left consumers with an unusual predilection for excess saving, and banks with an inability to lend. We might have been able to get through that, with animal spirits sufficiently restored to their Keynesian best, if it hadn’t been for the sudden oil price fall. That kept a lid firmly on inflation, led to further and extended central bank easing, and ended up with bubbles forming in financial assets.

So, what if we do get a good payrolls number today? Employment has been on a tear in the US for years, full employment is approaching, and yet growth and inflation remain anaemic.

OK, you might argue tersely, but it would mean the Fed are going to hike! Like, now! Or maybe December! But soon! Let’s not worry about the long-term macroeconomic view, we can trade off the back of this!

Ah but my friends if that’s the case, then won’t today be a case of Buy the rumour, sell the Fact, and actually a good number would then take the USD lower?

Blondemoney doesn’t like arguments, dear reader, so let’s settle this like grown-ups. Get yourself a whisky on the rocks and check out this chart:

It’s the US ISM index, one of the longest running indicators of the strength of the US economy. Yesterday we found out that it fell below the 50 boom-bust line. Note that it did the same at the end of the last year, and the Fed still hiked; but also note that it has struggled to stay above 50 ever since.

So, get excited about payrolls if you must. But don’t lose sight of the bigger picture.

The Day Today 15 August 2016

* BOE Haldane on Brexit: “This is a structural shift in the U.K.’s economic and trading regime, whereas monetary policy can offer no more than a short-term balm for economic uncertainty”
* 36% of businesses expecting to increase staffing over next 3 months, vs 40% pre-referendum; 56% of CEOs are unchanged in their investment plans
* Theresa May vows to push on with plans to trigger Article 50 next year, telling ministers to “Stop playing games”, according to a source – this after leaks in the press that the trigger might have to wait until after France and Germany elections next year, so Autumn 2017

* IMM short GBP positions are the largest on record

* Apple’s Tim Cook on taxes: “It doesn’t go that the more you pay, the more patriotic you are”

* Venezuela raises minimum wage 50%

* Japan GDP flat in Q2, missing estimates of +0.2%
* IMF diagnosis after their annual visit to Japan: “We need policies to support wage increases in Japan”
* Japan’s FSA estimates negative interest rates will reduce Japanese banks’ profits by $3bn

* World Bank looks to sell SDR bonds in China

The (Will You Marry Me) Day Today 29 Feb 2016

* G20 hears China say there will be no Yuan devaluation
* G20 statement: “we will consult closely on exchange markets”; PBOC Vice Governor said it helps alleviate concerns of a “currency war”
* Abe adviser Hamada: “Sporadic interventions may be needed to punish speculators who are taking advantage of temporary market psychology to keep the yen far above its market value”

* Fed Brainard: recent tightening of market conditions are equivalent to three Fed rate hikes

* France Central Bank Governor: “But if the low energy prices have sustainable long-term effects, we have to act. That seems to be the case, but we will see in March”
* ECB Praet: “Recent developments are not to be taken lightly”
* SNB Jordan: “the exemption threshold [from negative rates] is a possible policy instrument”

* New Brexit poll shows 56% in favour of Leave, if you weight opinions by how likely people said they were to vote
* UK Chancellor: we “may need to undertake further reductions in spending”

* Swiss reject referendum vote to expel foreigners for minor crimes, in a blow to the right-wing People’s Party. They reject the proposed ban on commodity trading too

* ex-BOE Mervyn King [remember him?]: “Another crisis is certain, and the failure…to tackle the disequilibrium in the world economy makes it likely that it will come sooner
rather than later”

* Ireland’s election is inconclusive

* Hedge Funds are the most bullish on US Tsys in 2 years

* Japan interbank balances plunge 79% on negative rates

* Saudi banks relax loan-to-value levels, Moody’s warns on Saudi banks credit ratings

And so, the end is near, we’ve yet to face the final curtain

Tonight, Janet Yellen gets to do it her way. 9 years since the last time the Federal Reserve hiked interest rates, three and a half rounds of QE and a financial crisis later, she gets to pull the trigger. Or at least signal the gun is cocked.

Now, it’s tough to get a handle on exactly what is expected, but broadly speaking, most expect the Fed to take a pass at this meeting. Why go now? Inflation remains benign and disinflationary pressures are increasing, not decreasing; China might be a sign the world is plunging back into doom; and why risk it? Just think of the consequences, screams a world that has suckled on an endless supply of monetary milk.

Let’s get real for a second shall we?

1) any increase in interest rates from here will still be an incredibly stimulative rate

2) they have to hike at some point, or run the risk of running out of bullets into the next crisis; or run the risk of having to hike more aggressively later

3) it would reduce uncertainty over that difficult first move (as anyone paralysed by Tinder could attest)

4) and monetary policy operates with lags, as the new Head of Monetary Affairs (appointed by Yellen herself this year) has shown

Sure, maybe they could wait a bit for some more data. But why? We already know about the global disinflationary impulse, as well as the improving labour market picture specific to the U.S.  We also know Q3 data has been “just OK”. When it comes to the Fed’s dual mandate, they’re doing better than expected on employment, and slightly worse on inflation. What more would we find out in the next couple of months that might skew that picture dramatically?

No, the more important aspect to the Fed’s mandate is the extra one they received post financial crisis. They are now mandated to ensure financial stability. Zero rates for as long as the eye can see doesn’t exactly chime with that remit. Hence Yellen’s comments this year about the worrying lack of a risk premium in certain financial assets.

To that end, recent market volatility has done them a favour. Stock markets wobbled but didn’t wither and die. Emerging markets swooned but contagion remained limited. In fact various EM officials were lining up at the G20 to encourage Fed action, to reduce uncertainty that is hanging over EM countries’ borrowings in US Dollars. By acting now, they can’t be accused of derailing everything in one fell swoop.

Blondemoney is in the U.S. right now and house prices, new vehicles, and adverts for cheap mortgages suggest at least anecdotally that this economy can take it.

In fact, restoring some kind of cost of capital might help businesses to invest. Higher interest rates doesn’t always mean doom. In the nine years since the last hike would we say the economy has been weaker or stronger than the years before? Cheap money is not a symptom of a healthy economy.

Tonight they’ll either move rates, or allow effective fed funds to normalise at the top of its 0.0-0.25% corridor. Or maybe signal that is possible at October by pre-emptively pencilling in a press conference to keep that meeting “live”. Or maybe even have more than half of the ‘end of 2015 dots’ above 0.25 to suggest the majority of the Fed wants to go by year-end. Any of those actions is “hawkish” enough to surprise the market, but not ultimately scare the horses. Remember the September taper that never happened after the May taper tantrum? They went ahead and tapered in Dec anyway.

The mood of the Fed seems to be that it’s better to have a hawkish hit now to avoid a dovish pause that could cause problems later.

The Fed are moving at some point soon. Janet will be doing it her way. She’ll be stating her case, of which she’s certain. The market just has to get used to this not being the final curtain.




Reporting from the front line


Ahead of possibly The Most Important Interest Rate Decision Ever, BlondeMoney is out in the field, reporting from the front line …. Today the Federal Reserve Bank of San Francisco was certainly busy, populated by a man in a cowboy hat and several chino-wearing minions. As we move into the denouement on Thursday, will we see some Hawks emerge?

(terrible joke, jet lag is the excuse)

Watch this space….