Why do we even bother sharing the Fed meeting minutes? Do you ever wonder that?
They didn’t hike rates. That’s it. Now you’re going to scour the tea leaves (the ones they report) for clues about November and December? Give us a break.
They aren’t going to hike in November around an election. That would be a monumental shock to markets. No one knows what they’re going to do in December, but what we do know is that no matter what they do, the so-called “flight plath” has been more like a turkey than a hawk. It’s been a year for God’s sake and we’re talking about 25bps. Who cares what the ECB and BoJ are doing. 25 bps isn’t going to derail that meaningfully other than perhaps raising the cost of FX hedging US dollar credit exposure which is only necessary for foreign investors because they can’t get a positive yield on domestic debt thanks to the lunacy of their own central banks’ policies. But don’t take it from us, take it from Deutsche Bank (emphasis ours):
“As we look out further into future, the Fed’s dot plot projects seven rate hikes before Dec 2018, while the market is implying only two and a half. This gap cannot exist in perpetuity, and if the Fed decides to force the market to realign its views closer to those of FOMC, the primary impact could transpire in FX hedging costs for EUR/JPY investors in the US going even higher than they are today, making their continued inflows, if not yet holdings of US assets uneconomical.”
“Such hedging costs have already increased by 40 bps in the past three months along with strong demand for yield from foreign investors coupled with rising expectations of another hike from the Fed. Even at today’s levels a portfolio of US IG bonds FX-hedged for only three months forward delivers little incremental yield pickup to EUR-benchmarked IG investors, compared to their domestic alternatives (US IG swapped into EUR for 3mo yields 33bps over EUR IG index). Nonfinancial single-As, the preferred destination of Asian money, swapped for only a year delivers less OAS than US single-A investors have ever accepted in the history of this market (63bps at its lows in recent weeks, compared to an all time low OAS of 70bps on our DM USD IG single-A index). In many cases, liquid on-the-run IG bonds swapped into EUR/JPY are delivering negative yields already.”
Want to know just how “data dependent” the FOMC really is? Here’s an excerpt from the minutes:
“Global financial conditions had improved somewhat in recent months. However, participants noted that economic growth in many foreign economies remained subdued, and inflation rates abroad generally continued to be quite low. Some participants continued to see important downside risks from abroad.”
Well, they’d be right about the inflation part:
(Bloomberg)
Which perhaps they should take as a sign that this isn’t the answer. How many trillions have to be spent without anyone reaching their inflation target before someone throws in the towel and says “let’s try something else?”
Of course it’s not as simple as Japan and Europe, you’ve got a fragile EM to worry about as well. You’d hate to cause the dollar to go through the through roof and trigger some kind of crisis across the emerging world.
Then again, if you read the Fed minutes (and we hope you will), it certainly sounds like they’re looking for any and all excuses not to normalize policy, which essentially tells us that the FOMC’s reaction function is becoming more and more beholden to international financial conditions and less and less beholden to the dual mandate prescribed by Congress.
For better or worse, it is what it is, but don’t cross your fingers for a December hike, because China (or really any other EM of any import let alone some friction out of the UK around Brexit) could derail those plans in the blink of an eye.
Recent Comments