Overseas markets got a bit of a breather Wednesday from the safe haven bid as everyone remained stuck in suspended animation ahead of the Fed decision.
Come to think of it, that’s ironic because the Fed itself seems to be frozen. We’d be remiss if we didn’t talk about central banks today and tomorrow. As a reminder, the Bank of Japan is up right after the Fed.
The expectation, clearly, is for nothing out of the Fed given the May payrolls number and little, if anything out of the BoJ, although that’s a dicey proposition for governor Haruhiko Kuroda given recent yen strength.
The X-factor here is of course China, where the PBoC continued to play chicken with the Fed overnight, setting the yuan fix below 6.60 for the first time since 2011 only to promptly intervene in the spot market to prop the currency up.
Remember, the still intact dollar peg drags the yuan kicking and screaming higher when USD rises, making China’s exports more expensive vis-a-vis the country’s other trading partners. With the economy flagging, Beijing can’t afford that - literally. So China will occasionally fire warning shots at the Fed by keeping pressure on the fix to remind Janet Yellen of what would happen should she make a “mistake” and hike.
(Chart: Bloomberg, annotation by DoubleLine)
Bloomberg’s Richard Breslow had some characteristically incredulous commentary out early this morning. Here’s are some excerpts:
“It’s FOMC day, and against what I’m sure is their most fervent wish, they will have to issue a statement and the Chair manage a press conference. I suspect it’ll be an exercise in conditional statements worthy of the best freshman logic class.”
“At least we don’t have to maintain the fiction that this was a ‘live’ meeting. Data dependence actually gets them off the hook of even thinking of committing the policy mistake of raising rates ahead of next week’s U.K. referendum.”
“But don’t think they’re going to give up on two possible hikes this year without a fight. This hasn’t been a lucky or opportunistic FOMC. They’re going to have to learn to seize the day when conditions allow.”
Of course Breslow is hardly alone in critiquing what certainly looks to be an increasingly frightened FOMC. In fact, the “Bond King” himself, DoubleLine’s Jeffrey Gundlach, has weighed in, making headlines last night and this morning.
"Central banks are losing control and they don't know what to do ... just like the Republican establishment and Donald Trump," Gundlach told Reuters, adding that "the Fed changes its tone so frequently, it seems every other week the message is different.”
“They’ve turned into the 'Zombie Fed.' They say the meeting this week is 'live,' but investors all know it isn't at all."
Their message does indeed change by the week due largely to the increasing number of variables in the reaction function. Once you have to incorporate everything into your thought process it becomes impossible to make any decisions thanks to the sheer number of competing interests. In effect then, the Fed boxed themselves in last autumn by tacitly admitting that global financial conditions had taken a September hike off the table.
Gundlach is also out with a new presentation which gives you a great 30,000 view of just how far over the top this global experiment in monetary policy has gone. Below, find a few of the more eye-opening slides.
First, note that nearly a quarter of the world’s entire GDP comes from countries operating with negative rates:
(Chart: DoubleLine)
But it hasn’t done anything to boost growth. In fact, the opposite is true:
(Chart: DoubleLine, Bloomberg)
Finally, note that as of late last month, a staggering $8 trillion in government bonds had negative yields (and you can bet it’s grown since then):
(Chart: JPMorgan)
That’s the backdrop against which the Fed is attempting to embark on a tightening cycle.
As we await the market’s reaction to the statement and the Yellen presser, we’ll leave you with one final chart from Deutsche Bank which should tell you all you need to know about the extent to which negative rates have encouraged Japanese consumers to spend:
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