The Federal Reserve just won’t admit that President Trump and the European Central Bank are holding its policy designs captive. Trump ramps up talk of tariffs in an effort to keep the financial markets uncertain while the ECB wishes to pursue an ever expanding balance sheet in an effort to reach an ambivalent inflation target. There is no doubt that REAL YIELDS throughout the European Union are NEGATIVE. Even the Italian 10-year is trading around 1.35%, which is below the inflation level however dubious it is calculated.
Ponder that Spain and Portugal’s 10-YEAR yields below 10 basis points, a real indication of NEGATIVE REAL YIELDS. But the ECB seems intent on powering on to pursue QE, if not QQE. On Thursday, ECB policy maker Olli Rehn said in a Wall Street Journal interview the ECB OUGHT to provide an “impactful and significant” stimulus package. Rehn put forth the possibility of purchasing equities in a nod to Governor Kuroda’s BOJ policy of purchasing equities and other assets.
The question remains: To what purpose is Rehn ramping up expectations for more stimulus when the current negative interest rates have wreaked havoc on European banks and financial institutions. The immediate effects of the Rehn interview was to put downward pressure on the EURO currency while sending BUNDS and U.S. Treasury yields lower. The REHN interview was similar in outcome to President Draghi’s speech at Sintra, Portugal the day before the June FOMC meeting. Chairman Powell needs to confront the White House and the ECB by cutting rates aggressively, which removes the FED from the discussion of even lower interest rates.
This would not do one thing to stimulate U.S. growth but none of the monetary stimulus is meant for growth. It is all a tour de force of academic arrogance. James Grant has been citing the PhD standard as the basis of central banking, an apt description about which NOTES FROM UNDERGROUND agrees. The present outcome of HIGHER BONDS, HIGHER STOCKS, HIGHER PRECIOUS METALS, is the culmination of central banks quoting “EVERMORE.”
The GOLD rally defies conventional wisdom as BONDS cannot be rallying if inflation expectations were increasing. Something will eventually have to give. But for all those maintaining that GOLD is solely a hedge against inflation I would advise recalibrating your models to be directed at central bank credibility. The Rehn interview has again trapped Jerome Powell heading into Jackson Hole on Friday. Another fine mess, indeed.
***On Friday (just after the equity markets closed), the U.S. Treasury released a statement saying that it plans to do “market outreach” again on ultra-long bonds (50 or 100 years). This is an attempt by the Treasury to take advantage of the ridiculous low bond yields and move to extend its offerings to 50 years or more. When it previously entertained the idea in 2017, market participants rejected it because Treasury wouldn’t be able to issue in a “regular and predictable” manner.
In response to the news, the 5/30 curve to jumped 4 basis points to 62.5- basis points, closing above the 200-day moving on the week. While we have all been concerned about the flattening of curves, Friday’s late action needs to be considered. It seems that the U.S. Treasury is trying to become involved in the yield curve discussion.
Extending duration would be a NEW TWIST in the discussion. And what a time to deliver some market outreach on late Friday. Watch the the BONDS for market confirmation.
Then on Sunday, Trump’s economic advisers were feeding the talk shows with forecasts about economic growth heading into the 2020 presidential election. Larry Kudlow maintained that there’s no recession coming and yet he continues to put pressure on Chairman Powell for a rate cut, as did Peter Navarro. If the economy is doing so well why cut interest rates, which leads to pressure on banks, insurance companies and pensions. Unless … the White House wants downward pressure on the DOLLAR. Hmm, currency manipulation?