The US$ continues on its rampage, particularly zeroed in on China for simple if misunderstood reasons (that have nothing to do with “devaluation”). What about the rest of the marketplace, the other stuff which identifies the eurodollar’s various cycles? You know about T-bills, which, yet again today, are more like what the dollar is suggesting. Other than those, what’s the yield curve, eurodollar futures, swaps, even the forward Treasury spread up to?In March – seasonal low point – these were all curve crazy, major fireworks and broad-based inversions. Since, many have calmed down a tad, apart from IRS swaps which have been less improvement-fluctuating than the others (though these popped this week on the May FOMC, which is not unusual). This is almost certainly because the swap market’sRead More »
Articles by Jeffrey Snider
It appears as if most reactions to today’s April 2022 payroll were quite positive, maybe enthusiastic when they should not have been. Though the Establishment Survey – the CES headline number most people pay attention to – gained 428,000 over March’s tally, it was the “other” one which crashed down like last week’s negative GDP thud.From the CES view, you can understand the optimism. Not only +428,000 for the second month in a row, this also marked the twelfth consecutive month of better than +400,000 for payrolls…even if only because last year’s benchmark revisions smoothed away the prior lows (and highs). The past couple of months for the Establishment Survey have, predictably, fallen right within that statistically-enforced range, though at the lower end of it. Take out February’sRead More »
As a preface to this update ostensibly on Europe, it’s all really about Euro$ #5 sadly rounding into form. In this first part, I’m going to have resurrect the quotation marks surrounding the term “rate hikes”, or bring back RHINO (rate hikes in name only) given what’s going on in Treasury bills.Not rate hikes, or enough of them. Our dead horse needs more clubbing.
Where's that dead equine? I'm going to beat on it some more.Tbills today: 4w @ 49bps, 31 less than RRP8w @ 71bps, 9 less than RRP3m @ 85 bps (down 2d in a row), just 5 above RRP even w/two fifty-bps rate hikes during those three months. "Rate hikes" pic.twitter.com/G63Tt3R2iG— Jeffrey P. Snider (@JeffSnider_AIP) May 5, 2022
The numbers are simply staggering considering what they represent; and that is tightening which
Cue up the old VHS tapes of Bill Clinton. The former President was renowned for displaying, anyway, great empathy. He famously said in October 1992, weeks before the election that would bring him to the White House, “I feel your pain.”What pain? As Clinton’s chief political advisor later clarified, “it’s the economy stupid.”Jay Powell is no retail politician in near the same company as Mr. Clinton. Yet, the Federal Reserve’s current Chairman is attempting to channel his inner-stupid anyway. Announcing the Fed’s first 50-bps rate hike in almost exactly two decades, this bureaucrat clumsily prefaced his post-FOMC press conference with a gimmick as if blatantly running for some office.
Before I go into the details of today’s meeting, I’d like to take this opportunity to speak directly toRead More »
It’s never just one thing or another. Take, for example, collateral scarcity. By itself, it’s already a problem but it may not be enough to bring the whole system to reverse. A good illustration would be 2017. Throughout that whole year, T-bill rates (4-week, in particular) kept indicating this very shortfall, especially the repeated instances when equivalent bill yields would go below the RRP “floor” and often stay there for prolonged periods.There was, as I wrote at the time, no mistaking what was really happening nor the straightforward implication. The problem is hardly anyone noticed, and of the few who did no one cared (enough).
It is possible that institutions are hoarding 3-month bills ahead of any debt ceiling difficulties this coming summer, but that wouldn’t account for theRead More »
This is the difference, though in the end it only amounts to a matter of timing. When pressed (very modestly) on the slow pace of the ECB’s “inflation” “fighting” (theater) campaign, its President, Christine Lagarde, once again demonstrated her willingness to be patient if not cautious. Why?For one thing, she noted how Europe produces a lot of stuff that, at the margins of its economy, make the whole system go. Or don’t go, as each periodic case may be:
Europe in particular benefited from the march of globalisation. Trade as a share of GDP rose from 31% to 54% in the euro area between 1999 and 2019, whereas in the United States it rose from just 23% to 26%. Europe’s integration with global value chains was deeper too, with GVC participation roughly 20 percentage points higher than inRead More »
It’s one of those things which everyone just accepts because everyone says it must be true. If the US$ is rising, what else other than the Federal Reserve. In particular, the Fed has to be raising rates in relation to other central banks; interest rate differentials. A relatively more “hawkish” US policy therefore the wind in the sails of a “strong” dollar exchange regime.How else would we explain, for example, the euro’s absolute plunge since around May last year? Everything since would seem to agree with the conventional theory; the Fed has turned ultra-hawkish whereas the ECB has time and again very publicly stated it will resist the same temptation to chase CPIs.As a result, expectations for much higher ST rates here versus there, therefore the euro’s plunge.But why didn’t the sameRead More »
This is one of those cases when Inigo Montoya, the lovable if fictional rapscallion from the movie The Princess Bride, would pop into the scene to devastatingly deliver his now famous rebuke. Last week, China’s one-man Dear Leader said that the country was going to start up its own version of Build Back Better. Immediately cheered by the entire Western media, every single news story contained the same phrase.“All out.”Cue Mr. Montoya’s wry witticism. Did anyone actually hear what Emperor Xi said? On this side of the ocean, it is being made to sound as if President Biden’s dead infrastructure deal has instead been breathed new life by…the guy deliberately dressing himself like Mao Zedong (see: below). Seriously, everything about the man is designed to send a message.What message?While XiRead More »
The FOMC meets next week, with everyone everywhere expecting a 50 bps rate hike to be announced on Wednesday. Yesterday’s “unexpected” and “shocking” negative GDP is unlikely to deter anyone on the committee. Most have already dismissed it as nothing more than quirky, temporary factors, not unlike when they did the same to Q1 2014’s similarly negative result. At least that one had the Polar Vortex (uh oh). Jay Powell’s group can’t see beyond the US border, doesn’t care much about inventory, and doesn’t seek counsel from markets. While Euro$ #5 rages up and down the curves, unleashing the wrecking ball of US$ exchange value (and already audible groans mewling in Chinese or Japanese), US policymakers remain steadfastly committed to “inflation” for the time being.When it comes to consumerRead More »
I may have to rethink my opinion of Christine Lagarde. It just may be that after helming one serious debacle after another, she – unlike most in her position – may have learned a thing or two about being too quick to call it a day. Premature celebrations were the hallmark of central banks throughout the last fifteen years, including, famously, her predecessor’s predecessor raising ECB rates…in June 2008.Lagarde was, after all, the leader at the IMF behind its biggest disaster in history (Argentina). Famous herself for making wildly optimistic statements (below), she appeared to have every reason to stick with the type. Early November 2021 had gifted Europe’s policymakers a clear green light; or so it may have seemed. Real GDP was roaring, Eurostat’s preliminary estimate for the EuropeanRead More »
According to today’s advance estimate for first quarter 2022 US real GDP, the third highest (inflation-adjusted) inventory build on record subtracted nearly a point off the quarter-over-quarter annual rate. Yes, you read that right; deducted from growth, as in lowered it. This might seem counterintuitive since by GDP accounting inventory adds to output.It only does so, however, via its own rate of change; the second derivative for specifically the difference. Because Q1’s third highest inventory accumulation follows Q4’s record high accumulation, the fact it was less if still huge when compared to the prior three months counts as a reduction to overall GDP. Even so, headline GDP would’ve still been less than zero because the US economy, contrary to most price illusion perceptions, hasRead More »
The Census Bureau today released its advanced estimates for March trade. These include, among other accounts like imports and exports, preliminary results reported by retailers and wholesalers. That means, for our purposes, inventories. Oh my, was there ever more inventory. It was, apparently, widely expected that following an avalanche of goods building up over the previous five months the situation might calm down a touch. Analysts had figured wholesale inventories, to start with, might have gone up 0.9% from February to March after having surged 2.5% January to February.No sir. On the contrary, wholesale inventories jumped again, another 2.3% month-over-month during March. And that was on top of a slightly higher revised estimate for February.Retail inventories (excluding automobilesRead More »
ECB Governor Christine Lagarde surprised, maybe even shocked most people when a few days ago it was reported she’d told her fellow policymakers to keep their mouths shut. Don’t go running to the financial media. Justifying the censorship, Lagarde said it was important for the central bank’s key officials to present a unified front given some drastic challenges over the months ahead. Most observers took this to mean bottling up dissent from the so-called hawks; that is, those who might both speak German while also vehemently opposed to the measured, perhaps plodding pace plotted out so far by the ECB’s leadership. In sharp contrast with the damn-the-torpedoes Fed, impatience isn’t just perceived competition. Right on cue, several someones immediately, anonymously blabbed their discontentRead More »
It wouldn’t be Euro$ #5 without perhaps the last of its rituals completed: the mainstream downgrades. Go back in time to each of the prior episodes, markets change, the data inflects, and then only later do surprised, shocked Economists at whichever establishment outpost begin to recalculate their DSGE outputs. Every time.Way back in 2015, it took the IMF’s semi-annual World Economic Outlook (WEO) quite a while to catch on to what was already shaping up to be a nasty third outbreak of eurodollar disease. This was on top of only long after picking up the atrociously permanent aftermath from number two (see: below). When the downgrades finally began, I wrote about how initially there’d been hope for “decoupling”:
The situation now is reversed [from 2007-08] in that advanced economiesRead More »
Last Friday, S&P Global (the merged successor to IHS Markit) reported that its PMI for German manufacturing fell to 54.1. It hadn’t been that low for more than a year and a half. Worse than that, the index for New Orders dropped below 50 for the first time since the middle of 2020. The excuses are plentiful, as there’s COVID, supply problems, Russia, a drop in demand.Wait, what was that last one?
The S&P Global Flash Germany Manufacturing PMI fell to 54.1 in April of 2022 from 56.9 in March, below forecasts of 54.1, and pointing to the slowest growth in factory activity since August of 2020 amid reports of severe supply disruption and a drop in demand for goods. [emphasis added]
Since I’ve belated decided to date Euro$ #5 to around May 2021 using various financial markets,Read More »
For one thing, that whole Bretton Woods 3 thing is really off to an interesting start. And by interesting, I mean predictably backward. According to its loud and leading proponent, China’s yuan was supposed to be ascending while the dollar sank, its first step toward what many still claim will end up in some biblical-like abyss. Instead, CNY is doing the plummeting and at a speed reminiscent of August 2015. That month did not, obviously, lead to a vast rearrangement of the global reserve currency system. On the contrary, what happened then (and after) was yet another reminder – the third devastating one since August 2007 – of the eurodollar’s unfortunate supremacy (the same reason why there is no such thing as a petrodollar).
A commodity based Bretton Woods 3. We're supposed toRead More »
For the third month in a row, China’s PBOC refrained from guiding its quasi-credit benchmark lower. This seemed out of line with what Premier Li Keqiang, in particular, had stated last week before authorities did drop the RRR rate on Friday. Saying that China would “step up” support for its faltering economy, however the RRR cut was half of what had been expected.Now the central bank does nothing to the LPR.Authorities had cut the country’s 1-year Loan Prime Rate (LPR) once in December and then again in January. Oddly enough, those were unexpected by most Western analysts. Since all indications have pointed to more weakness yet to come, despite some favorable initial January-February data, since then the same analysts have been predicting (myself included, if anyone would call me one ofRead More »
The month of February 2022, the calm before the latest storm. Russians went into Ukraine toward the month’s end, collateral shortage became scarcity, maybe a run right at February’s final day, and then serious escalations all throughout March – right down to pure US Treasury yield curve inversion.Given that setup, it was unsurprising to find Treasury’s February TIC data mostly unremarkable. Top to bottom, there wasn’t really much that changed. No huge negatives, nor positives, either. Much of the same, therefore February became March.While waiting another month to see what TIC has to say about last month, there were a few highlights worth mentioning from the current update. Officials overseas sold a few more Treasuries, foreigners on the whole bought more US$ assets (since October, thisRead More »
What everyone is saying, because it’s convenient, is that China’s zero-COVID policies are going to harm the economy. No. Economic harm of the past is the reason for the zero-COVID policies. As I showed yesterday, the cracking down didn’t just show up around 2020, begun right out in the open years beforehand, born from the scattering ashes of globally synchronized growth. Xi Jinping saw how a very different post-2008 global economy without any recovery was going to keep China from living all the way up to Deng Xiaoping’s grand promise of total Chinese prosperity (borrowing heavily from its capitalism undercurrent). Rather than sit around waiting to be Gorbachev-ed, he gave himself the crown of dictator and has ruled with an increasingly harsh iron fist ever since.
His main point: the
I Told You It *Wasn’t* Money Printing; How The Fed Helped Cause, But Can’t Solve, Our Current ‘Inflation’April 19, 2022
Trust the Fed. Ha! It’s one thing for money dealers to look upon Jay Powell’s stash of bank reserves with remarkable disdain, more immediately damning when effects of the same liquidity premiums in the real economy create serious frictions leaving the entire world exposed to the consequences. When all is said and done, the Federal Reserve has created its own doom-loop from which it won’t likely escape. The 2022 FOMC has made itself plain, incredibly hawkish to an extent not seen since 2006, if not 1994. The reason is quite simple: the US CPI continues to embarrass both policymakers and the politicians holding their leashes (five open nominations). Rate hikes are the political theater where the primary Fed actors appear to be doing something about rampaging consumer prices. What these orRead More »
The first chapters to China’s new story now playing out in Shanghai were written down in October 2017. Planning for them had begun years earlier, their author Xi Jinping requiring more research before committing them to paper. Communist authorities there had grown increasingly concerned about the lack of growth potential for its political system by then utterly dependent for a quarter-century on the economy growing.So long as other places around the world wanted what the Chinese could produce relatively more cheaply, then Deng Xiaoping’s vision of a quasi-capitalist (but not really) China would proceed toward that version of “prosperity.” Along came the “somehow” Global Financial Crisis and its Great “Recession, before too long (2011’s Euro$ #2) it just didn’t work that way any longer;Read More »
The goods economy in the United States is – maybe was – the lone economic bright spot. That in and of itself should’ve provoked more caution, instead there was the red-hot recovery to sell under the cover of supply shock pricing changes. The sheer spending on goods, and how they arrived, each unabashedly artificial from the get-go.Combine those two factors, however, the necessary supply squeeze surge in prices along with the artificiality behind it wearing off, eventually perhaps inevitably the world’s lone bright spot would have to dim. Maybe the real question(s) always was (were), OK, slow, by how much (and how fast)?Here lies the intersection between sales, inventory, and demand destruction created by consumer exhaustion in all its dastardly forms. Paying more for gasoline. HigherRead More »
If there was a compelling collateral case for bending the Treasury yield curve toward inversion beginning last October, what follows is the update for the twist itself. As collateral scarcity became shortage then a pretty substantial run, that was the very moment yield curve flattening became inverted.Just like October, you can actually see it all unfold.According to the latest FRBNY data taken from Primary Dealers, repo fails during the week of April 6 (most recent figures) were a whopping $507 billion combined (remember, an unknown proportion of fails, likely a huge chunk, in my view, is due from failed collateral for collateral swaps). This is the highest since the worst week of GFC2 in the middle of March 2020, the second worst weekly total in more than four years; that’s how badRead More »
The Census Bureau provided some updated inventory estimates about wholesalers, including its annual benchmark revisions. As to the latter, not a whole lot was changed, a small downward revision right around the peak (early 2021) of the supply shock which is consistent with the GDP estimates for when inventory levels were shrinking fast. What’s worth noting about the figures now is how much of a problem there is in terms of petroleum. By that I mean two ways. First, wholesale sales of petroleum have absolutely skyrocketed, no surprise. Just amazing the level of increase, keeping in mind much of it due to price changes rather than as-rapid volume expansion. According to the estimates now for February 2022, dollar-value sales of crude and whatnot were just about 50% higher than the previousRead More »
The price illusion. It is causing enormous confusion and difficulty, making the global economy out to be something it really isn’t. In fact, the whole situation is being viewed backward. What’s presumed from this is a red-hot economy causing consumer prices to skyrocket. In such a scenario, central banks might need to rush their rate hikes to cool it down (assuming, of course, that’s what modern “central banks” actually do). They’d have to step it up because red-hot growth would otherwise keep going and so would the alleged inflationary spiral. But that isn’t what has happened. On the contrary, an outward shift in demand (for various reasons, some different in different places around the world) combined with inelasticity in supply (including the ability to move and deliver goods) causedRead More »
Last September 28, Treasury Secretary Janet Yellen wrote to Nancy Pelosi of the House of Representatives to inform its Speaker that the government would run out of cash, and accounting tricks, by October 18. Unless Congress, starting in the House, did something about the so-called debt ceiling, Treasury would be forced to take even more restrictive, potentially destructive means to stay legal.Yellen had already been scaling back T-bill issuance as one of those tricks, no different than any of her predecessors. Despite huge demand for bills – for other reasons, which I’ll get to – bill prices, therefore equivalent yields, would become wildly volatile in that first week of October. Money market funds, in particular, tend to become overly cautious, avoiding any bill maturities that mightRead More »
This isn’t going to be like the tale of Goldilocks, at least not how it’s usually told. There are three central banks, sure, call them bears if you wish, each pursuing a different set of fuzzy policies. One is clearly hot, the other quite cold, the final almost certainly won’t be “just right.” Rather, this one in the middle simply finds itself…in the middle of the other two.Running red-hot to the point of near-horror, that’s “our” Federal Reserve. The FOMC minutes from last month’s rate hike meeting were published today, not that anyone needed any addition to the ongoing jawboning. Speeches and appearances by any of the FOMC between then and now have clearly indicated just how uncomfortable policymakers have become about the CPI (or PCE Deflator, if you prefer, like they do).PureRead More »
The US Treasury curve, as you might have heard, is inverted. After today’s repeat sell-off, it’s a little less inverted than it had been recently (un-inverted in the 2s10s, which isn’t unusual) given how yields closed at the longer end up more than those up front and middle. The zig-zag back and forth of ultra-short run market fluctuations continues.But what about the intermediate trend for other curves around the rest of the world?It is a global bond market, after all, so if USTs are upside down we shouldn’t expect to find outright contradictions elsewhere in places like Japan or Germany.Starting with the latter, yields over the past few months have gone vertical (comparatively speaking) there, too. Unsurprisingly, the higher Treasuries go the more they tug on bunds (10s) and bobls (5s)Read More »
Someone once said that the stock market is always climbing a wall of worry. Maybe that had been true in some long-ago day, but whether or not it might nowadays is beside the point. The nugget of truth which makes the prosaism memorable is the wall rather than the climber. There’s always something going on somewhere to get worked up over. And it matters to far more than financial actors, the entire global economy must surmount what can seem like an unending series of events each one at certain times described as the most wicked and befouling disaster humanity has ever confronted. Such hyperbole, however, is applied only selectively to those times when the economy can’t seem to overcome these things. When the system is humming along, or even just barely reflating, the regular interjectionRead More »
You look at the two charts below, and immediately you see how something doesn’t add up. On the one side, US banks haven’t lent dollars to Russia since the first time the Russians ended up in Ukraine back around February 2014. The US government declared domestic firms wouldn’t do business with Russian banks and they really haven’t.Score a victory for Uncle Sam, I suppose. Even though US institutions have steadfastly avoided Russia, the Russians appear to have been able to keep piling up reserve assets anyway (timed to 2017’s “globally synchronized growth”, no less). Furthermore, those reserves are predicated upon US dollar-based trade of oil and natural gas, regardless of what authorities in Russia might do with the proceeds once exchanged.In other words, the Russians intermediateRead More »