In retrospect, Monday’s reversal call appears to have been accurate. A couple of more hawkish than expected comments from both Bernanke and Dudley over the past couple days (both noting that QE purchases could be reduced after the next few meetings) has ramped up QE tapering expectations, and sent 10y Treasury yields up 11bps on the day. 10y real yields in the US are now up a sharp 44bps since 4/29, and is now at the highest level in over a year:
This in turn drove a de-risking across assets that positively correlated to US growth. The SPX, WTI Crude Oil, and the Mexican Peso all moved sharply lower. The USDJPY retraced a substantial part of its intraday gains, which is quite odd given that higher real rates in the US are a positive. Also interesting is that implied volatility was fairly tame – the VIX moved up just 1 pt on the day. As my astute manager noted, this could mean this move has more room to go. Also interesting is the fact that Gold and Silver did not make new lows on this, as higher real rates should be quite negative for precious metals. This suggests that short term downside for precious metals is limited.
Over a longer timeframe, however, rapid tapering concerns are likely overdone. The Fed is keen on avoiding any sharp selloffs in US bond markets, and has said so. Furthermore, the hawkish comments by both Bernanke and Dudley were during the Q&A sessions. The actual texts of their speeches were much more neutral. This also appears to be the belief of the FOMC majority based on the minutes:
Most observed that the outlook for the labor market had shown progress since the program was started in September, but many of these participants indicated that continued progress, more confidence in the outlook, or diminished downside risks would be required before slowing the pace of purchases would become appropriate. A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.
Separately, some very interesting articles: (The second one is long but well worth reading)
- job market remains weak overall
- the Committee is aware that a long period of low interest rates has costs and risks…The Federal Reserve is working to address financial stability concerns through increased monitoring, a more systemic approach to supervising financial firms, and the ongoing implementation of reforms to make the financial system more resilient.
- Recognizing the drawbacks of persistently low rates, the FOMC actively seeks economic conditions consistent with sustainably higher interest rates. A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further. Such outcomes tend to be associated with extended periods of lower, not higher, interest rates, as well as poor returns on other assets. Moreover, renewed economic weakness would pose its own risks to financial stability.
- In the Q&A session, however, Bernanke noted that the Fed could decide to taper purchases in a few months
BoJ kept policy unchanged and upgraded the BOJ’s economic assessment – expected. The formal statement made no mention of JGB volatility although during his press conf Kuroda suggested the pace of bond purchases could be adjusted according to market conditions
Bank of England MPC voted to keep policy rate at 0.5% and 6-3 to keep the stock of asset purchases unchanged
US Existing Home Sales rose to 4.97mm in Apr vs 4.99 exp and 4.92 prev
Australia Westpac Consumer Confidence declined to -7% vs -5.1% prev
UK Retail Sales ex Auto Fuel was weak, rising just 0.2% vs 1.8% exp and 0.4% prev
Canada Retail Sales ex Autos declined -0.2% MoM in March vs +0.2% exp and 0.7% prev
EUR/CHF through 1.26 for first time in 2 years
- Wed: China HSBC Flash Mfg PMI,
- Thu: EU PMI, UK Retail Sales, GDP, US Jobless Claims, Preliminary Markit Mfg PMI
- Fri: German IFO, US Durable Goods Orders,
- Mon: US Memorial Day
- Tues: Swiss Trade Balance, French Consumer Confidence, US Consumer Confidence, Japan Retail Trade
- Wed: Spain Real Retail Sales, German unemployment, BoC, South Korea Business Survey, Australia Building Approvals, Private Capex expectations.