Recap : Fed Funds Path, Links


Quiet day today – so I’ll just list some interesting links and notes:

First, GS notes that:

The final question is how much weight we should put on the committee’s apparent view that the path will ultimately be very flat. Are these types of statement a good or bad predictor of what ultimately happens? There are not enough precedents to be sure, but the answer seems to be that it is not too unusual for the Fed’s signals, or plans, before the start of a tightening cycle to underestimate the ultimate path. We have evidence on this for the rate hike cycles commencing in 1994, 1999, and 2004:

· In February 1994, the Federal Reserve staff projected that the funds rate would rise by 150bp over a nearly two-year period, or by less than 100bp per year, through the end of 1995. In the event, the FOMC hiked by 300bp in less than one year through January 1995.

· In June 1999, the staff projected that the funds rate would rise by 150bp over a 2½-year period, or by about 60bp per year, through the end of 2001. In the event, the FOMC hiked by 175bp in less than one year through May 2000.

· In June 2004, the staff projected that the funds rate would rise by 325bp over a three-year period through the middle of 2007, or by just over 100bp per year. In the event, the funds rate rose by 425bp over a 2-year period through the end of 2006, or by 200bp per year.

There are some caveats here. First, note that GS refers to the Fed Staff, not FOMC participants. It is probably fair to say that the projections are not likely to be substantially different. In addition, the realized PnL of Eurodollar steepeners did not always go the way one would expect. Reds-Whites were at zero by late 2005 even though Fed hikes continued through mid 2006. Having said that, note that there are some interesting steepening bets in Eurodollar futures to play that view. The curve has been flattening beyond the Greenback since December, and has recently stabilized. Blues/Greens, at ~88bps, offers an interesting bet on the possibility of either a later first hike, a faster pace of hiking, or both. In addition, the roll is positive at ~25bps a year.

Interesting bit on why some tech companies get such absurd valuations. I am not sure that the reasons listed here are the only factors – surely the massive cash hoard and high valuations of the acquiring company stocks may have an impact also:

Palantir is a company that was started by, among others, Peter Thiel. The company has been working with US government agencies to pull together data available in the government domain for analysis. This site should be especially helpful in the coming 24 months or so as more and more government data on healthcare is made public. Take a look – you will need Java: (h/t Jess)

· As George Packer recently wrote in the magazine, “Few customers realize that the results generated by Amazon’s search engine are partly determined by promotional fees.” GrubHub Seamless, the merged food-delivery engine, recently revealed in an S.E.C. filing that “restaurants can choose their level of commission rate … to affect their relative priority in sorting algorithms, with restaurants paying higher commission rates generally appearing higher in the search order than restaurants paying lower commission rates.”

· Last year, the extent of the problem was revealed when the New York Attorney General’s office, soon after setting up an undercover yogurt shop, found itself fielding offers for fake reviews from companies with names like Eboxed and XVIO.

· when you “buy” these digital goods, the companies maintain that, despite the big “buy” button, what they gave you is nothing more than limited permission to use it—based on fine print that creates a license, not a transfer of ownership. If Apple or Amazon can offer only what amounts to a long-term lease, the button shouldn’t say “buy.” It’s misleading.

And finally here are a couple of links on China. First, the BIS quantifies the impact of RMB on Asian currencies from 2010-2013:

And some great charts on the Chinese credit situation from Bloomberg Brief, h/t Riholtz:

Finally, note that the momentum in the CNY fix seems to be slowing (20d rate of change in green):


  • In Ukraine separatist forces rejected the peace pact agreed to last Thurs night and while violence has settled a bit there are still instances of fighting. The government in Kiev has halted operations aimed at recapturing control over disputed territories in the east and separatists aren’t reaching for additional land but the present détente is a very fragile one that could unravel at any moment
  • Port of Los Angeles Shipments Jump in March by Most Since 2007
  • GS on US Banks: After 2.5+ years of higher prices on flat estimates, we believe 1Q earnings imply a (temporary) return to micro fundamentals in the absence of macro themes. MS, C, WFC and PNC all outperformed the market since reporting better-than-expected EPS, while JPM, USB and BAC lagged on weaker results. The most consistent trend has been a weaker-than-expected top-line as 1) falling loan yields (part spread-driven) more than offset modest loan growth and 2) mortgage and capital markets (FICC) depress fees. While expense discipline is helping (core down 3% YoY), litigation remains lumpy and reserve releases are fading. We … see a valuation floor for the group as investors pay for large interest rate sensitivity in 2016+.
  • Banks are beginning to gradually ease mortgage lending standards according to the WSJ, a positive development for the housing market. WSJ
  • Iran and the six world powers have “virtually agreed” on a settlement regarding the Arak heavy water nuclear reactor, according to statements made by an Iranian official on Saturday – RT

Upcoming Data:

  • Tue: US Existing Home Sales, EU Consumer Confidence, Australia CPI, China HSBC Mfg
  • Wed: EU PMI, BoE Minutes, Canada Retail Sales, UK Markit PMI, New Home Sales
  • Thu: Germany IFO, Draghi Speaks, US Durable Goods Orders, Jobless Claims, Japan CPI
  • Fri: UK Retail Sales, US Markit PMI
  • Mon: US Pending Home Sales