Recap 2014-09-13: Are Hawkish Fears Overdone?


Are fears of a hawkish FOMC overdone? GS argued that a shift this week would be a big hawkish surprise, given that they’d previously indicated that the first tightening would come about 6 months after the end of QE at the end of October, which is 6 weeks away. They think that the Fed may not change the considerable time language until December, which is also when they publish projections. Paul McCulley at Pimco has hypothesized that the Fed may lower its neutral real rate expectations ahead of the first hike, which is intriguing. Certainly, that’s been the trend.

Anyway, in Friday’s note I noted that higher US real rates have driven sizable moves across multiple asset classes. In the absence of significant macro data, it’s probably reasonable to assume that a fair amount of it has been driven by FOMC expectations. I also noted that many asset prices are near important support/resistance levels. That combination suggested the possibility that prices have gotten ahead of themselves. One item that I forgot to look at was inflation expectations. They are important because ultimately, if the market is not concerned about inflation, outside of macro-prudential reasons, there isn’t a strong need for the Fed to be hawkish. The chart bellows shows 5y real yields in white, and 10y inflation breakevens in orange. Note two things. First, inflation expectations are notably lower than during the last cycle. The white vertical line marks 6 months before the start of the last Fed hiking cycle – note how 10y inflation expectations then had already cleared the ~2.2% area by then. Secondly, note how we remain below that level now – and in fact are at the low end of the range that has persisted for over a year.

Also, expectations remain well above market rates. Despite the large move lower in long dated yields this year, consensus forecasts have not really kept track. 4 quarter ahead Bloomberg forecasts for the 10y rate has only moved down 20bps since year end, vs 45bps for the forwards.

In aggregate, I think there is a good chance that hawkish fears may be a bit overdone. I mean, not that much has changed from a big picture perspective, but yield sensitive assets including REITs have seen their biggest drops since last October, with almost all of it coming over the past 3 or 4 days.

The great Chinese economic rebalancing is ongoing, and so far, things are mostly playing out as Michael Pettis has predicted. The Chinese data over the weekend was unambiguously weak, with capex heavy sectors feeling the brunt of the hit. Industrial production hit the lowest level since December 2008, and Fixed Assets Investment growth is at the lowest level since 2001. All of this was foreshadowed by the weak money supply prints earlier this year. If Pettis is right, there’s still a long way to go.

The BIS did an international study of house prices. What stood out to me was this chart – the US is an anomaly!

Interesting article on Germany’s push into renewable energy, and the massive price deflation in that space:


  • China Retail Sales declined to 11.9% YoY vs 12.1% exp and 12.2% prev
  • China IP declined to 6.9% vs 8.8% exp and 9.0% prev
  • US Empire Manufacturing jumped to 27.5 in Sept vs 16 exp and 14.7 prev


  • Tue: UK CPI, PPI, German ZEW, US PPI
  • Wed: BoE Minutes, UK Employment, US CPI, NAHB Housing Index, FOMC, NZ GDP
  • Thu: UK Retail Sales, ECT 1stTLRTO, US Jobless Claims, Housing Starts, Philly Fed
  • Fri: Quadruple Witching, Canada CPI