Recap 2014-10-07


It feels like there has been a very large, multi-week asset allocation switch from equities into nominal treasuries. (But not TIPS, perhaps due to Pimco) USD inflation breakevens have been falling since August, but has really accelerated in the last couple weeks. US 30y breakevens, for example, is now at just 2.05% – the lowest level since late 2011:

I’ve noted that this is a pretty big deal, but I didn’t mention one thing. The Fed is still at the zero bound, which means its only way of influencing real rates is via the inflation expectations component. And the sharp drop in that component in the past couple weeks is something that poses significant risks to the Fed’s ability to impact the economy, to say nothing about the implications for inflation expectations anchoring.

As I’ve noted before, this drop may well be driven by the general risk off flows in combination with Pimco selling, so the Fed will probably wait to see how things play out. But it’s worth noting that other metrics, such as short term inflation swaps (which should theoretically be more immune to Pimco selling due to both what Pimco holds and the short time to maturity) and long dated forwards suggest that this is more than just flows driven. And it’s not just oil either – the last time front WTI futures were here in early 2013, 30y break evens were 30bps higher.


  • RBA kept policy unchanged. “The exchange rate has declined recently, in large part reflecting the strengthening U.S. dollar, but remains high by historical standards, particularly given the further declines in key commodity prices in recent months… It is offering less assistance than would normally be expected in achieving balanced growth in the economy… In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”
  • BoJ left monetary policy unchanged last night. The BOJ maintained its overall assessment
  • The largest global banks will have to hold more capital and liabilities than previously reported that can automatically be written off in a crisis — as much as a quarter of risk-weighted assets — as regulators take on lenders deemed too big to fail… The FSB, which consists of regulators and central bankers from around the world, plans to present the draft rules to a G-20 summit in Brisbane, Australia, next month. The plans, which will be published for comment and completed next year, are part of a package of measures designed to make sure taxpayers are no longer on the hook when banks fail. BBG


  • Tue: CanadaBuilding Permits
  • Wed: Japan Eco Watchers Survey, FOMC Minutes, UK RICS House Price Balance, Australia Employment
  • Thu: German Current Account, BoE, US Jobless Claims, Williams Speaks
  • Fri: Canada Employment, USDA report