Ok, we’re just going to level with you here because there’s really no way to spin this: that was all kinds of silly.
If someone showed you this chart…
...and then subsequently asked you whether you thought the Fed statement was dovish or hawkish what would you say? Well, you’d probably say “dovish,” right? You’ve got bonds rallying and gold soaring.
Only the statement wasn’t dovish. It was hawkish if it was anything although as we noted earlier, it was basically nothing.
The term “Japanification” gets tossed around a lot to describe what happens when a country finds itself in a deflationary, demographic deathtrap, but we think it might soon take on another meaning.
Going forward, “Japanification” is what happens when the market is either so utterly confused about central bank policy or else so utterly skeptical about that policy’s efficacy that investors do the exact opposite of what would appear to be the rational trade. Remember what happened to Japan after the central bank announced negative rates? Here’s a subtle reminder:
That is the very definition of counterintuitive. They’ve bought half the ETF market and they’re buying all the government bonds, now they’ve announced negative interest rates so… get massively long their currency? Only a lunatic would make that trade. We don’t care if they’re a creditor nation or not; if they stacked the amount of money they’re printing in one pile you could climb it straight on up to the moon. Nevertheless, long yen has been one of THE trades this year and as we documented on Tuesday, that will probably continue thanks to the fact that market expectations for Friday’s BoJ announcement are so high that it’s not even clear what those expectations are.
In short, it’s starting to look like the market has adopted a modified strategy when it comes to central banks. Whereas we used to simply frontrun their asset purchases and ride the bond wave until yields hit zero then move on to something farther up the risk ladder and do the exact same thing, now we frontrun their expected announcements and then immediately do the exact opposite of whatever it is they actually announce. Central banks have become contrarian indicators, much like their bosses over at Goldman.
Fed says things are improving? Buy bonds. Chances of a hike going up? Buy gold. Japan launching helicopter money? Long yen. One is reminded of Bill Murray in Ghostbusters: “...dogs and cats living together, mass hysteria!”
Of course really this is just another way of putting on the oldest trade in the book: buy the rumor, sell the news. But this has gotten too confusing to keep track of. Take today for instance. Good economic news (blockbuster June jobs print) is bad news because it means more hawkishness from policy makers, but we can’t trust policy makers so hawkishness actually means dovishness at least as far as trading Treasury bonds goes. It’s almost impossible to follow the narrative anymore. Which is perhaps why gold was bid today - everyone just threw up their hands and bought shiny pet rocks.
And if you thought today was weird, just wait until Friday when everyone tries to figure out whatever comes out of Haruhiko Kuroda’s mouth.