Perhaps SocGen was right after all.
On Monday we highlighted a note in which the bank suggested that the current environment in which stocks and bonds rally in tandem is “as good as it gets.” Of course Monday’s market moves begged to differ as stocks continued their inexorable push higher.
Well on Tuesday we got what looks like a repeat of May’s hawkish rhetoric from Fed officials that was ostensibly designed to pave the way for a June hike. On Monday, San Francisco Fed chief John Williams called for a rethink of Fed policy, noting that "there is simply not enough room for central banks to cut interest rates in response to an economic downturn when both natural rates and inflation are very low.”
Well no John, there’s not because interest rates are at best near zero and at worst languishing in some nightmarish negative state that only “Freddy Krugman” would support.
Anyway, an even heavier heavy weight weighed in on Tuesday morning when the NY Fed’s Bill Dudley dropped the following tape bombs:
-
DUDLEY: MY VIEWS HAVEN'T CHANGED VERY MUCH LATELY
-
DUDLEY: SEPTEMBER RATE HIKE IS POSSIBLE
Oh, come on Bill! That’s not what anyone wants to hear! Look what you did:
Now you’ve got yields rising and stocks falling. Thanks a lot. Just stay home next time.
Of course you can’t place all the blame with Dudley. This didn’t help either:
So at least in that regard, thank God for Dudley, because there for a minute the dollar was in an uncontrolled dive versus the yen and that’s never good for risk. Speaking of risk, the crude short squeeze continued on Tuesday as the market has apparently decided that next month’s ad hoc OPEC meeting is actually going to bear some fruit.
Here’s BNP’s rather amusing take: “Oil inventories remain just as high, the U.S. active rig count continues to rise. It’s quite interesting that the market chooses to ignore these more bearish fundamental developments to latch on to the potential promise of producer cooperation.”
Yes BNP, it’s “quite interesting” - or “quite silly.”
In any event, Barclays was out this morning with some commentary on recent Fed rhetoric. Here are some highlights:
“A broad re-think of monetary policy is on the horizon. Recent communications by San Francisco Federal Reserve President John Williams and former Fed Chair Bernanke suggest the committee is coming around to the point of view that we and many market participants have held for some time, namely that potential growth (y*) is low and unlikely to recover swiftly, the Phillips curve is flat (eg, NAIRU, or u*, is either very low or the pass-through of labor market scarcity to inflation outcomes is modest), and the natural rate of interest (r*) has fallen to very low levels. The Fed had hoped that its unconventional policies would have generated better outcomes, but seven years of incoming data after the end of the recession have done little to alter the view of slow potential growth, zero policy rates, low global government bond yields, and persistent disinflationary pressures. Bottom line: Still “September with risk to never,” and we await Chair Yellen’s comments at Jackson Hole. This shift in Fed rhetoric fits in with our view that Fed policy is in “September or never” mode.”
That’s right folks. It’s come to that - “September or never with risk to never.”
Of course really, it all depends on you. Just ask UBS who was out with this bit of confused analysis on Monday:
“On balance, for the Fed, financial conditions, labour market progress and future service inflation expectations are likely improved. While, long term growth outlook and near term inflation outlook has likely worsened. All in all, the market has recognized this and is allowing the Fed some room for action later this year (Please see Figure 2). Using January 2017 Fed funds futures, we estimate that the market is pricing in about 48% chance of a December hike. The probability was above 50 percent post payroll report. The fact that market is more prepared for a hike should reflexively increase the odds of a Fed hike this year.”
(Chart: UBS)
Got that? Nope? Us neither.