RANSQUAWK 'WEEKLY WRAP': 25th September 2015 - ECB and Fed rhetoric has been less dovish than expected this weekSubmitted by RANSquawk Video on 09/25/2015 08:41 -0400
"By relaxing constraints on other economic actors, central-bank support may create opportunities for them to shirk their responsibilities. In turn, this may render it more difficult for the central bank to withdraw its exceptional measures. The road to central bankers’ hell may be paved with good intentions."
- Global Markets Rebound on Yellen Speech (WSJ)
- Obama and Putin to meet; Syria and Ukraine vie for attention (Reuters)
- Obama to host China's President Xi amid simmering tensions (Reuters)
- Don't Fall for It, Xi! Chinese Take to Web to Scorn U.S.—and China, Too (BBG)
- Yellen Confirms Fed Still on Track to Raise Rates This Year (BBG)... but is still China dependent?
- Abe's New Economic Plan Confounds Analysts (BBG)
- It's All `Perverted' Now as U.S. Swap Spreads Tumble Below Zero (BBG)
The market, which clearly ignored the glaring contradictions in Yellen's speech which said that overseas events should not affect the Fed's policy path just a week after the Fed statement admitted it is "monitoring developments abroad", and also ignored Yellen explicit hint that NIRP is coming (only the size is unclear), and focused on the one thing it wanted to hear: a call to buy the all-critical USDJPY carry pair - because more dollar strength apparently is what the revenue and earnings recessioning S&P500 needs - which after trading around 120 in the past few days, had a 100 pip breakout overnight, hitting 121 just around 5am, in the process pushing US equity futures some 25 points higher at last check.
When you tie the reflexivity problem in with the fact that the excessive use of counter-cyclical policy is leading to the creation of ever larger asset bubbles by effectively short circuiting the market's natural ability to purge speculative excess and correct the misallocation of capital, what you get is a never-ending loop whereby the consequences of unconventional monetary policy serve as the excuse for doubling and tripling down on those same policies.
There is growing turmoil in buybacks that threatens the very fabric of the stock bubble. That was always the primary transmission of the foundation of its current manifestation, corporate debt, into asset prices; especially the huge run following QE3 and QE4. The problem once momentum fades is that investor attention turns toward valuations that were repeatedly ignored before. As long as everything is moving upward and any fundamental downside is completely contained (in perception) as “transitory” then valuations are easily set aside as one form of rationalization. The effect of reversing momentum is for a more honest measurement; particularly by force of change in economic sentiment which is almost always concurrent.
The One Phrase That Actually Matters In Yellen's Speech: "Nominal Interest Rates Cannot Go Much Below Zero"Submitted by Tyler Durden on 09/24/2015 17:59 -0400
"...the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities. ... the lowest the FOMC can feasibly push the real federal funds rate is essentially the negative value of the inflation rate. As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low. This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace."
When risk sold off last week in the wake of the Fed’s so-called “clean relent,” it signalled at best a policy mistake and at worst the loss of any and all credibility. Tonight, Yellen gets a do-over.
The problem with rushing to combat any sign of economic or financial market turmoil by resorting immediately to counter-cyclical policies is that the creative destruction that would normally serve to purge speculative excess isn’t allowed to operate and so, misallocated capital is allowed to linger from crisis to crisis, making the next boom and subsequent bust even larger than the last.
It just keeps getting worse, and worse, and worse...
The global race to the bottom continued on Thursday as Norway and Taiwan moved to cut rates sending NOK plunging to its weakest level against the dollar in 13 years and pressing Tawain dollar forwards to six year lows.
European equity have been weighed on by BMW after reports in German press that the Co.'s emission tests for their X3 model could show worse results than that of the Volkswagen Passat. The Norwegian and Taiwanese central banks have both cut interest rates, taking the number of central banks to cut rates this year to 40. Today's highlights include US weekly jobs data and durable goods orders as well as comments from ECB's Praet and Fed's Yellen. Of note US data, including jobless claims, durables and home sales will be delayed today & not released to newswires 1st due to Pope's visit
And just like that Weimar 2.0 is born.
Not surprisingly, the failure of the Federal Reserve to hike overnight lending rates sent a clear message to the markets that the economy was simply not strong enough to withstand tighter monetary policy. While Chairwoman Janet Yellen did her best to pass off the recent disinflationary trends as transient due to the decline in oil prices, the discussion of the potential for negative rates sent a very different message. The failure at overhead resistance, combined with a continued weak technical backdrop of momentum and relative strength, suggests that a retest of lows in the weeks ahead is a likely probability.
While the Federal Reserve has chosen to keep the Federal Funds rate near zero, it is merely delaying the inescapable and inevitable result of its own monetary policy – another needed economic correction that its actions will have generated but which it will, no doubt, blame on the supposed “failures” of the market economy.