Not full-dovish, risk assets face tremendous downside potential. Key highlights: YELLEN SAYS FOMC SEES SIGNIFICANT UNDER-USE OF LABOR RESOURCES; YELLEN SEES ROOM FOR WAGE INCREASES THAT DON'T BOOST INFLATION; YELLEN REITERATES ASSET BUYING TO BE COMPLETED IN OCTOBER; YELLEN SAYS FASTER PROGRESS ON GOALS MAY BRING RATE RISE SOONER
While today's key events were supposed to be the Jackson speeches first by Janet Yellen at 10:00am Eastern and then by Mario Draghi at 2:30 pm, Ukraine quickly managed to steal the spotlight yet again when moments after the first Russian humanitarian aid convoys entered Ukraine allegedly without permission, Kiev first accused Russia of staging a direct invasion, even if moments later it changed its tune and said it had allowed the convoy in to "avoid provocations." In other words, your daily dose of Ukraine disinformation, which initially managed to push futures down some 0.3% before futs regained virtually all losses on the subsequent clarifications. Expect much more conflicting, confusing and very provocative headlines out of Kiev as the local government and the CIA try to get their story straight.
“Here’s when US equity and bond markets will change direction: when investors come to fear the next Fed-talk.”
We are sure this will end well... As CDS-based credit ETFs are launched, so the number of ways to 'sell' volatility (buy complacency) for retail equity investors have exploded in recent years as The Fed's stranglehold on uncertainty has continued. However, as Bloomberg reports, as VIX has tumbled in the last few weeks, investors are wagering on further declines - in the five weeks through Aug. 15, they put almost $320 million into the VelocityShares Daily Inverse VIX Short Term ETN (XIV): the longest stretch of weekly investments since the note began trading in 2010.
- FTW: Europe Stocks Rise as Data Signals Need for Stimulus (BBG)
- More de-escalation: Dozens die in Ukraine in street battles, Donetsk shelling (Reuters)
- Calm largely holds in Missouri after grand jury opens shooting investigation (Reuters)
- Attorney General Eric Holder Vows Thorough Probe of Ferguson Shooting (WSJ)
- World’s Biggest Wealth Fund Slows Emerging Market Investment (BBG)
- Market Chilly to Argentine Debt Proposal (WSJ)
- Israeli air strike kills three Hamas commanders in Gaza (Reuters)
- Retooled Hamas Bloodies Israel With Help From Hezbollah (BBG)
- Investors Pour Into Vanguard, Eschewing Stock Pickers (WSJ)
- Fed Debates Early Rate Increases (WSJ)
With the FOMC Minutes in the books, the only remaining major event for the week is the Jackson Hole conference, where Yellen is now expected to talk back any Hawkish aftertaste left from the Minutes, and which starts today but no speeches are due until tomorrow. And while the Minutes were generally seen as hawkish, stocks continue to levitate, blissfully oblivious what tighter monetary conditions would mean to an asset bubble, which according to many, is now the biggest in history. And speaking of equities, US futures climbed to a fresh record high overnight on just the right mix of bad news.
The soft July data have once again generated expectations of monetary easing from China. Goldman however thinks further monetary easing would have incrementally less of an impact and would come at the cost of financial stability. This diminishing impact, they argue, would result as overcapacity/oversupply restricts long-term borrowing demand and due to interest rate deregulation, which tends to move the long-term risk-free interest rate to a higher equilibrium, as seen in recent data. As the tradable sector continues to recover on the back of an improved global outlook, Goldman believes that a combination of sectoral policies aimed at easing financial stress and structural adjustment would be a better policy option. They do not expect broad macro easing or an interest rate cut in what remains of this year.
When a tin-foil-hat-wearing blog full of digital dickweeds suggest the dollar's reserve currency status is at best diminishing, it is fobbed off as yet another conspiracy theory (yet to be proved conspiracy fact) too horrible to imagine for the status quo huggers. But when the VP of Research at the New York Fed asks "Could the dollar lose its status as the key international currency for international trade and international financial transactions," and further is unable to say why not, it is perhaps worth considering the principal contributing factors she warns of.
Even Hellicopter Ben would have balanced remarks. However, Janet Yellen has taken dovishness to an all-time high or low dpending on your perspective.
The July FOMC minutes generally had a slightly hawkish tone, warns Goldman's Jan Hatzius, emphasizing that labor market slack had improved faster than expected and that the labor market was now closer to what might be considered normal in the longer run. Overall, these remarks suggest that the change in the labor market language found in the July FOMC statement - shifting focus to broader labor market indicators rather than the unemployment rate specifically - was not intended to be a dovish change, as some commentators thought at the time. Finally, some participants noted some evidence of stretched valuations in specific markets.
The Wall Street Journal's Jon Hilsenrath unleashed an instantaneous reaction to today's FOMC minutes and the message is clear - markets are much less uncertain than the Fed about the timing (sooner rather than later) of the first rate-hike. The minutes of the meeting, Hilsy notes, provide fresh evidence of an intensifying debate inside the central bank about when to respond to a surprisingly swift descent in the unemployment rate and rising consumer prices. The minutes appeared to reflect a slightly more aggressive stance than Ms. Yellen's testimony.
These are the minutes from when the Fed toned down deflation fears and raised concerns over labor slack, and expectations going in were for a slightly more hawkish tone from the minutes (and perhaps commentary on financial stability - bubbles - and exit strategies). This is what we got:
- *MANY FED OFFICIALS SAID JOB GAINS MIGHT BRING RATE RISE SOONER
- *FOMC AGREED BALANCE SHEET SHOULD BE CUT GRADUALLY, PREDICTABLY
- *SOME FOMC PARTICIPANTS MORE UNCOMFORTABLE WITH FORWARD GUIDANCE
Sounds pretty hawkish to us...
Pre-FOMC Minutes: S&P Futs 1982.5, 10Y 2.4175%, Gold $1294 , USDJPY 103.40, Oil $95.40
The world’s central bankers have given companies the urge to merge. Merger and Acquisition (M&A) activity has already reached $2.2 trillion this year according to Thomson Reuters Deals Intelligence, up 70% from this time a year ago. The deals are big, with eight acquisitions, each over $5 billion, being announced in just a single week in July. However CEO buying sprees do not create new jobs and new products that make our lives better, but are instead just wasteful malinvestments that destroy capital. The cost of capital is integral to making these assumptions. The lower the assumed interest rate or cost of capital, the higher the price for the acquisition that the models will justify. Once interest rates go up, these valuation models will be blown to pieces.
At this point, one has to wonder, just what is the point of all the Central Banks’ activities? The QE efforts in the US and Japan (two of the biggest in history) haven’t really generated jobs or GDP growth… so just what ARE they doing?
The main event of the week will be Yellen's long awaited speech at the Jackson Hole 3-day symposium taking place August 21-23. The theme of this year's symposium is entitled "Re-Evaluating Labour Market Dynamics" and Yellen is expected to deliver her keynote address on Friday morning US time. Consensus is that she will likely highlight that the alternative measures of labour market slack in evaluating the ongoing significant under-utilisation of labour resources (eg, duration of employment, quit rate in JOLTS data) have yet to normalise relative to 2002-2007 levels. Any sound bite that touches on the debate of cyclical versus structural drivers of labour force participation will also be closely followed. Unlike some of the previous Jackson Hole symposiums, this is probably not one that will serve as a precursor of any monetary policy changes but the tone of Yellen's speech may still have a market impact and set the mood for busier times ahead in September.