The consensus expectation is overwhelming that Fed Chair Yellen will deliver a dovish message at Jackson Hole. Macro investors have largely eliminated their short Treasury position and look to be long risk, particularly via equities and EM. FX positioning is long USD and long EM, the long USD largely because the euro zone economy is slipping again and the ECB is hinting at further ease. Our question is whether Yellen can be more dovish than what is now priced in, not whether she will be dovish on the Richter scale of dovishness. Full dovish, semi-dovish, or contingent dovish.
This is a tricky period for asset markets, warns Citi's Steven Englander. Positioning still reflects a risk-on view but the risk-on enthusiasm is in EM, equities and Asia rather than peripheral Europe. Investors are still long risk, despite the geopolitical tensions and Fed Chair Yellen’s modest nod to the risk of faster than expected tightening, Englander cautions, concluding that investors continue to anticipate a soft landing despite all the discussion to the contrary.
This shortened week is dominated by a veritable explosion of critical jobs market data on Thursday. As Citi's Steven Englander notes, there are five key US labor indicators - two of which will be initial asset market drivers: Citi expects disappointment; and three more that will give signals more relevant to the medium term evolution of asset markets and Citi think will give a more positive signal.
Goldman Sachs, like most of the mainstream economists believes today's FOMC statement will likely be "broadly neutral" with no indication of sooner rate rises than expected (despite what we have noted as the timing not being better), some modest upgrades to the economic outlook (to keep the "everything's good and you don't need us anymore" meme alive), and continued taper at the same pace (with maybe some acknowledgemnet of the transitory pop in inflation). UBS, on the other side, suggests there is a chance of some FOMC surprises with Janet Yellen pulling a semi-Carney as Citi's Steven Englander has previously noted "the Fed needs more volatility in order to maintain its illusion of omnipotence."
"Words speak louder than actions until words stop working then we promise some actions... or more talk about actions." That appears to be the communication method-of-choice for the world's central bankers and The Bank Of Japan's Kuroda stepped into the breach today with his own demands. As Citi's Steven Englander translates, Kuroda is telling investors not to buy JPY just because the BoJ is being very reticent on policy ease (do as we say, not as we do). However, there is an important second message which is intended to be delivered to the Japanese bureaucracy - "Mr. Kuroda also acknowledged limits to what the BOJ can do to generate long-term growth."
With The White House proclaiming Russian stocks a "sell" today (and in the meantime Russian stocks and the Ruble strengthening), it is clear, as Citi's Steven Englander notes, that the Russia/Ukraine crisis may be the first major political conflict that is played out in international financial markets. The difference, Englander points out, between this and standard imposition of sanctions is that both sides have some options that can inflict damage on the other side; and this has significant implications for investors in the short- and medium-term.
Hinting that the worst is yet to come, was none other than India's Central Bank governor Raghuram Rajan himself, who yesterday in an interview in Mumbai with Bloomberg TV India, said that "international monetary cooperation has broken down." Of course, when the Fed was monetizing $85 billion each and every month and stocks could only go up, nobody had a complaint about any cooperation, be it monetary or international. However, a 4% drop in the S&P from its all time high... and everyone begins to panic.
From Citi: From the viewpoint of domestic US economic conditions the Statement is completely anodyne. From the point of view of EM, the Fed has just said "hasta la vista, baby"
One question that keeps popping up, and was addressed to some extent by NAB's recent report, is whether all the elements of the current Bitcoin are necessary for a viable alternative currency. And, as Citi's Steve Englander asks (from a libertarian and pragmatic perspective), if they are not, or can be improved on, where does that leave Bitcoin’s first mover advantage?
Who knew? Jane Austen was a dyed-in-the-wool, easy-money-loving, stimulus-demanding 'expert' on monetary policy. As Citi's Steven Englander finds in his eloquent new year's note, it seems the antiquated authoress has much sense-and-sensibility to reproach those of us who believe in real money and a return to a real economy. From justifying QE, "Money is the best recipe for happiness," to the importance of the wealth effect, "If this man had not twelve thousand a year, he would be a very stupid fellow;" Austen offers some 'balance' to offer on Fed transparency, tapering, and congressional spending.
The most succinct post-mortem summary of the FOMC announcement comes from Citi's Stephen Englander.
"Market response - will add to downward pressure on bond yields and may be worth another 10-15bps on the downside. FX terms - hard to see it as anything but USD negative for now. Main buying opportunities probably high current account deficit EM, AUD,and JPY. Discussion of waning Summers odds had been in market last week so we would see impact on JPY in 0.5-1.0 percent range. Whether this puts Yellen in driver's seat is unclear, so this Wednesday tapering and FOMC forward guidance are still the focus. We still think tapering schedule rather than FOMC language will be the main market driver."
"The opposite of currency wars is not necessarily currency peace; it can easily be interest rate wars," is the warning Citi's Steve Englander sends in a note toda, as EM and DM bond yields have relatively exploded in recent weeks. The backing up of yields represents an increase in risk premium, so this will likely have negative effects on asset markets and the wealth effect abroad as well. It is difficult to explain the magnitude of the yield backup in terms of normal substitution effects, and broadly speaking, if you were to compare the backing up of bond yields with the beta of the underlying economy and asset markets there would be a good correspondence. So, Englander adds, it is fear, not optimism that is driving bond markets.
As Citi's Steven Englander suggested earlier, the developments in Cyprus will lead to EUR selling and USD, CHF, GBP, NOK and SEK buying (in that order). He adds, the issue is whether to believe that the Cyprus levy on depositors is one-off, but depositors and investors elsewhere could easily see this as another in a string of ‘one-offs’ and react badly. The risk-return to depositors in countries with weak banking systems may not favor taking the risk that Cypriot banking system was so unique that such a levy would never be considered elsewhere. The levy on deposits ostensibly covered by deposit insurance may also undermine confidence in weak banks. The question is whether this becomes a full-blown crisis or a mini-crisis. For now, as FX markets open, it appears EURJPY is getting hammered (from 124.47 close to 121.6) implying S&P futures will open down around 30 points. We are sure Abe is watching closely...
When a note by a Citi FX strategist begins with the following proclamation endorsing outright fascist despotism, you know it's going to be good: "This is the first European election in which voters didn't do the right thing." Perhaps if Citi would be so kind to overrule the democratic vote, in which 55% or the majority of the people voted against the "right thing", and impose its own unelected Italian dictator, just like Goldman did in November 2011, that long EURUSD call would be happier? Then it only gets better: "Elections are more problematic than market scares or sentiment shifts as they can't be undone by printing monry" (sic). True: some things outright money debasement by central banks can't buy - for everything else there are Siberian Gulags. And the absolute punchline: "Still the outcome does not seem so dire that a bit of growth and ECB flexibility could not turn it around." Why yes, all Europe needs is a "little growth" obviously in lieu of lots of growth, but frankly it will settle for any growth - something it has been unable to do under the wise tutelage of the banker-dominated oligarchy for the past four years, as for that little "ECB flexibility" - wink wink: just where would you like those Euro Stoxx Steve?