The Federal Reserve’s prevailing view of the world seems to be that a) QE lowers interest rates, b) lower interest rates stimulate jobs and economic activity, c) the only risk from QE will be at the point when unemployment is low enough to trigger inflation, and d) the Fed can safely encourage years of yield-seeking speculation – of the same sort that produced the worst economic collapse since the Depression – on the belief that this time is different. From the foregoing discussion, it should be clear that this chain of cause and effect is a very mixed bag of fact and fiction.
The future fund flows out of the bond market over the next four months as the economic data comes in hotter each month s going to be staggering to watch as the realization that the Fed has to move on rates by March, and not June of 2015.
Dispassionate overview of the week ahead, with thoughts about September.
There is an ongoing belief that the current financial market trends will continue to head only higher. This is a dangerous concept that is only seen near peaks of cyclical bull market cycles.The problem for most investors is that by they time they recognize the change in the underlying dynamics, it will be too late to be proactive. This is where the real damage occurs as emotionally driven, reactive, behaviors dominate logical investment processes.
If you’re a girl and you’re old and you’re grey and you’re the size of a hobbit, who’s going to get angry at you? If your predecessor had all the qualities anyone could look for in a garden gnome, and his predecessor was known mainly as a forward drooling incoherent oracle, how bad could it get? Think they select Fed heads them on purpose for how well they would fit into the Shire? Janet Yellen has a serious problem: the story no longer fits.
With Yellen's speech a bit of a letdown for the doves - she did not go full-dovish - markets anxiously await Mario Draghi to promise whetever for ever and ever... While financial markets don’t expect bombshells, his speech is an opportunity to underscore that ECB policy will stay looser for longer than that of the Fed and the Bank of England.
DRAGHI SAYS HE'S 'CONFIDENT' JUNE STIMULUS WILL BOOST DEMAND, SEES 'REAL RISK' MONETARY POLICY LOSES EFFECTIVENESS
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
With all eyes and ears firmly focused Janet Yellen's opening oratory this morning (due at 10ET), the contents of the rest of the conference appear to have been forgotten (and yet in the past have been among the most crucial to comprehend central banks' actions after the fact - forward guidance and QE for 2). As Bloomberg BusinessWeek reports, robots don’t steal jobs, the U.S. labor market is less flexible than it was, and workers haven’t suffered unprecedented periods out of work (and rehiring odds are the same as always), are among the conclusions of key papers being presented at the symposium, along with (unsurprisingly) findings that policymakers would benefit from a better understanding of labor market dynamics. The following is a brief review of their contents...
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.
Previewing Yellen's Jackon Hole "Gobbledygook": Not One Analyst Thinks Yellen Will Say Anything Remotely HawkishSubmitted by Tyler Durden on 08/21/2014 13:55 -0400
Ahead of Yellen's Jackson Hole speech tomorrow, the sell-side, hypnotized by 6 years of Fed bubble-inflating generosity, refuses to even consider the possibility that the Fed could possibly pull the punch bowl away, and the absolutely unanimous consensus is that despite yesterday's minutes (or perhaps due to, because as the Chinese Department of Truth has taught us, one must first and foremost baffle with BS), Yellen will go uber-dove. So without further ado, here is what the Penguins expect Yellen's "gobbledygook" will reveal tomorrow, and as a reminder, yesterday Citi warned that there is "tremendous" downside risk if Yellen doesn't go "full-dovish".
Following last week's surge back over the 300k Maginot Line, the Labor Department print this week is 298k (sigh of relief heard around the world). This is also the week that BLS surveys for the Augsut NFP print. Continuing claims fell once again to 2.500 million - the lowest print since June 2007. So great news... that explains why stocks are fading modestly off the highs in reaction.
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 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.
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.