Citi's Englander On What Can Go Wrong In The Next 11 Days?

Tyler Durden's picture

1) Regional Fed presidents are talking hawkish but markets are pricing dovish.

Expectations of fed actions have retraced sharply since March. Consider the path of the October 2014 fed funds futures rate (right now the first fed funds contract that prices in a full hike, Figure 1).  With the exception of a brief period immediately after the January FOMC, fed funds futures now price in the lowest path of Fed policy rates on record.


Now consider the risks that accompany Wednesday’s FOMC. Our economists write: “Fed officials are expected to reaffirm the need for a highly accommodative monetary policy ‘at least through late 2014.’ The Committee has set hurdles for additional QE-type asset purchases and at this meeting is not likely to resolve plans beyond the scheduled completion of Operation Twist.”  If they unexpectedly they shift the timing of the expected Fed hike to earlier in 2014, or even if “at least through late-2014” becomes “through late 2014”, we are likely to see pressure on bond markets, FX risk and very probably all risk correlated assets, -- to a limited degree if “at least” is dropped, and much more strongly if the timing is changed. Very likely they will reiterate the previous timing, as our economists expect. Even for those of us who still think there is a significant chance of additional stimulus, the chance of misunderstood language at this meeting seems very high, when it is very unlikely that additional measures will be announced.


What may be a bigger risk is that some Fed governors and regional Fed presidents shift their expectation of tightening to earlier. When the last FOMC projections were published in January, three FOMC participants saw a need to tighten in 2012 and six in 2013. Six participants saw no need to tighten until 2015 or beyond.  If there is a shift in this distribution to earlier and tighter, investors may interpret the drift in the projections’ center of gravity as an early Fed-warning signal. Given the pricing in the fixed income market, this could easily be viewed as an stealth indication of tightening risk.


The rates effect and the asset market effect in this case would be unambiguously USD positive.


What skews the risk is the degree to which rates have shifted back to pricing in pretty much unalloyed policy dovishness despite Fed governor and regional President hawkishness, better than expected economic data on the whole, and the absence of any smoking-gun indication of weakness.


Figure 1 – October 2014 fed funds contract implied yields



2) The ECB doesn’t announce any measures for Spain and Italy

The next ECB meeting (May 3) is critical for both euro optimists and pessimists.  German yields are at record lows, euro zone bank stocks are at almost-record lows and  sovereign spreads are widening (Figure 2).  European policymakers very likely thought they had a break from crises after the Greek debt package and PSI were rammed through.  The rapid advent of the Spanish crisis, its spread to Italy, new concerns on the Netherlands and  very poor economic data have caught them flat-footed and so far there is no indication that any policy response is thought to be needed.


Figure 2: Euro bank stocks, German yields and Italy-Germany spreads


In the past, the euro has sold off sharply when the ECB does not present a policy response to rapidly deteriorating market conditions.  When conditions are deteriorating the euro trades off tail risk, and whether the policy  is attractive or not, the market focus is whether sovereign debt concerns will intensify or recede. If the ECB does not provide relief and especially if they give a complacent signal on market conditions (which will likely be interpreted by FX investors as  signaling the absence of a consensus), the EUR is likely to break to the downside sharply. By contrast, a week ago even the mention of more SMP buying sent the euro up more than a big figure, so we would not underestimate the upside risk to the EUR, when much of the market is clearly leaning to the downside, if they manage to put together an effective response.


One issue that the ECB may have to address is that monetary policy has effectively tightened for the euro zone (Figure 3). The thick blue line at the top of the figure is the GDP-weighted 10yr yield in the euro zone (this includes German, France, Spain, Italy etc, but excludes Greece, Portugal and Ireland). It is running about 150bps above the G120 countries clustered at or below 2%, and has widened by about 50bps in recent weeks as euro zone GDP-weighted yields have gone up and those elsewhere in  G10 have declined.


Using a common rule of thumb that a 100bp increase in policy rates is equivalent to about a 20-25bp increase in long rates, we have seen the equivalent of an effective short-end tightening of more than 200bps recently. If we consider the full 150bp gap between euro zone long rates and the rest to the G10, it is equivalent to monetary policy being 600bps tighter at the short end.


That this spread is a result of risk premium, rather than monetary policy, and is probably unwelcome to the ECB does not unwind the negative effect that it has on activity.  One reason that tail risk is euro negative is that it reduces any prospect that the euro zone has of growing out of its debt crisis.  Hence, if FX investors perceive that no policy response is forthcoming, the euro is at risk of falling sharply.


Figure 3. 10-yr yields in euro zone and elsewhere

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ACP's picture

Black swan BITCHEZ!

flacon's picture

Like I said before, who fucking needs markets. They are sooo pasee... why not give central authority to the pH. Dees to dictate all of our prices for each stock and bond and commodity. Surely they are more intellectual and have a higher degree of accuracy than "we the people". Let's go full retard communist. Let's let ONE MAN dictate all of our prices and submit to him and him alone. For in communism is freedom because the oceans will turn to lemonade and we will all be wealthy beyond measure. What we need is the FOMC, the Fuckyou Open Market Comittee. 


Or not! 

Oh regional Indian's picture

Hmmmm.... if you think of the Billion Price Project, perhaps that is the plan?

Once you knwo how much everything is selling for everywhere.....POWER!!!

But again, I think the risk this couple of weeks is much more Geophysical and Geo-political, with banks taking a back seat for now. 



macholatte's picture


One headline from FT and everything will change. And that will happen about 2 minutes before the headline is published.

It rhymes.


Oh regional Indian's picture


if interested, the great cannabis controversy.... crazy information....



Milton Waddams's picture


Eireann go Brach's picture

It is clear to see that some of you hoodlums on here have no fucking jobs considering the amount of time some of you send on here posting jibberish, either that or you work govt jobs, where you sit and pick your fucking arse all day and don't actually do anything at all, yet pick up a paycheck!

DormRoom's picture

Still waiting for Tianamen Square 2.0  One of the main reason why the Chinese regime turned to hyper free market capitalism, post 1989, was to re-negotiate a social compact with the people.  Prosperity for Stability.


Now that income inequalities are so wide, not only between  migrants, and city folks, but within the power-elites ( Xilai v. Jiabo ) camps , scar tissues will be exposed.  The GDP rate of 8.1% is dangerously close. 


Also, it'll be interesting to see how the Obama regime deals with the American Spring.  Will America have its own Tianamen moment?

Red Swan.


ISEEIT's picture

Good try.

Try again? I like funny joke!

I think I need to buy a gun's picture

"will america have its own Tianament moment"?


Its not looking like it, we love american idol, going to watch fixed NHL playoff games and pay for our 11 dollar beers, watching shows that show glam like kardashians, sweet 16 birthdays of ultra rich mostly thieves and paris hilton. Everything is fine in America. Mind numbing tv solves it all

Chump's picture

So you're saying that as long as the processed foodstuffs stay on the grocery store shelves and the TV keeps flickering, Americans will remain passive?  Interesting...what happens after three days of supply chain interruption/electrical outages?  There be dragons...

Bro of the Sorrowful Figure's picture

the "american spring" has already been managed by the obama administration...through ndaa and executive orders. got our dicks checkmated right off. 

also, as far as the chinese power struggle is concerned: 

i live in china, the wealthy are leaving in droves. maybe they know something we dont.

navy62802's picture

What could the ECB possibly announce that would make people feel better about Spain and Italy? Perhaps they will announce that they have found an alternate universe?

HD's picture

Sadly, any old fantasy based annoucement will be embraced to keep the ponzi going. The markets do not care if the plan will actually work, or if it's even the slightest bit rational - extend and pretend 'til the end.

BandGap's picture

That would be funny if it weren't in the suggestion box already.


Rob, I'm watching your video now but didn't want to lose my place in the who replied first contest...


Mugatu's picture

Is this article a repeat?  I feel like we are in some perverted economic form of "Ground Hog Day".  Every few months the same shit happens.....over and over again!   We are stuck in a fucking time loop where we periodically dump fantasy cash into the markets and then everyone's happy - but then we go through withdrawl as soon as the rush is over.  I think even a first semester econ major at the University of Phoenix could see this shit coming.....again, and again, and again.

Can the powers that be please throw us a fucking scandal to spice things up?

The4thStooge's picture

MF Global was the last exciting thing to happen. Speaking of which, how come nothing ever happened with that? Lehman Bros nearly took down the whole damn thing, but MFG didn't seem to upset anything at all except for MFG clients. Were CDS paid out on MFG bonds? How did this card manage to fall without disturbing all of the other precariously stacked cards?

El's picture

Wondering why no prosecutions at MF Global? Here's your answer. CORZINE RAISES $500,000 FOR OBAMA

mess nonster's picture

Be careful what you wish for.

Crawdaddy's picture

Another opinion of some flackatoid still drawing a paycheck from a bankrupt company. Why should I pay attention to what they have to say? Really...please, someone help me out here.

chump666's picture

It is all about the EUR, it stayed well supported throughout the European sell off, hence a muted sell on the dow and s&P and oil still well bid. 


q99x2's picture

The EU has improved the firewall. LaGarde gots herself a shopping cart.

GMadScientist's picture

What does it mean when the "Magic 8-Ball" just sinks to the bottom?


Ted Baker's picture


misterc's picture

What can go wrong?

Possibly something like Ford Cologne (Germany) putting 4,000 people on short hours in the near future since they cannot sel their frickin' cars anymore.

I mean, does anybody care about fundamentals & facts anymore? The pillar of the European community, supposed to bailout the whole continent, on short hours? How's that possible? What will this do to the region's industrial tax? What about the suppliers?,text...

evolutionx's picture

Overlook Bank Credit Default Swaps


they are exploding, specially in Europe

l1b3rty's picture

Germany and France making moves to leave Eurozone? Just hogwash until the austerity is locked-in like a sure trade at your broker.


Element's picture

Oh look ... another major attack and escalation ... how unexpected ... ok ... is it Iran's turn yet?




Suspected cyber-attack hits Iran’s oil sector
Published: 23 April, 2012, 23:30
A virus has been discovered in computers running key parts of Iran's oil sector, forcing authorities to unplug its main oil export terminal from the Internet.
The country’s oil ministry, national oil company and a number of other companies affiliated with the ministry were hit by a cyber-attack on Sunday, according to Iranian news agency Mehr.
Iran’s deputy oil minister said the facilities were taken offline and a special cyber response team was set up.
Around 80 per cent of Iran's daily 2.2 million barrels of crude export goes through Kharg Island, located off Iran’s southern coast, which was one of the facilities attacked.
Iran has often claimed it is involved in a long-running technological war with the United States and Israel. The most recent similar attack happened in 2010, when the country’s nuclear program suffered a big blow from a worm called Stuxnet.
Stuxnet, many experts claimed, focused precisely on the computers running uranium enrichment centrifuges at Iran's nuclear facility in Natanz, destroying thousands of them and setting the atomic program back months.
Both Iranian officials and Western computer techs said that because of the complexity of the virus and the fact it had an “expiry date”, rendering it harmless after a while, it was most likely created by a government.
Fingers were pointed by Tehran at the United States, possibly with help from Israel.
The US and EU are trying to cut the country’s oil exports through a ban on the import of its crude, as well as with financial sanctions against Iran’s trade partners. Their stated goal is to force Tehran to freeze its controversial nuclear program.
Europe was among the largest buyers of Iranian crude, but is now trying to replace it with fuel from other sources. Japan and South Korea are also trying to reduce imports from Iran, although unlike the EU they haven’t set a deadline for stopping all oil imports from Iran.China, India and other refused to side with the US-sponsored effort, saying only a UN Security Council resolution would make them stop buying Iranian oil.




Cyber-terrist econo-bombers bitchez!

Just remember Uncle Samuel ... all is fair in Love and War ... what goes around ... well, ... tends to land like an RQ-170.

But fortunately, the US can just piss all over the Iranian State and they'll only keep ... well ... preparing to cut off the ... western world's ... energy supply ...

Gee ... do ya think the nobel Oboma might want to ... "bring it on"? ... but whatever can be the reason for him doing that?

What's the bet Oboma's term both started, and will end with a major bombardment of civilian suburbs by the IDF?

jjsilver's picture

Hawkish, Dovish this! it's all just a mental masturbation psyop. It's hard to keep a story straight when you are a criminal organization operating under the guise of legitimacy!