Earlier today, the clueless French president Francois Hollande caused a stir when he confirmed what everyone else had known: central banks around the developed world are anything but independent, and constantly leak their imminent policy actions to the well-connected, or in his case, leaders of socialist utopias. To wit, first this:
- HOLLANDE SAYS ECB TO PROVIDE SIGNIFICANT LIQUIDITY TO ECONOMY
This immediately caused much confusion and anguish as it put the ECB in a very uncomfortable spot, one where Draghi has to preclear not only with Merkel (which is understandable - after all without Germany there is no Eurozone), but also with Hollande, who just happens to be the head of the "sick man of Europe", which in turn is a direct hit on the reputation of Mario Draghi himself. Sure enough, a few hours later Hollande followed up with:
- HOLLANDE WAS REFERRING TO 'HYPOTHESIS' ON ECB QE DECISION
It is unclear which is more embarrassing: that the narrative is failing so blatantly now, and nobody can even remember how to lie accurately, or Hollande's attempt to save face and preserve some faith in the Frankfurt money printing shamans.
However, one thing is clear: "surprises" like the SNB shocker from last Thursday will no longer be tolerated, especially if the 1% stands to lose real money, so the leaks by central banks will continue even as said central banks are increasingly more clueless about what they need to do.
In any event, it is now confirmed that in addition to printing money and crushing the middle class (see "Spot The Trend: The Richest 1% Are About To Own Over Half Of Global Wealth [18]") central banks do one thing and one thing well: leak their decisions in advance to policitians: who, at least in the US, have full legal right to trade ahead of the public on such material non-public information. And some idiots still think the market is fair, unrigged and efficient.
So back to the topic of central banks leaking, we find that the Fed's own favorite mouthpiece Jon Hilsenrath (for more see "On The New York Fed's Editorial Influence Over The WSJ [19]"), just released a piece in which he claims, or rather his sources tell him, that the Fed is "on track to start raising short-term interest rates later this year, even though long-term rates are going in the other direction amid new investor worries about weak global growth, falling oil prices and slowing consumer price inflation."
In other words, just like the ECB in 2011, the Fed which has hinted previously that it will hike rates just so it has "dry powder" to ease once the US economy falls into recession, will accelerate a full-blown recession in the US when it does - if indeed Hilsenrath's source is correct and not merely trying to push the USDJPY higher (for reference, see Reuters "exclusive" report on the Samsung takeover of Blackberry, denied by both parties within hours - hike some time this summer.
So what calendar of events can one expect? According to the WSJ [20]"no moves for at least the next two meetings—or not until June at the earliest, they have indicated in recent public statements and interviews. At the same time they aren’t likely to signal an alarm about developments abroad that would indicate a meaningful shift in their plans."
For now the Eurodollar/Fed Funds market, tired of being raped year after year by Bernanke and Yellen with promises of "imminent rate hikes", is no longer buying it: "Some investors have been betting the Fed will hold off on rate increases. In fed funds futures markets—where traders stake out positions on the expected Fed target rate—the average expected rate for the month of June has drifted down from 0.20% to 0.16% since the beginning of the year, a sign investors in these markets see a diminished likelihood of a midyear rate increase." Ironically in the past Fed Funds had repeatedly been on the Fed's side in seeing a recovery only to lose massive amounts of money. It will be ironic if FF futures are now caught on the wrong side of the trade again, when the Fed does begin a brief and ill-advised hiking cycle.
And anyway, why is the Fed so confident it can hike rates without causing a massive market crash? Simple: it hopes that the QE about to be launched by the ECB will provide sufficient "flow" offset to mitigate the implicit tightening by the Fed:
While European officials are near launching a new bond-buying program known as quantitative easing to boost feeble growth and low inflation, Fed officials are generally upbeat about U.S. economic prospects. U.S. inflation is below the Fed’s 2% objective, but the unemployment rate fell—to 5.6% in December, which many Fed officials take as a sign that wage and price pressures could be building in the domestic economy. They have held short-term rates near zero since December 2008 and want to start moving them up before those pressures gather force.
So is it all engines go? Not really, because while the Fed is increasingly ignoring any data to come out of the BLS for the simple reason that it is politically goal seeked to make Obama's administration look better when in reality just shy of a record number of Americans are still on foodstamps, an all time high 93 million Americans have left the labof force thereby leading to an abnormally low jobs number, and the bulk of jobs gained in the 'recovery' have been low-paying wages all of which are about to be crushed by the high-paying shale sector collapse, Fed officials are looking at the 10 Year, yielding well below 2%, and basis points above its all time low, and asking questions:
One worrying development for Fed officials is a drop in yields on 10-year Treasury notes below 2%. Boston Fed President Eric Rosengren said in an interview last week the decline raised questions about whether investors believe the Fed’s forecast that inflation will rise toward 2% in coming years. Treasury yields tend to move in line with inflation. If investors believed inflation was set to rise, yields on government bonds would be rising, not falling.
On the other hand, the Fed appears to have finally figured out what we have been saying since 2009: that all the market is doing is frontrunning central bank purchases of increasingly scarce treasury "high-quality collateral" which is the primary reason why yields will without doubt continue ever lower as the Fed noted in its most recent minutes (see "Fed Finally Admits Frontrunning Of Central Banks Is What Moves Markets [21]")
In their discussion of financial market developments, participants observed that movements in asset prices over the intermeeting period appeared to have been importantly influenced by concerns about prospects for foreign economic growth and by associated expectations of monetary policy actions in Europe and Japan.
Hilsenrath notes as much:
But other officials believe the drop in bond yields is being caused primarily by global capital flows–most notably a rush of investors into U.S. assets and out of lower-yielding European investments. These officials are prepared to look through the drop in bond yields for now until there is more convincing evidence U.S. inflation has taken a sustained turn lower.
In other words, the ongoing decline in the long-end is nothing short of the market frontrunning other central banks' direct and indirect monetizations of US paper, even as the Fed prepares to raise the short-end.
So does this mean that 9 to 12 months from now the short end will be rising in 25 bps increments even as the central banks elsewhere around the world are pushing their own rates ever more negative and/or rushing to monetize ever more of the declining amount of quality collateral left in the private market, and are we finally going to get that last and most visible indicator of an imminent recession, the inverted yield curve?
The answer is most likely yes, but don't worry: the US finally admitting it has slid into a recession will be promptly spun as bullish: after all it will mean that a full business cycle has come and gone, and give the Fed green light to resume doing what it does best: print.
