Authored by Michael Every of Rabobank
Noughts: As Philip Marey notes here, the FOMC kept the target range for the Federal Funds rate unchanged yesterday, and the dot plot continued to show the Fed on hold in 2020, before hiking in 2021 and 2022. In other words, no change for a year, so when we go away for Xmas we can effectively stay away for as long as we want. However, Powell was rather dovish, stressing that there was less reason to hike than after previous mid-cycle adjustments in the 1990s because there is now less upward pressure on inflation. (As headline US CPI printed a tick above expectations at 2.1% y/y and core at 2.3%.)
Powell was sanguine about the problems in the repo markets, despite market chatter that the complete opposite stance was more logical, and said that temporary upward pressures were not uncommon year end, and they appear to be manageable. He also did not seem to be in a hurry to introduce a standing repo facility and said that the Fed was at the moment more focused on treasury bill purchases and looking into supervisory and regulatory issues affecting repo. However, he showed willingness to buy coupons, in addition to T-bills, in the balance sheet expansion program if necessary. Does that make NOT QE into QE, one wonders? Or is it still NOT QE if they claim that’s what it is?
Philip thinks that we may still see some Fed action before year end, of course only ‘technical.’ For example, he has already explained that if the Fed does not develop better tools to control the repo markets - such as a standing repo facility -, it is only a matter of time before we get another episode of repo stress
All in all Philip concludes that while the Fed thinks it has everything under control, the same forecasting framework that helped us pinpoint the end of the Fed’s hiking cycle in 2019 is also indicating that the FOMC will have to cut rates all the way back to zero before the end of 2020. In short, enjoy that Xmas break – because you will need it.
How did the market react? With 10-year Treasuries closing down around 5bp to below 1.80% again, and 2-years around 4bp at 1.61% and hence the curve flattening; equities marginally in the green again; and the broad USD index in the red again.
Crosses: Today is election day in the UK, where millions get to put an X on a bit of paper to try to find the solution to the complex set of socioeconomic problems besetting the not-so United Kingdom. It seems appropriate for a country addicted to schlocky TV reality show ‘Love Island’, and with an education system that has produced a contestant that claims to not understand the difference between a city, a county, a country, and Europe, that this election revolves around issues such as ‘is Liverpool is in Europe?’; and that PM Johnson has an election video calling to “Get Brexit Done” in the style of the movie ‘Love, Actually’. In which case we can portmanteau that the UK is now ‘Love Island, Actually’. There just isn’t a lot of love to go round.
Stefan Koopman has produced a detailed dive into the election, which is available here. He concludes that It is easier for BoJo to win a parliamentary majority in an election than to win a popular majority in a People’s Vote, but that assuming that clarity on Brexit is the only thing that is broadly desired, party allegiances could potentially break down; indeed, the election will be dominated by tactical voting. The greatest likelihood is of a Tory majority, but other outcomes are still easily possible. In short, we either have PM BoJo, heading straight towards a further set of cliff-edge negotiations with the EU over a trade deal and with a risk of Hard Brexit and/or Scottish independence looming this time next year; PM Corbyn, and the kind of socialism that will see champagne socialists in the City clutching their rosary beads, and again a call for Scottish independence; or a hung parliament, and more of the purgatory of the past five years. To quote Woody Allen: “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.”
Noughts: Meanwhile, there is another big nought today in the form of the ECB meeting, the first led by President Lagarde. Our ECB watchers Bas van Geffen and Elwin de Groot don’t expect any changes at this juncture – thus the nought (their full preview is here). However, some doubts were expressed about the inflation assumptions in the October ECB meeting. We think that the bleak outlook for 2020 (close to nought for GDP growth and CPI?) will eventually force the ECB’s hand on policy again. In her first speech, Ms. Lagarde stated that the ECB’s strategic review would begin soon. The press conference today may reveal more information about this, and could come with a formal announcement. Among many other policy/mission tweaks, will it include a pledge to also do ‘whatever it takes’ to get to the Eurozone to net-zero carbon emissions?