From Bloomberg's Richard Breslow whose recent pieces have been spot on.
Dear Fed, It’s Time to Lean, or Leave
At long last we’ve reached April’s FOMC day.
Interesting that while almost everyone agrees on what the statement will/should say, there is no clarity on what the members, especially the core members, are really thinking.
Communication policy -- the professed desire for "transparency" - and the crutch of “data dependency” crutch have turned market participants into great Fed staffer clones but not the Board Governors.
I for one think this is a golden opportunity for policy makers to lean the right way.
Not that I am unsympathetic to concerns about weaker than forecast 1Q economic numbers, or the the tenuous global situation. But given the Fed has QE everywhere (just today the Riksbank extended their QE), it really must consider that today represents a chance to move toward normalcy without anyone thinking they are going to get (overly or even mildly) aggressive.
Just today BlackRock was quoted as predicting an emerging market “taper tantrum” whenever the Fed begins to tighten. They are probably right but only as a knee-kerk reaction. Any “severe tension” or “major shock”, to quote BLK’s Amer Bisat, is likely to be followed by tactical and then strategic investors realizing what a great opportunity to get in at better levels just presented itself.
This is not 1994 because Yellen and Fischer remember that episode well. The Fed is not about to enter a sustained campaign of tightening. And everyone knows it. The rest of the world has had plenty of notice to get their ducks in a row.
Reserves held by emerging countries are at vastly different levels than they were 18 years ago. The expected weak GDP could actually help here to temper concern.
Goldman Sachs has a very interesting piece this morning comparing the causes and levels of increased corporate leverage in the US and Europe. As they say, corporates are releveraging (some would say their balance sheets are deteriorating) but showing “similar symptoms, different causes”
A big part of the U.S. equation is U.S. executives are looking at yields and realizing that to not borrow at these unsustainable levels could be a missed opportunity they will sorely regret. If you run a viable business and “investors” are throwing free money at you for future growth, why not leverage up and buy back some stock.
This is ultimately something the Fed needs to focus on and lean against.
Norway’s sovereign wealth fund, the world’s largest (although I would argue that all central banks are now sovereign wealth funds) reported today record gains of $53B in the first quarter. Equity holdings were the driver of this. Good for them. Bad for global markets if monetary policy decisions become tied to any greater extent to the level of the SPX.
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