Just one week after the Fed overwhelmingly voted to keep rates unchanged, in a move that was seen as a painfully dovish admission that neither the global nor the US economy are growing at anything close to a satisfactory pace, last night, in a very macabre speech which ended prematurely when a clearly unwell Yellen called it a day, the Fed Chair tried to once again lay out the case for a rate hike before year end.
The market, which clearly ignored the glaring contradictions in Yellen’s speech which said that overseas events should not affect the Fed’s policy path just a week after the Fed statement admitted it is “monitoring developments abroad”, and also ignored Yellen explicit hint that NIRP is coming (only the size is unclear), and focused on the one thing it wanted to hear: a call to buy the all-critical USDJPY carry pair – because more dollar strength apparently is what the revenue and earnings recessioning S&P500 needs – which after trading around 120 in the past few days, had a 100 pip breakout overnight, hitting 121 just around 5am, in the process pushing US equity futures some 25 points higher at last check.
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So is that it? Has the confused market, after a 7-year liquidity addiction driven by an overly generous liquidity dealing Fed, decided to go cold turkey and accept that rate hikes are positive for risk? Hardly. But it will take the confused market the usual period of time before it realizes that Yellen’s deathwish on Emerging Market currencies is about to unleash havoc on global risk flows as we showed earlier this week.
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And if rate hikes are bullish, then why flirt with 25 bps – why not just do 2.5% or better yet, 5%, and send the E-mini limit up.
Joking aside, another catalyst for the overnight surge in the S&P500 carry trade, the USDJPY, was Japan’s previously reported relapse into deflation for the first time since 2013, a clear indication that Abenomics is no longer working so, drumroll, more Abenomics is needed (i.e., more QE)!
The CPI announcement was followed by a meeting between Kuroda and Abe earlier this morning. Some, like the Nikkei, suggested the meeting was to discuss future monetary policy and further easing, something we have said is in the cards now that the ECB is off the table indefinitely and leaves the BOJ as the only source of incremental “outside money” flows into risk… Even if such a QE boost means the BOJ monetizes outstanding Treasurys that much faster and is forced to taper QE prematurely. That doesn’t matter: what matters is preserving the status quo in a regime in which central bank credibility is suddenly crashing every single day.
But back to markets, and where the aforementioned USDJPY did not take place until just before the European open, Asian equity markets traded mostly lower following Fed Chair Yellen’s less dovish than expected comments where she said she expects rate lift-off this year. Shanghai Comp. (-1.6%) led the declines on continuation of Chinese growth concerns, while the ASX 200 (-0.6%) conformed to the negative tone led lower by energy and large banking names.
Japan’s Nikkei 225 (+1.8%) fluctuated between gains and losses as strength in health care was offset by weakness in tech names, while Sharp (-8%) fell to record lows after it confirmed that it will miss its H1 profit forecast. JGBs initially tracked the losses in T notes post-Yellen comments but the better than prior enhanced liquidity auction added support.
But if Asia limped along, European equity markets positive blasted off (Euro Stoxx: +3.0%) heading into the North American crossover, bolstered not only by the global Yen carry but also by stock specific news as German automakers see a rebound from recent losses after German press reported that there has been no suggestion of BMW exhaust manipulation despite contradictory reports yesterday. However it is worth noting that Euro Stoxx remains lower by around 1.5% for the week on the back of the ongoing emissions scandal.
In FX, the final session of the week starts with USD dominating proceedings, with the greenback bolstered by comments last night from Fed’s Yellen (USD-index: +0.3%). Yellen’s comments yesterday were seen as less dovish than expected, whereby she said she expects rate lift-off this year – of course the Fed has been saying that for the past year. The real question is not if the Fed will hike rates in 2015 – it is when in 2016 Goldman will give the greenlight for a 2016 hike, if ever.
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