Donald Trump Jr. was told that he was about to be introduced to a source of information that would bring down his father’s rival for the presidency but he never told the old man?
Who can’t remember Bill Clinton, whose nickname had been “Slick Willie”, swearing that although he had smoked cannabis, he had never inhaled? Likely stories, both, but which of the two is more credible or significant seems irrelevant to markets. US asset markets set out in the morning session with a major bout of the jitters but once they had decided that there was no smoking gun - any cannabis pun wholly unintended - they raced back to close more or less where they had started. Maybe they had simply inhaled what Bill Clinton hadn’t.
A Frankfurt operative of 30 years’ standing yesterday declared quite firmly that although he had been through some periods in his career that were pretty difficult to read, he had never found reading markets more tricky than he does now. Whether Janet Yellen’s appearance in front of Congress today in her Humphrey-Hawkins testimony helps to improve that or not will have to be seen.
The Humphrey-Hawkins testimony is not just another set-piece speech; it can be used to announce some very clear policy goals. Today’s appearance might have within it a ticking time bomb as some observers are speculating on whether or not Madame Yellen might announce that she will not stand for a second term at the head of the Federal Reserve System. That, of course, will beg the question as to whether she will have jumped or will have been pushed for there is a major issue at stake. The Humphrey-Hawkins testimony is an integral part of the implementation of the Full Employment and Balanced Growth Act, known informally as the Humphrey–Hawkins Full Employment Act and it is this part of the Fed’s mandated remit that the Trump administration is questioning.
Part of Trumpists’ desire to roll back the state has to be to take the Fed out of the natural supply and demand equation in the labour market. The Full Employment Act was created in 1978 in response to the economic mayhem following the 1973 oil shock, the concomitant recession and explosion of unemployment across the US. Some would argue that the Fed, in pursuit of its full employment brief, has pushed monetary policy beyond the bounds and that any future crisis will be brought about as the result of too many concurrent but mutually incompatible objectives. Thus they would conclude that Yellen’s instinctive dovishness is detrimental to organic economic growth and that she should therefore go. Financial asset markets might not agree although nobody has benefitted more from the long period of low interest rates and the excessive supply of cheap funding that have they. Markets applauding a possible exit of Yellen and a toning down of the Fed’s full employment brief with its fostering of accommodative monetary policy would be tantamount to the turkeys voting for Christmas.
Personally, I don’t think walking away from a fight is Yellen’s style. She first joined the Fed as an economist in 1977 – just as Humphrey-Hawkins was in gestation – and she must have a distinctive feeling that the barbarians are banging at the gate. Trumpists clearly hate the instinctively Democrat-leaning Fed but taking out Yellen and declaring war on the institution might ultimately prove counterproductive. That said, Trump does not seem to shy from fighting conflicts, even conflicting ones, on several fronts and there is no saying that he doesn’t regard the FOMC as part of the swamp.
Opinions are like…
Full employment is a very flexible thing and for most of the past 50 years 4.4% would have been regarded as full. The dove/hawk divide not only affects the FOMC but the divide in the greater markets as to which way the Fed should go next has rarely been deeper. This is reflected in the forward pricing that has currently pinned the probability of a further increase in Fed funds before the end of 2017 at pretty much bang on 50%. Neutral is obviously the new neutral.
Euro/dollar on the other hand seems much less assured that US rates are going to go much higher in the short term. At US$1.1462 the euro is knocking on the door of its may 2016 high of US$1.1534. Given that there can’t be much pull from the euro side of the equation – the ECB isn’t going anywhere in a hurry – the only conclusion is that currency markets are beginning to price out any further Fed action on the interest rate front. That said, Trump Jr’s assurance that he also never inhaled hasn’t done much to support the greenback.
I still can’t grasp why not a day can go by without some Fed official expressing an opinion on the economy and policy. First Amendment rights or not, having Lael Brainard, possibly the most dovish of doves, on the wires spreading her creed just 24 hours before the boss is on the Hill seems rather silly and counterproductive to me. We can now do no more than sit back and see what the boss herself has to say.
Back in the real world, many congratulations to the Republic of Indonesia for its very successful three-tranche deal yesterday that brought it US$1bn for 10 years, US$1bn for 30 years and €1bn for seven years. The euro tranche was priced at mid-swaps plus 158bp and is this morning already trading at a 50 cent or 12bp premium to the launch price. There is, however, as ever, a fly in the ointment. When the deal was first announced in Europe yesterday morning the first pricing indications were at plus 185bp. I know that that was not a typo and I ask myself what the purpose was of starting out with such a stupid number.
Compared to outstanding issues for the same borrower plus 185bp was clearly out of line and the deal never stood a snowball in hells’ chance of pricing there. So why the pantomime? Why draw people into a deal at a price level which is never going to stand? Is this not fundamentally the same as offering a product at half price although it had never been on the shelves at what is purported to have been the full price?
Rather than destroying the plurality of research through MiFID II, the authorities would do well to look at some of the syndicate practices that will undoubtedly put small investors without their own research team at a critical disadvantage while exposing them to the peccadilloes of overpaid and undertrained syndicate desks. First call at plus 185bp and trading this morning at plus 145bp. Somebody ought to be fired for rampant incompetence and flagrant lack of professionalism that makes a total mockery of best practice. Rant over.