Saturday, 21 July 2018

A Fed take on the "D" word

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Anthony Peters weighs up inflation, risk, growth and Italian art valuations.

Risk markets rebounded on Tuesday, albeit only by a fraction of what they had lost on Monday. Short covering rally? Dead cat bounce? The blind leading the blind? Well, at least there is one good thing which is the cost-efficiency of canvassing opinion. You need fifteen of them? Three decent market economists should quite easily get you there.

But how many central bankers does it take? To start with, you don’t need fifteen opinions. All you need is to know what the boss is thinking. And yet we get very excited by the iterations of all around them. Yesterday it was the turn of dove-in-chief Charles Evans, President of the Chicago Fed. Speaking at the Detroit Economic Club, Evans spoke of the unemployment rate, of inflation and of his opinion that, despite tapering, monetary policy will remain highly accommodative well into 2015.

Mind the output gap.

Without mentioning the dreaded “D” word which is stalking Europe, he said “All told, the potential risk of high inflation seems very low” and went on: “In fact, I am concerned that inflation will not pick up quickly enough.” 

There is already no doubt here on which side of the argument Evans is sitting but if not certain, listen to this: “…monetary policy will remain highly accommodative for some time” and “the benefits of our policy choices continue to far outweigh the potential risks….”

The new boss lady has only been in office for a few days and I doubt that Evans would have come out with such clear statements if he had felt that he was not completely on the same page as chairman Janet Yellen. However, that leaves us with the persistent conundrum with respect to pricing equities. Do we buy low discount factors or sell stuttering growth? As ever, markets will do whatever they do, only for deep and meaningful explanations to be tacked on by smart commentators, post factum.

Pays yer money, takes yer choice.

Italian Art

Meanwhile, back in the comedy division, Italian state auditor Corte dei conti has expressed the view that the principal ratings agencies got it wrong when failing to value Italy’s art and literature before downgrading the country. The auditor has estimated that what he regards as premature downgrades cost the Italian taxpayer €234bn which is what he believes the country should try to recover from the agencies by way of damages.

Although I worked around the agencies from my role in structured credit during the peak of the credit boom and am well aware of their embedded failings, a credit opinion remains a credit opinion and although anybody has the right to disagree with someone else’s opinion, an opinion can never as such be right or wrong. If the powers that be choose, as they did for far too long, to elevate agency credit opinions to near biblical status, that’s their matter… and I’d barely have expected the ratings agencies to object.

The agencies have hit back with their usual bland response that the claims are “without merit” rather than referring the auditors to the light entertainment departments of Europe’s major broadcasters. Maybe we ought to sue the Italians for the rape and pillage perpetrated against this country and its people by the Romans and for which no compensation has yet been either demanded or paid… enough frivol.

Macroeconomics is doing little to help investors position and flows are inconsistent enough to make tracking them as good as impossible. I heard of one broker yesterday, when showed a stack of bids and offers by an investment bank, who simply replied that there were no flows and hence nobody to show the ideas to.

Uncertainty has clearly supported the front end of the curves but it is clear that, although new money will be parked there for safety sake nobody is ready to make strategic decisions with respect to duration and risk. A light short still seems to be the positioning of choice though even that is currently winning no prizes.

Hang on to your hats and wait for the storm to blow itself out. 


PS: London is beset with a 48-hour tube strike on Wednesday and Thursday. Although getting to work in the mornings tends not to be too much of a problem, expect people to start drifting out of their offices early in an attempt to be home at a sensible time. City probably firing on three cylinders today and tomorrow.

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