Much ado again over the September FOMC minutes. There was a study out recently that looked at past minutes, tried to tie them up with later policy action and concluded that the correlation is plus/minus diddly-squat.
In other words, the news we glean from the minutes is about as hot as yesterday’s bath water. When it comes to vacuous nothings, try the following for size: “Several members judged that it would be appropriate to increase the target range for the federal funds rate relatively soon if economic developments unfolded about as the committee expected”. Sure, and if my grandmother had wheels she’d be the number 11 omnibus.
There really was very little in there that we either didn’t already know or should have already known and other than having spent the past three months on Mars there is little excuse not to have done. I have been trying to remember the last time that the minutes revealed a bombshell and, accounting for the possibility that age might possibly be messing with my memory, I can’t. That Esther George of Kansas, Loretta Mester of Cleveland and Eric Rosengren of Boston dissented and voted for an early tightening is no great surprise but greater dissent would not have been expected.
Let it be remembered that there has never been an FOMC decision that has seen Janet Yellen on the losing side. I suspect that there might have been more among them who dissented in the mind but not in the voting hand.
December 14 now looks like a done deal but we have had too many done deals that in the end didn’t get done. The biggest support for a December tightening is probably not to be found in the data but in the ongoing public debate, which is questioning whether ZIRP and NIRP really have had the positive effects they were supposed to or, perhaps more poignantly, whether a continuation of that policy will bring any further benefits.
Bond markets aren’t exactly in freefall but at 1.75% yield, there is little room in the 10-year Treasury before one is back in negative total return. A 20bp increase in yields would wipe out the annual net income on the bond. This is a significant number for anybody for whom coupon income is relevant as opposed to some of the highly paid MBAs, CFAs and PhDs who don’t care, as long as the benchmark index loses more money than they do.
China
That said, bonds globally had a screamer overnight, largely on the back of some pretty dismal Chinese September trade figures. Forecasts had been for an increase in local currency terms of exports by 2.5% and imports by 5.5%. In the event the reading was a massive miss at -5.5% and +2.2%, respectively. If China really is slowing at the rate that it now appears to be, then all calculations with respect to global economic growth will need to be seriously revised down.
Old sceptics like myself have often questioned the longevity of the Chinese borrow-to-grow, grow-to-borrow model and the accumulated stock of bad and doubtful debts has been hanging over the growth story like a bad smell for a very long time. And yet time and time again we have all been proven to have been too early in calling the end of the cycle. Market moods seem to turn on a sixpence; look at some of the strategy pieces coming out of research departments. They can go from long-term bullish to long-term bearish and back again in a matter of weeks.
Market illiquidity adds to the volatility, which is more pronounced in an environment where carry alone pays no bills and trading revenues need to be maximised. We’ve looked at the prevalence of momentum trading in the past and its interplay with the liquidity gap.
At the end of the day there is only one question: have we finally reached the end of the bullish cycle and are we facing the much-vaunted sharp correction in asset prices? I still don’t think it’s game over in equities although rising bond yields would normally augur a correction in stock markets too. I might be wrong but I still believe in the “no alternative” story for stocks and until bond yields begin to outstrip dividends again I’m not sure it will change in the longer term. Sell-offs, therefore, remain better buying opportunities.
Marmite moment
Back to the UK where Unilever and Tesco are reported to be in a clinch over demanded price increases prompted by the precipitous fall in sterling. Sorry Mr. Unilever but I think you are wrong. Yes, prices will need to rise with the weaker pound but what seems to be a 10% increase across the board appears to be a bit fast and a bit simplistic.
It’s often hard for us to compare prices but one source which has bugged me for a very long time is the Levi’s website, where my beloved 501s are priced at US$51 but where I am billed – or would be if I were foolish enough to buy them that way – at £51.
Having moaned about a lack of inflation, everyone is now worried about it setting in again. I have been through two major inflation cycles and through a lifetime of sterling depreciation, and although the transition into inflation is very painful on the debt servicing front, it does also pay back most of the debt over time. For those who have borrowed entirely on their ability to meet the cost of interest, life could become pretty horrid. For those who have lent on that basis it won’t be much better. 2007/2008 should have taught some lessons; the betting has to be that it hasn’t. Holders of non-conforming UK RMBS might be advised to recalibrate their stress tests.
Meanwhile oil is sliding again and the Chinese figures won’t help. That will surely kick back into commodity prices and eventually into the commodity currencies. The Australian dollar has fallen back to US$0.7515 – Next stop US$0.7200? That all depends on whether the China story gathers momentum or whether one decent set of numbers changes the entire approach. The rest of the world needs a bad China story like it needs a hole in the head. Now it might just get it. Gold has slipped back to US$1,250 – maybe this would be a good time to strap some more on…