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Saturday, 21 October 2017

The first move is less important than the last one

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  • Peters 475px June 2014

Yellen looked like a woman released from a huge burden

For a while this morning I felt sorely tempted not to mention at all the 25bp move by the Fed as it was such a “So what?” event but then, sleepless and sad bastard that I am, I sat in bed in the wee small hours and watched on my iPad a recording of the entire hour-and-a-quarter press conference given by Fed Chair Janet Yellen. Frankly there was nothing new and, more to the point, nothing unexpected in what she had to say with respect to the caution which the FOMC will be applying to further tightening, but she did look a lot more comfortable delivering her shtick now that the first move is finally out of the way.

The questions from the room were equally predictable and mainly followed the line of “…and when’s the next one please?” which she fended off with ease and elegance, not least of all when she put Jon Hilsenrath, chief economics correspondent of the Wall Street Journal firmly in his place with a bit of a “I don’t know and even if I did, I wouldn’t be telling you”.

Yellen looked like a woman released from a huge burden and, in my humble opinion, she gave an extremely good account of herself.

So there we are: one down and an unknown quantity to go over an unknown period.

As I suggested quite a long time back, the first move is pretty irrelevant and in the final analysis it’s all about the last one. On that front, we know as little this morning as we did yesterday. Yellen certainly didn’t offer support to those who back the “one quarter per quarter” tightening cycle theory but, then again, she didn’t rule it out either.

Policy speculation from FOMC meeting to FOMC meeting can only increase from here … groan.

So her utterances were taken by the Street to be dovish and stocks and other risk assets were off to the races. The S&P closed up 1.45% at 2,073.07 which took it straight back into positive territory year-to-date albeit only by 0.69%. The Dow got close but remains just under a half of one percent in the red.

There is much debate as to what effect on consumers a rise in the cost of money might have. To be honest, if the payments on a sub-prime car loan are 10% or more, I don’t think the 25bps will make much of a difference.

The cheap money has been made available to the guys at the top who have done nothing with it other than to enrich themselves through stock buy-backs.

Raising rates doesn’t make money go away; it simply directs in towards the lenders rather that the borrowers and many of those lenders, the simple savers, have borne the brunt of the zero interest rate policy. They too can recycle their interest earnings and if they do so into consumption, then those boardrooms might, horror of horrors, find themselves obliged to invest in manufacturing capacity rather than into feathering their own nests by pumping up the share price at the expense of the Fed’s balance sheet.

Those who will find themselves in trouble will above will be those who borrowed to consume and not to invest and top of the list, as usual, will be the emerging economies.

Brazil is but the tip of the iceberg. I continue to track the fate of the Angola 9.5% 11/25 bond which traded as low as 90, representing a loss of 10 price points in just a month from issuance.

It has rallied back to a mid-price of 92⅞ - it broke syndicate at close to 102.00 - but a yield of 10.75% demonstrates what a game of pinning the tail on the donkey emerging market sovereign debt can be.

I began my banking career in the midst of the 1970s Third World Debt Crisis and I can assure you that, with exception of the vocabulary, not all that much has changed in that the money is made by those first in and first out. At this point in time anyone who is dabbling in EM is neither.

Oil slid further but at US$35.46 pbb WTI is still above its intra-day low of US$34.53 which it hit on Monday.

Even Yellen admitted that it was now trading below where she had expected it to be but she reminded us all that in 12 months the basis effect on inflation will have faded, even if it remains stable for the period. Does anyone out there believe oil will still be at US$35.00 this time next year?

I heard Ken Rogoff on the wireless yesterday morning being asked what effect a rate hike might have on the US dollar. He admitted that he didn’t have a clue and came very close to articulating the thought that forecasting currencies was a mugs’ game. Well, after the immediate post-tightening spikes in both directions the greenback continued to fall against the yen but is today 1.5 cents stronger against the euro than it was before the announcement. Put that in your pipe and smoke it!

So now the Fed hike is out of the way we can look forward to the Spanish elections on Sunday and the effect the results will have on the markets on Monday.

It’s been an all-round bad tempered affair which culminated yesterday in Prime Minister Rajoy being punched in the face in public.

The outcome remains uncertain but Rajoy’s PP is visibly failing to capitalise on its economic success when faced with the allegations of corruption within the party.

As Argentina goes one way, Spain looks to be going the other. Clowns to the left of me, jokers to the right.

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