Everybody into the pond, everybody out of the pond! The minutes of the FOMC’s last meeting on July 27 were released yesterday and some reading they made. The bit which had noses twitching was the observation that the labour market was developing “somewhat slower” and – in the beautifully opaque way in which these minutes tend to be worded – “several voters” found the case a further and early tightening of monetary policy “less compelling”.
Markets took this all to mean that the September tightening, a possibility which looked to be gaining in currency, has to be an absolute no-no. While the dollar was offered all day and began to trade back above ¥100.00 again, everybody was seemingly getting excited about not raising of rates before December.
I’m not at all sure. Anybody with half a brain – an increasingly rare commodity in financial markets – ought to have been able to work out that the meeting was on July 27 while the most recent payrolls report was not released until August 5. That showed the June release, the one in front of the Committee at the time, to be an aberration and the July numbers bounced right back.
It happens from time to time that the FOMC minutes are overtaken by events and this is, in my thinking, one of those.
I well remember when Janet Yellen began, in her classic Brooklyn drawl, to talk about “data dependency”. Although I couldn’t at the time think of any period when Fed policy had been anything else than data dependent, I’m sure I had not appreciated what the outcome would be.
Long-term policy aims were going to be traded in for the sort of month-by-month release-hopping which plagues markets and investors. The Fed was supposed to rise above the white noise of monthly stats, take a 20,000 foot view of the economy and leave the scrapping in the dust to lesser mortals. Yellen’s “data dependency” turned out to be another step in the decent of the FOMC from the clean air on Mount Olympus to the grime and pollution at the gates of Athens.
Analysts can pore over the minutes as much as they like, but in an environment where the Fed is tracking monthly data, the July minutes, three weeks on, have no more purpose than for wrapping fish and chips.
I can’t imagine that the moves in markets which were triggered by the minutes will last too long and if I were to be permitted under the new MAR rules to say this without the risk of being accused of making an investment recommendation, I would suggest that one trade against them. But I don’t want to run that risk, so I won’t.
Rant over.
On a slightly different note, I was talking to a senior market person on Tuesday who told me about one of his clients who had offered him a bond for sale back in March. In the words of my man it was a piece of dog’s doo-doo for which at a spread of 240bp he could find nothing but disdain.
He was on a call with said client at the beginning of this week, only to be told that he had been lifted in the position at a spread of 125bp. If the credit spread is supposed to reflect the fair return adjusted for the credit rating and hence the default probability, the credit standing on the name has to have either improved dramatically or buyers must have pickled their brains in formaldehyde. I am assured the credit hasn’t improved. A dog’s little package might cut like butter and it might even spread like butter but in no way does not mean that it will taste like butter too.
Five years ago the iTraxx Xover index was trading in the 780s; it is now at 312bp. At the same time the Main was at or around 175bp and it is now trading at 67bp. We know that the front-end spread compression is to some extent being driven by the ECB and its bond purchasing programme and it quite natural that investors who cannot compete with the central bank will creep up the credit curve – or is it down – in search of anything which might be mistaken for value.
I would venture to bet that if there was a fraction as much leverage in the market today as there was in 2007/2008, spreads would be a lot tighter or, put the other way around, without the leverage we had back then, spreads going into the global financial crisis would surely not have been anywhere near to as tight as they are now.
In the past, whenever markets looked to be getting ahead of themselves, especially over the summer months, clever strategists have gone back to looking at the 1987 chart and have checked for similarities in trading patterns. I have been through periods when the graph of the then market movements could be laid right on top of that of 1987 chart but, in the end, the copy-cat crash has always stubbornly failed to follow. The thing is, the charts tell us only what happened and not why.
Briefly digressing, I played bridge last night with a proud Oxford man. He read engineering. Inevitably the discussion as to the merits and demerits of Oxford versus Cambridge come up and he defends his alma mater with the words “You go to Cambridge to find out what but to Oxford to find out why”. I went to neither, but to the rather less prestigious but still excellent University of Manchester where, at the actual birthplace of the digital age, one was more likely to be encouraged to ask “Why not?”.
In the summer of 1987 – I happen to have been there – one could smell the fear. It was the same in 2008. I don’t smell fear now. I sense perplexity but I can’t smell the fear – yet.
It’s not about “This time it’s different” for that assumes the same components in a different timeframe. The components have changed and comparing is akin to pitching the world’s fastest operator of a table top calculator – there used to be championships – against a computer.
Monetary authorities have prompted, or dictated if you prefer, a paradigm shift and they will make sure, whatever the cost, of this not being proven to have been a big mistake. The Greenspan put has been replaced by the Yellen-Draghi-Kuroda-Carney call and woe betide those who ask either “How? or “Why?”. Isn’t it now all down to “Why not?”