Friday, June 26, 2015
Capital Markets Update
By Louis S. Barnes Friday, June 26th, 2015
Here at the turn of the year,
days getting shorter, time to look ahead — which I am reluctant to do, unable
to predict the future. But we can bracket probabilities, and apply a little
history. Seven wagers on the future follow below.
New economic data this week were
limited, but positive. Sales of existing homes in May rose 9.2% year-over-year,
and prices with them, up 7.9%. Personal income gained .5%, and spending surged
.9% (possibly suspect); and the core personal consumption expenditure deflator
(PCE, the Fed’s favorite measure of inflation) stayed at 1.2% year-over-year.
Only new orders for durable goods were tepid, up .5% for May but down 2.2%
year-over-year, clearly suppressed by the hot dollar.
The Bureau of Labor Statistics
has an odd protocol for releasing the all-important employment statistics each
month: the program calls for release on the first Friday each month, but often
delayed if the first day of a month falls on Friday. However, the BLS is
oblivious to holiday weekends, like next week: we’ll get June data next
Thursday, which in thin pre-holiday markets guarantees an explosive response to
a surprise in the data. Only the very brave should float a mortgage rate into
Thursday.
Which leads to the future. Which
is already here: the 10-year T-note today trades at 2.48%, up more than a
half-percent from last winter’s lows. Mortgages always follow 10s, which have
pushed vanilla 30-year loans with low fees to about 4.25%.
The only meaningful questions for
the rest of the year are versions of “How high is up?” How much of the
long-term rate jump in the last 90 days is front-running Fed liftoff? Or is the
bond market behind, just now catching up?
Then the painful branch of
inquiry: At what point will higher mortgage rates slow housing? And will that
pinch then constrain the Fed?
It has been so long since the Fed
tightened that the young have no feel for mechanics. From here forward, as the
Fed normalizes, think “yield curve.” Every day. The yield curve is the graphic
description of the spread between the Fed’s overnight cost of money and the
10-year. The two move together only by temporary accident, and changes in the
slope of spread are the best single guide to the future.
Historically, long-term rates do
front-run the Fed, rising before it begins a tightening cycle and then rising
through the cycle. The volatility in long-term rates in the up-cycle is
directly proportional to uncertainty about the speed of tightening and its
ultimate extent. Bet on this, first: most of the long-rate jump since March has
been a correction of an overdone drop, and bonds are just beginning to
anticipate the Fed.
Bet on this, second: the Fed is
coming. September is in the can unless economic data weaken a lot. The Fed will
not wait for inflation to rise to target, nor for further increases in incomes.
Third bet: volatility will be big because nobody including the Fed knows how
hard they’re coming. Their first marker: the reaction to liftoff. If
hysterical, they’ll cool it. If routine, they’ll proceed. No way to know in
advance, especially as bond-market capacity for self-deception is European in
extent (sidebar: this week’s pop in the 10-year tells me that Greece is off
market radar, an unspeakably silly exercise which will not stay the Fed’s
hand).
Fourth bet: bond-market
complacency at this moment is epic. The US economy appears self-sustaining. The
developed world is also heating — a reckoning someday for extreme central bank
rescues, but at the moment the rescues have traction.
Long-term rates must enjoy a
positive spread versus the cost of money during any economic expansion phase,
if only as a buffer to further tightening. The end of every tightening phase is
marked by an “inversion,” short rates over long, as bond investors bet on a
recession — hardly likely, now, although the Fed does always overshoot.
Fifth bet: mortgage rates are
going up with the Fed, tick for tick, overshooting and then falling back to the
Fed’s slope. Sixth: only the strongest housing markets will stay so through
next year. Seventh: after its second hike, mortgages 5.00%, the Fed’s life will
be very complicated. Lucky seven.
Friday, June 19, 2015
Capital Markets Update
By Louis S. Barnes June 19, 2015
Long-term rates have run up again, now to levels of last fall: mortgages are close to 4.25%, the 10-year T-note cresting Wednesday just under 2.50%. Today, 2.36%.
Possibly fatal stubbornness, but I think most of this up-lurch is a correction from overreaction last winter, not the threshold of a sustained swoop-up. That may come, but it will require sustained economic data at least as strong as this spring’s revival.
Beginning mid-fall last year, Europe appeared headed into deflation. The ECB would embark on QE, but its effectiveness was very much in doubt. Oil crashed, removing all fear of inflation, and a lot of us discounted its stimulus potential. QE in one form or another spread everywhere outside the US, producing a dollar rocket, which at minimum created buyers for US financial markets (stocks-up rates-down), stimulated all of the export-based economies overseas (that would be all of them), and undercut the US. The icing: the weird US winter slowdown.
All of that has now either reversed or stabilized. Rates up.
Maybe, maybe, maybe at last a genuine turn in the world economy, which will self-reinforce. But the odds are that the great charge of the central bank cavalry has only bought more time, and the deflationary pressures are all still in place, especially overseas — and above all, hyper-competition compressing wages.
In the last two weeks both the IMF and World Bank have downgraded their forecasts for global growth, the latter to just 2.7% for this year.
The aspect without precedent is the divergence between the US and the rest. This certainly would not be the first time the US did better than the rest, even the locomotive for the others. But the divergence among central banks is without precedent, all-out printing over there, and tightening beginning here.
The US is by far the world’s most adaptable economy. That, our greatest strength, can be cruel to our people, more so than political structures overseas can survive. Europe is having an impossible time calibrating its several labor forces to one currency. China is trying to change its engine without slowing the car, fearful that any downturn will expose the Party as the fraud that it is. The Emergings are all in similar soup.
US data has picked up, I think more than just a rebound from another odd winter. The NFIB survey of small business is an especially important indicator, and it has nearly normalized. There are flickers of rising incomes especially at the low end, although compressed incomes for the lower two-thirds of our people are our principal headwind. Defying our fabled flexibility: the runaway cost of health care, acting as an anti-productivity tax, and the same for higher education.
Still, the Fed has to come up from zero. Clue: the IMF is so worried about the effect of liftoff on the dollar, and its effects on the weak Emergings, that it asked the Fed to hold off until next year. The huge dollar rise last winter versus all of the others (or their devaluation versus us — all is relative) was in response to the fact of QE overseas but anticipation of Fed liftoff. QE elsewhere is not going to change much. But nobody knows the moment of Fed liftoff or the slope of increase beyond. Shoot, the Fed doesn’t know.
This liftoff process is going to last a long time, and we should expect BIG volatility in things like mortgage rates. Not just up, but up and down and up. Liftoff is a given, but the future slope of increases is not. Since the Fed is data-dependent — all of its forecasting models worse than useless, misleading — then so are we.
The world is going to stay in a low-rate era so long as competitive pressures cap inflation. In many places, central banks may have to QE-lean against deflation open-ended. However, mortgage rates can ricochet rapidly in the post-bust range, 3.50% to 5.50%. Even a careful, “crawling” Fed pace (Vice-Chair Fischer’s word) of increase in short-term rates will beget wild anticipation in long rates. One month thinking the Fed is coming hard (mortgages up) the next thinking it’s overdone (back down).
As we come out of a place we’ve never been before to a new place we’ve never been before, the bond market will have no bearings. Moving, but busted compass.
Long-term rates have run up again, now to levels of last fall: mortgages are close to 4.25%, the 10-year T-note cresting Wednesday just under 2.50%. Today, 2.36%.
Possibly fatal stubbornness, but I think most of this up-lurch is a correction from overreaction last winter, not the threshold of a sustained swoop-up. That may come, but it will require sustained economic data at least as strong as this spring’s revival.
Beginning mid-fall last year, Europe appeared headed into deflation. The ECB would embark on QE, but its effectiveness was very much in doubt. Oil crashed, removing all fear of inflation, and a lot of us discounted its stimulus potential. QE in one form or another spread everywhere outside the US, producing a dollar rocket, which at minimum created buyers for US financial markets (stocks-up rates-down), stimulated all of the export-based economies overseas (that would be all of them), and undercut the US. The icing: the weird US winter slowdown.
All of that has now either reversed or stabilized. Rates up.
Maybe, maybe, maybe at last a genuine turn in the world economy, which will self-reinforce. But the odds are that the great charge of the central bank cavalry has only bought more time, and the deflationary pressures are all still in place, especially overseas — and above all, hyper-competition compressing wages.
In the last two weeks both the IMF and World Bank have downgraded their forecasts for global growth, the latter to just 2.7% for this year.
The aspect without precedent is the divergence between the US and the rest. This certainly would not be the first time the US did better than the rest, even the locomotive for the others. But the divergence among central banks is without precedent, all-out printing over there, and tightening beginning here.
The US is by far the world’s most adaptable economy. That, our greatest strength, can be cruel to our people, more so than political structures overseas can survive. Europe is having an impossible time calibrating its several labor forces to one currency. China is trying to change its engine without slowing the car, fearful that any downturn will expose the Party as the fraud that it is. The Emergings are all in similar soup.
US data has picked up, I think more than just a rebound from another odd winter. The NFIB survey of small business is an especially important indicator, and it has nearly normalized. There are flickers of rising incomes especially at the low end, although compressed incomes for the lower two-thirds of our people are our principal headwind. Defying our fabled flexibility: the runaway cost of health care, acting as an anti-productivity tax, and the same for higher education.
Still, the Fed has to come up from zero. Clue: the IMF is so worried about the effect of liftoff on the dollar, and its effects on the weak Emergings, that it asked the Fed to hold off until next year. The huge dollar rise last winter versus all of the others (or their devaluation versus us — all is relative) was in response to the fact of QE overseas but anticipation of Fed liftoff. QE elsewhere is not going to change much. But nobody knows the moment of Fed liftoff or the slope of increase beyond. Shoot, the Fed doesn’t know.
This liftoff process is going to last a long time, and we should expect BIG volatility in things like mortgage rates. Not just up, but up and down and up. Liftoff is a given, but the future slope of increases is not. Since the Fed is data-dependent — all of its forecasting models worse than useless, misleading — then so are we.
The world is going to stay in a low-rate era so long as competitive pressures cap inflation. In many places, central banks may have to QE-lean against deflation open-ended. However, mortgage rates can ricochet rapidly in the post-bust range, 3.50% to 5.50%. Even a careful, “crawling” Fed pace (Vice-Chair Fischer’s word) of increase in short-term rates will beget wild anticipation in long rates. One month thinking the Fed is coming hard (mortgages up) the next thinking it’s overdone (back down).
As we come out of a place we’ve never been before to a new place we’ve never been before, the bond market will have no bearings. Moving, but busted compass.
Friday, June 12, 2015
Capital Markets Update
By Louis S. Barnes June 12, 2015
Long-term rates have run up again, now to levels of last fall: mortgages are close to 4.25%, the 10-year T-note cresting Wednesday just under 2.50%. Today, 2.36%.
Possibly fatal stubbornness, but I think most of this up-lurch is a correction from overreaction last winter, not the threshold of a sustained swoop-up. That may come, but it will require sustained economic data at least as strong as this spring’s revival.
Beginning mid-fall last year, Europe appeared headed into deflation. The ECB would embark on QE, but its effectiveness was very much in doubt. Oil crashed, removing all fear of inflation, and a lot of us discounted its stimulus potential. QE in one form or another spread everywhere outside the US, producing a dollar rocket, which at minimum created buyers for US financial markets (stocks-up rates-down), stimulated all of the export-based economies overseas (that would be all of them), and undercut the US. The icing: the weird US winter slowdown.
All of that has now either reversed or stabilized. Rates up.
Maybe, maybe, maybe at last a genuine turn in the world economy, which will self-reinforce. But the odds are that the great charge of the central bank cavalry has only bought more time, and the deflationary pressures are all still in place, especially overseas — and above all, hyper-competition compressing wages.
In the last two weeks both the IMF and World Bank have downgraded their forecasts for global growth, the latter to just 2.7% for this year.
The aspect without precedent is the divergence between the US and the rest. This certainly would not be the first time the US did better than the rest, even the locomotive for the others. But the divergence among central banks is without precedent, all-out printing over there, and tightening beginning here.
The US is by far the world’s most adaptable economy. That, our greatest strength, can be cruel to our people, more so than political structures overseas can survive. Europe is having an impossible time calibrating its several labor forces to one currency. China is trying to change its engine without slowing the car, fearful that any downturn will expose the Party as the fraud that it is. The Emergings are all in similar soup.
US data has picked up, I think more than just a rebound from another odd winter. The NFIB survey of small business is an especially important indicator, and it has nearly normalized. There are flickers of rising incomes especially at the low end, although compressed incomes for the lower two-thirds of our people are our principal headwind. Defying our fabled flexibility: the runaway cost of health care, acting as an anti-productivity tax, and the same for higher education.
Still, the Fed has to come up from zero. Clue: the IMF is so worried about the effect of liftoff on the dollar, and its effects on the weak Emergings, that it asked the Fed to hold off until next year. The huge dollar rise last winter versus all of the others (or their devaluation versus us — all is relative) was in response to the fact of QE overseas but anticipation of Fed liftoff. QE elsewhere is not going to change much. But nobody knows the moment of Fed liftoff or the slope of increase beyond. Shoot, the Fed doesn’t know.
This liftoff process is going to last a long time, and we should expect BIG volatility in things like mortgage rates. Not just up, but up and down and up. Liftoff is a given, but the future slope of increases is not. Since the Fed is data-dependent — all of its forecasting models worse than useless, misleading — then so are we.
The world is going to stay in a low-rate era so long as competitive pressures cap inflation. In many places, central banks may have to QE-lean against deflation open-ended. However, mortgage rates can ricochet rapidly in the post-bust range, 3.50% to 5.50%. Even a careful, “crawling” Fed pace (Vice-Chair Fischer’s word) of increase in short-term rates will beget wild anticipation in long rates. One month thinking the Fed is coming hard (mortgages up) the next thinking it’s overdone (back down).
As we come out of a place we’ve never been before to a new place we’ve never been before, the bond market will have no bearings. Moving, but busted compass.
Long-term rates have run up again, now to levels of last fall: mortgages are close to 4.25%, the 10-year T-note cresting Wednesday just under 2.50%. Today, 2.36%.
Possibly fatal stubbornness, but I think most of this up-lurch is a correction from overreaction last winter, not the threshold of a sustained swoop-up. That may come, but it will require sustained economic data at least as strong as this spring’s revival.
Beginning mid-fall last year, Europe appeared headed into deflation. The ECB would embark on QE, but its effectiveness was very much in doubt. Oil crashed, removing all fear of inflation, and a lot of us discounted its stimulus potential. QE in one form or another spread everywhere outside the US, producing a dollar rocket, which at minimum created buyers for US financial markets (stocks-up rates-down), stimulated all of the export-based economies overseas (that would be all of them), and undercut the US. The icing: the weird US winter slowdown.
All of that has now either reversed or stabilized. Rates up.
Maybe, maybe, maybe at last a genuine turn in the world economy, which will self-reinforce. But the odds are that the great charge of the central bank cavalry has only bought more time, and the deflationary pressures are all still in place, especially overseas — and above all, hyper-competition compressing wages.
In the last two weeks both the IMF and World Bank have downgraded their forecasts for global growth, the latter to just 2.7% for this year.
The aspect without precedent is the divergence between the US and the rest. This certainly would not be the first time the US did better than the rest, even the locomotive for the others. But the divergence among central banks is without precedent, all-out printing over there, and tightening beginning here.
The US is by far the world’s most adaptable economy. That, our greatest strength, can be cruel to our people, more so than political structures overseas can survive. Europe is having an impossible time calibrating its several labor forces to one currency. China is trying to change its engine without slowing the car, fearful that any downturn will expose the Party as the fraud that it is. The Emergings are all in similar soup.
US data has picked up, I think more than just a rebound from another odd winter. The NFIB survey of small business is an especially important indicator, and it has nearly normalized. There are flickers of rising incomes especially at the low end, although compressed incomes for the lower two-thirds of our people are our principal headwind. Defying our fabled flexibility: the runaway cost of health care, acting as an anti-productivity tax, and the same for higher education.
Still, the Fed has to come up from zero. Clue: the IMF is so worried about the effect of liftoff on the dollar, and its effects on the weak Emergings, that it asked the Fed to hold off until next year. The huge dollar rise last winter versus all of the others (or their devaluation versus us — all is relative) was in response to the fact of QE overseas but anticipation of Fed liftoff. QE elsewhere is not going to change much. But nobody knows the moment of Fed liftoff or the slope of increase beyond. Shoot, the Fed doesn’t know.
This liftoff process is going to last a long time, and we should expect BIG volatility in things like mortgage rates. Not just up, but up and down and up. Liftoff is a given, but the future slope of increases is not. Since the Fed is data-dependent — all of its forecasting models worse than useless, misleading — then so are we.
The world is going to stay in a low-rate era so long as competitive pressures cap inflation. In many places, central banks may have to QE-lean against deflation open-ended. However, mortgage rates can ricochet rapidly in the post-bust range, 3.50% to 5.50%. Even a careful, “crawling” Fed pace (Vice-Chair Fischer’s word) of increase in short-term rates will beget wild anticipation in long rates. One month thinking the Fed is coming hard (mortgages up) the next thinking it’s overdone (back down).
As we come out of a place we’ve never been before to a new place we’ve never been before, the bond market will have no bearings. Moving, but busted compass.
Friday, June 5, 2015
Capital Markets Update
By Louis S. Barnes June 5, 2015
Last week I thought the rise in long-term rates was overdone and had a chance to reverse. Oops. The jump in rates has continued, and with it deepening confusion. In just six weeks, the 10-year T-note has moved from 1.90% to 2.40% today, mortgages from 3.75% close to 4.25%.
News media today are desperate to find valid business models to replace newspapers and think-TV. Thus a mass move to competitive nano-second shouting, trying to match the attention span of the phone-addicted. How to convey emphasis, or events over time if every headline is hysterical, and the copy below twitter-bitted?
Today’s payroll report added little to damage already in place by Wednesday. A nice gain in jobs, heavy with poor ones (57,000 in “liesure and hospitality), and a minor up-tick in wages — 0.3% in May after 0.1% in April, year-over-year 2.6%. A couple more reports as adequate as this, and the Fed will lift off.
But that’s not the story. That’s just twitter-flicker. Go back, way back, to summer 2013, when Perfesser Bernanke announced the pending end to QE3. The Taper tantrum took the 10-year from the same lows as this past winter to 3.00%, and mortgages just short of 5.00%. From which rates slid in an elegant straight line to last winter’s lows. The twin puzzles throughout that slide: why, and how far down?
The first part turned out to be easy. There were plenty of bond buyers to fill in behind the Fed, and economic data in the US stayed soggy-ambiguous and deteriorated overseas. That simple calculus changed last fall, and I think we are all struggling to keep the change in mind now. Last fall the Fed began its hold-us-back chanting: liftoff and normalize… liftoff and normalize. Meanwhile every other central bank embarked on deeper versions of QE. That central bank mismatch has no precedent.
The immediate result of the mismatch was a massive global devaluation versus the dollar, pushing down US rates, and the advent of ECB QE encouraged wild over-buying of euro-denominated bonds. The whole affair was assisted by the collapse in oil which began last October, turning risk of inflation into risk of deflation. That pattern continued into February, assisted by lousy global economic data.
The end of the 16-month drop in global rates coincided with this reversal: US data was so bad that markets began to assume the Fed would hold off and then move slowly. An aggressive Fed was the reason for the strong dollar, which stopped rising. The fantastic devaluation has produced better numbers in Europe, buoyed the euro and eliminated nearby risk of deflation. The German 10-year in six weeks has gone from a panicked yield of 0.05% to an equally panicked 1.00% (intraday), today 0.85%.
Everybody drop your phones and ask the long-term question. Has anything changed since last year? In these real economies? I suppose the US economy is closer to full employment, whatever that means. Maybe employers will pay up, maybe not. Europe’s gain has been the US’ loss, zero sum. Oil will stay down. China and Germany are still deadly predators, generating deflation for all the others and completely indifferent.
I am a fan of the Fed, and this and the prior Chair, but it is having an awful time. Its forecasting models have not worked. Its six-month insistence on liftoff and normalizing toward a 4% overnight cost of money in a couple of years, in retrospect has been ridiculous and counter-productive. Vice Chair Stanley Fischer this week replaced “liftoff” with “crawling,” in an embarrassing reversal of his previously threatening stance.
The Fed’s difficulty does not signal incompetence; it marks the unprecedented situation afflicting world trading, currencies, and credit.
It looks to me as though a rate decline that should have stopped last fall sometime instead overshot, and we’re now back where we were.
Everyone has remarked on the rise in volatility, many blaming “illiquidity” caused by new regulation. Keep it simple: volatility is rising because the world is dependent on un-coordinated but hyper-active central banks, and markets are always illiquid when too many people try to get through a closing door at the same time.
Last week I thought the rise in long-term rates was overdone and had a chance to reverse. Oops. The jump in rates has continued, and with it deepening confusion. In just six weeks, the 10-year T-note has moved from 1.90% to 2.40% today, mortgages from 3.75% close to 4.25%.
News media today are desperate to find valid business models to replace newspapers and think-TV. Thus a mass move to competitive nano-second shouting, trying to match the attention span of the phone-addicted. How to convey emphasis, or events over time if every headline is hysterical, and the copy below twitter-bitted?
Today’s payroll report added little to damage already in place by Wednesday. A nice gain in jobs, heavy with poor ones (57,000 in “liesure and hospitality), and a minor up-tick in wages — 0.3% in May after 0.1% in April, year-over-year 2.6%. A couple more reports as adequate as this, and the Fed will lift off.
But that’s not the story. That’s just twitter-flicker. Go back, way back, to summer 2013, when Perfesser Bernanke announced the pending end to QE3. The Taper tantrum took the 10-year from the same lows as this past winter to 3.00%, and mortgages just short of 5.00%. From which rates slid in an elegant straight line to last winter’s lows. The twin puzzles throughout that slide: why, and how far down?
The first part turned out to be easy. There were plenty of bond buyers to fill in behind the Fed, and economic data in the US stayed soggy-ambiguous and deteriorated overseas. That simple calculus changed last fall, and I think we are all struggling to keep the change in mind now. Last fall the Fed began its hold-us-back chanting: liftoff and normalize… liftoff and normalize. Meanwhile every other central bank embarked on deeper versions of QE. That central bank mismatch has no precedent.
The immediate result of the mismatch was a massive global devaluation versus the dollar, pushing down US rates, and the advent of ECB QE encouraged wild over-buying of euro-denominated bonds. The whole affair was assisted by the collapse in oil which began last October, turning risk of inflation into risk of deflation. That pattern continued into February, assisted by lousy global economic data.
The end of the 16-month drop in global rates coincided with this reversal: US data was so bad that markets began to assume the Fed would hold off and then move slowly. An aggressive Fed was the reason for the strong dollar, which stopped rising. The fantastic devaluation has produced better numbers in Europe, buoyed the euro and eliminated nearby risk of deflation. The German 10-year in six weeks has gone from a panicked yield of 0.05% to an equally panicked 1.00% (intraday), today 0.85%.
Everybody drop your phones and ask the long-term question. Has anything changed since last year? In these real economies? I suppose the US economy is closer to full employment, whatever that means. Maybe employers will pay up, maybe not. Europe’s gain has been the US’ loss, zero sum. Oil will stay down. China and Germany are still deadly predators, generating deflation for all the others and completely indifferent.
I am a fan of the Fed, and this and the prior Chair, but it is having an awful time. Its forecasting models have not worked. Its six-month insistence on liftoff and normalizing toward a 4% overnight cost of money in a couple of years, in retrospect has been ridiculous and counter-productive. Vice Chair Stanley Fischer this week replaced “liftoff” with “crawling,” in an embarrassing reversal of his previously threatening stance.
The Fed’s difficulty does not signal incompetence; it marks the unprecedented situation afflicting world trading, currencies, and credit.
It looks to me as though a rate decline that should have stopped last fall sometime instead overshot, and we’re now back where we were.
Everyone has remarked on the rise in volatility, many blaming “illiquidity” caused by new regulation. Keep it simple: volatility is rising because the world is dependent on un-coordinated but hyper-active central banks, and markets are always illiquid when too many people try to get through a closing door at the same time.
Subscribe to:
Comments (Atom)