Rockefeller Treasury Services, Inc. Analytics | 29 of June

Posted 29 June, 2017

The “Draghi Effect” is exaggerated in the FX market. Currencies have moved farther than the differentials would call for. Compare the dollar index on the first page, near the low end of the 52-week range, with the 10-year, closer to the high end of the 52-week range. And see the chart showing the 2-year US vs. German Schatz yield. The German yield is rising, to be sure, but the euro is rising disproportionately more.


And if currencies moved more than the differentials call for, the rates themselves moved more than the comments call for. Bloomberg reports “The yield spread between U.S. and Canadian 10-year debt fell to 58 basis points on Wednesday, the lowest since October. Compared with German bunds, Treasuries offer the smallest yield pickup since November. On Thursday, the U.S.-U.K. 10-year yield differential, fell to 105 basis points, the smallest since February.”


Bloomberg reports the German Bund yield climbed the most since 2015. The 2-year Gilt reached the highest since June 2016 on Carney saying the BoE may need to begin removing stimulus. The Canadian 2-year rose over 1% for the first time since Jan 2015 when Poloz said the BoC could be considering higher rates. “Swaps trading suggests investors are see a roughly 70 percent chance of a rate hike at the bank’s July 12 rate decision, up from about 40 percent Tuesday.” See the Bloomberg chart. And that’s in the absence of any consideration of oil.


Beware the near-term—we often get a pullback right after an Event like this. It can be a combination of profit-taking and second thoughts, compounded this time by month-end, quarter-end and a major holiday in the US next Tuesday when markets are well and truly closed. That can be said only of Christmas and the Fourth of July. Plenty of market players will take a holiday on both Friday and Monday, making today the last full-volume trading day until next Wednesday. Note that historically, the first week of July is often a big one for FX.


As for second thoughts, why did Draghi say the market was misinterpreting him? We guess it was not the tapering part but rather the focus on inflation. Draghi re-emphasized that inflation is the primary ECB concern and it has still not shown itself to be durable and self-sustaining. Maybe some Germans whispered in his ear backstage. As for both Poloz and Carney, analysts were gobsmacked by hints that these central bankers would be considering rate hikes.


Consider the Bloomberg note that traders see a 70% chance of a BoC rate hike at the July 12 meeting. Really? We’d bet against that one. And consider the number of “if’s” in the Carney comments. Carney said the BoE’s tolerance for inflation is limited. “Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.” Carney was referring to spare capacity and the balance between growth and inflation. Three factors are topmost: “the extent to which weaker consumption growth is offset by other areas of demand such as business investment, wages and labor unit costs, and how the economy reacts to Brexit,” according to Bloomberg.


Several analysts have rushed to say neither the BoC nor BoE is actually going to be raising rates anytime soon, let alone next week or by year-end. And we will be lucky to get a hint of a suggestion of tapering at the Sept ECB policy meeting. In any case, even if the ECB does discuss tapering, actual tapering would not begin until well into 2018. Talk about “buy on the rumor.”


While the FX market has jumped the gun and the fixed income market has jumped the gun, too, in practice we can’t expect a dollar recovery once this has sunk in. It will be a whimper, not a bang.


For one thing, there is the long-standing anti-dollar bias arising from the twin deficits and the world’s annoyance at the US for its “extraordinary privilege” (being able to issue debt at low rates because it has the top reserve currency). This time it has an added push from the repulsive nature of the US president.


Ahead of a G20 meeting next week in Hamburg, German Chancellor Merkel said “The discord [among major countries] is obvious and it would be dishonest to paper over the conflict.” Russia and China will attend as well as the US. The agenda includes free trade, climate change and migration, all subjects on which Trump has an outdated, uneducated and mean view. Merkel said those trying to solve problems through isolation and protectionism are making a grave error. The Paris climate change accord is “irreversible and not negotiable”—and “we won’t wait until the last person on earth is convinced of the scientific basis for climate change.” As for China, Germany is thinking about defining strategically important industries and hinted China will be excluded.


Most of all, G20 needs to send a signal that they understand “their overarching responsibility for the world.” The FT calls it Merkel throwing down a gauntlet to Trump. We say Merkel just called Trump a jackass.


Finally, nothing is getting done under the Trump presidency. A limited travel ban, rolling back EPA and other regulations, and that’s about it. Unless the healthcare/tax bill gets passed, and it seems unlikely, next up is the budget and debt ceiling in September. Sensible people are afraid, very afraid, of another government shutdown.


While many traders will be taking tomorrow off to expand the July 4th holiday, the diligent will be at their desks—tomorrow we get eurozone flash inflation data and also US personal income and spending, with its imbedded inflation rate. After all, inflation or the absence of it is at the heart of this central bank debate. We also get US GDP today (forecast at a tepid 1.2%) and UK GDP tomorrow, but we’d bet the inflation data rules. Disappointment looms for anyone expecting vindication of the higher rate scenario.
Note to Readers: Next Tuesday is July 4, a national holiday in the US. All markets are closed and we will not publish any reports.

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03 July, 2017 16:00

← Rockefeller Treasury Services, Inc. Analytics | 3 of July

Late Friday the IMF released the most recent data on the composition of reserves, the exact right timing to ensure nobody notices the story. The dollar lost some share of total reserves, to 64.5% from 65.2% at end-December. This is not to say central banks bought fewer dollars—theybought more, from $5.50 trillion in Q4 to $5.71 trillion.

Rockefeller Treasury Services, Inc. Analytics | 3 of July

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27 June, 2017 15:30

Rockefeller Treasury Services, Inc. Analytics | 27 of June →

The single biggest question this week is whether Fed chief Yellen is going to get away with repeating that inflation and inflation expectations are almost irrelevant—the Fed is going to hike again this year on the thesis that full employment means inflation somewhere in the pipeline, even if we can’t see it yet.

Rockefeller Treasury Services, Inc. Analytics | 27 of June
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