The Jury Remains Out

Published on: March 7th, 2019

The Federal Reserve has signalled a pivot towards a more accommodative interest rate policy and ending QT. This is potentially reflationary. But several weeks into their new regime and (beyond the narrow focus of US equities) the market jury remains out. I examine the mixed signals from equities, currencies, commodities, and bonds.

Comments

  • lD
    lance D.
    11 March 2019 @ 15:38
    hehehe is there anybody out there
    • lD
      lance D.
      11 March 2019 @ 15:41
      ask some questions plz i need to learn ... then i could stop eating fish finger sandwiches
    • JM
      Jason M.
      11 March 2019 @ 22:11
      Iance - you are absolutely right - how can there be such apathy during the current USD debate raging in markets and inside Julian's big brain?
    • lD
      lance D.
      13 March 2019 @ 15:08
      Agree its crackers .. Julian & Raoul have some big brains BUT you know what they say about blokes with big brains eh? (wink wink) Maybe folks are just trying to decipher the info (this is the case with me) All the B/S this QT/QE that Rate cuts Rate hikes pause. WOW the brain is close to cutting out, its near on impossible to have my mind store in an orderly manner. Just when i think i am on the verge of having it in some sort of order something comes along to scramble it all up for me be some thing on Twitter, TV,China saying they will keep currency stable, China Stimulus, Articles RE central banks buying gold hand over fist- only to see gold falls straight out of bed $ stays solid, markets rally etc... I'm just left thinking to myself wtf......(Thankfully i have a sense of humour) because its my sense of humour that allows me to 'square the circle' for the fed - it goes like this- I imagine i am the 'gaffer' at the Fed after months of QE/QT this BS that talk. I wake up in the middle of the night say to myself its enough is enough - 9am @ the office, demand every body in the meeting room. make clear theres to be no interrupting me! and at the end of my rant they get up calmly leave the room and go execute my instructions - which are- cut the fukn rates so theres a recession and then sit back and watch the economy recover. Pretty sure a strong economy in the future is all anybody wants? OR have i got this 'arse about tit' so much i get home to find the missus and kids have been kid knapped - bloody hell its just occurred to me i need a job at the Fed in order get some piece and quite. ANYWAYS hope folks can keep asking the question like Jason.M it really helps to see and read the more experienced asking question for........the Small opps... I'm mean the 'Big Brains to answer. Right GOOGLE is in my sell zone so I'm off to short it ( wonder how many dirty looks the the missus is going to give me this time next week that is how i mange risk - a dirty look = hold your nerve...dirty look followed immediately with an insult = Cut the position Immediately -and Dinner on the table = add to the position ...( I'm wasting away)
    • KJ
      Keith J.
      13 March 2019 @ 15:30
      It is surprisingly quiet on here. Perhaps everyone just wishing they had BTFD.
    • MW
      Marco W.
      14 March 2019 @ 06:54
      Julian's title "The Jury remains out" as well as the inside contents are simply marvellous and perfect. The report not only discussed the current market condition but also the market philosophy. I am speechless after reading so that I didn't ask questions. And I will just wait for further development as Julian suggested and not seek for certainty at this moment.
  • se
    scott e.
    13 March 2019 @ 18:12
    Julian I can see the Fed can't cut rates while tightening but with political pressures mounting, what would be the downside if they decided to end QT and cut rates fairly soon thereafter ?
  • JM
    Jason M.
    9 March 2019 @ 08:37
    Julian: In the Stanford speech tonight, Powell made it pretty clear (at least on my read) that he is nowhere near a rate cut and left door open to hikes by just using neutral language....his focus remained on QT ending later this year. Maybe there was a bit more detail on that but seemed like a lot of it was expected. I assume we'll get more detail on March 20th FOMC. If you mostly agree with the above, my question would be - Q1: Will QT fully ending be enough to tip the USD over later this year? 2nd Question: Q2: Is it correct to assume that if its not actually stopping in any way for, say, 6 more months, US and EMs aren't going to happy? (esp with the current state of the Euro). Tough question but you are the best man I know that can help on the interplay btw USD and Fed B/S. Thanks, Jason
    • JB
      Julian B. | Contributor
      11 March 2019 @ 19:15
      Hi Jason and sorry for the delay. You have correctly nailed the dilemma i.e. if the Fed continue hiking albeit after a pause and only slow but continue with QT (the talk is that they will reduce the run-off in half but continue the programme into Q2 next year) then how the hell do we get a lower $, which is so necessarily to global reflation? The simple answer is we won't and this current risk rally will falter yet again. PS. that's why my current tactical or short term bet. However, perversely if we do get that weakness, especially if it is accompanied by an acceleration lower in the economic data (my models are forecasting horrible manufacturing data) it actually makes me more bullish. Why? Well at that point, I believe the Fed will stop with the dovish talk and actually deliver dovish policy i.e. end QT, cut rates and even possibly deliver QE. That’s when I see the $ turning lower and we should get a true 2016 style reflationary risk rally. PS. That when you look for the next leg up in Treasury yields.
    • JM
      Jason M.
      11 March 2019 @ 21:39
      thanks Julian - I could see the US economy muddling through over the next few quarters at around 1.5% growth and this might not be enough to get a rate cut so soon after Powell was essentially embarrassed into stopping. Not an easy call, but I could see things in the US looking better after the comps get easier towards year-end. So here is another question - Q3: Is there any scenario where you see the Fed going with a QT(stop) to QE(start) without even touching rates? Just leaves rates where they are or even gives u a token Powell (cue inflation fighting face) hike in 4Q....but the real action is all in the Fed B/S??....after all that has been your assertion all along. (correctly) With Europe and Japan and China essentially abandoning balance sheet normalization, isn't the Fed better off going this route as they don't lose credibility (they are simply off the charts in normalization versus their peers) and its almost certainly a quicker path to a weaker USD...which might be required if EUR and/or RMB keep sliding. The "bond market QE rumor" on Bbberg today is essentially all about this question although it might be totally wrong-headed. If the rumor is actually right...the rally is justified (cough, cough) - esp for non-US cash flows. Wanted your thoughts. I believe strongly in your view that Feb B/S can move the international markets far more. I also believe that this slowdown is not "the big one" for the US and as such Powell should be trying to keep as much DOMESTIC ammo in his gunbelt (I think interest rate cuts probably are the biggest tool he'll have - especially if he somehow gets to 2.75-3.0%. Fed Funds before "the big one". Of course, this analysis might assume too Powell is politically neutral. If he just wants to get Trump re-elected he should cut rates hard I guess this year. Thanks again.
    • JB
      Julian B. | Contributor
      11 March 2019 @ 23:09
      Jason you may be right that we muddle through. Although, I would caution that given the excesses in housing/equity prices created by QE and Yellen's policy of Optimal Control achieving a soft-landing is rather hard. I firmly, believe that asset prices now dictate the economic cycle and not the other way around i.e. the tail wags the dog. Hence, if stocks and house prices languish too long (let alone fall) it sets off a vicious circle of faltering corporate spending, job losses, falling business/consumer confidence and ultimately a tightening of the credit cycle. That is why, I believe the Fed needs to ease and the sooner the better. In terms of how they do it, which is the core of your question. I believe that before we see renewed QE the Fed will at least start by cutting rates. Why not rely fully on QE as you suggest and save rate cuts for the big one? Well first off, the Fed is still struggling with the link between asset prices and the balance sheet. Yes they see the flow through in terms of relative movements but don't get the mechanics. Secondly, jumping straight into QE and driving asset prices higher in the current political environment with its focus on inequality probably isn't acceptable. So I see the sequence as ending QT, some rate cuts and then QE. PS. I believe ending QT should pressurise the $ and QE certainly will. But cutting rates and narrowing the rate differential to other currencies should also achieve the same outcome. Don't forget that the ECB is essentially powerless to match the Fed's cuts.