Hang on the minutesYesterday was an odd trading session. Stocks started higher then sold off, not hugely, but still by the kind of level (-0.4%) that seems to generate furrowed brows and a change on tone from anchors on financial TV, as well as central banks doing hand-stretching exercises next to the ‘do something again’ button. 10-year US yields fell from 0.67% to 0.65%, rose to 0.69%, and then decided they had been right all along to close to at 0.66%; 20-year yields, however, spiked from 1.12% to over 1.18% after a poorly-received auction. The US Dollar, meanwhile, had the best day in two months, rising from 1.1940 to 1.1840 vs. EUR, for example, from 105 to 106 vs. JPY, and 0.7270 to 0.7170 vs. AUD, to give just three examples.
Pretty much everything revolved around the Fed’s July 28-29 minutes, which had been expected to open the door to the next phase in central-bank jigger-pokery, including either more QE, because one can never get enough, yield curve control, because it’s been such a roaring success everywhere, or negative rates, because why not?
In reality, however, what we saw was a consensus that the Fed has backed off from what had looked like an earlier readiness to make it even clearer than it already is that the bar for rates ever rising again has been lifted. This is now appropriate “at some point” rather than “at upcoming meetings”; and since then stocks have mostly gone up, surely cementing that thinking ahead of what was supposed to be the pivotal September 15-16 meeting. Of course, the Fed agreed that the virus is weighing heavily on the economy: is that some kind of surprise? Apparently it was. Which does make you feel many people either live in bubbles, or are gargling the bong water: and I am not just talking about central bankers in that regard.
Overall, the picture should be clear: the economy is in serious difficulty due to the virus; the Fed is not going to raise rates for a long, long time; and at some point it will make that clear with a new set of targets, goals, and strategy, which may well include factors not previously looked at that will take central banking further away from the purely financial and deeper into the realm of the real economy and of politics. That should be just as clear today as it was yesterday before the minutes – but apparently it wasn’t, and hence the market swings and roundabouts.
The one thing that caught my eye personally was the passage which said the Fed would have to sharpen its language around its asset purchases in terms of “fostering accommodative financial conditions and supporting economic recovery.” One can read that lots of ways; but to this reader it says:
“We have to explain to the public far better why we are buying the assets of cash-rich mega companies that does nothing to help struggling SMEs and those on Main Street who can’t borrow, and which also exacerbates both irrevocable market and real economy distortions, such as it is.”