The first thing I read this morning was a Bloomberg preview of Fed Chair Yellen’s speech today at 12:30. It was titled: Yellen Speech May Offer Little Clarity After Vagueness Paid Off.
I obviously have no beef with Bloomberg, I am not one to shoot the messenger. But I’m not sure that six months after the Fed’s first rate increase in 9 years that the vagueness is helping financial markets. Their continued uncertainty on the path toward further tightening has actually created a shit-ton of volatility in risk assets. Yes we’ve seen a 5% decline in the U.S. Dollar from the mid December FOMC meeting, which the FOMC can take a slight victory lap on. But the 10 year Treasury yield has dropped nearly 50 bps from 2.25%, now less than 50 bps from all time lows, a far cry from what you would expect from talking up tightening, even with a vague road-map.
When Yellen last spoke on May 27th, this was her less than specific commentary about the potential for near term rate increases:
“It’s appropriate — and I’ve said this in the past — for the Fed to gradually and cautiously increase our overnight interest rate over time,”
“Probably in the coming months such a move would be appropriate.”
Got it. Clear as mud. Given last week’s generally weak global manufacturing data, and Friday’s massive disappointment in May non-farm payrolls, and substantial downward revision to April and March in the U.S., in today’s speech, Ms. Yellen is likely to crank up the vagueness and rip off the knob.
The fact is the Federal Reserve has lost control of their message and with it their intent to normalize monetary policy. At some point the powers that be will need to tell it to us straight-up, or we will be subject to downward volatility shocks like we saw in the fall of 2014 after QE ended, or the Summer of 2015 when we saw a commodity implosion as a result of the rise of the U.S. dollar at the end of QE, and then again in January/February when diverging monetary policy of the U.S. and the rest of the world threatened the stability of years of crisis monetary policy that has kept a very fragile global economy dependent on very easy money.
Ms. Yellen and her cohorts must have had a decent feel for the weak economic data leading up to her May 27th speech that suggested a continued commitment to tighter monetary policy here in the U.S. in 2016, despite the epic rise of global sovereign debt that now has a negative yield the world over:
Negative Yield on Government Bonds on Earth
— Lawrence McDonald (@Convertbond) June 5, 2016
It’s been my view for a while now that the Federal Reserve has no real intent of normalizing interest rate policy anytime soon (given the state of the global economy) and the fragility of financial markets. They just want to tease it and get results without actually doing it. At least not in any aggressive way. I doubt today’s speech will do much to change that.
But Friday’s knee-jerk reaction lower in stocks after the weak jobs data suggests that bad news for our, and the global economy may start being taken as bad news for risk assets. All you have to do is look at the performance of European and Japanese equities since their sovereign debt has been submerged below the zero interest bound, with the Euro Stoxx 50 and the Nikkei in Japan both down about 20% from last summer’s 52 week highs.
This long term trend of the 10 year Treasury yield seems unlikely to reverse anytime soon: