Last week I thought the rise in long-term interest 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% , mortgages from 3.75% close to 4.25%.
News media 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?
Friday’s payroll report added little to damage already in place by Wednesday. A nice gain in jobs, heavy with poor ones (57,000 in “leisure 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 quantitative easing (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 U.S. 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 U.S. rates, and the advent of European Central Bank (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: U.S. 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%.
Has anything changed since last year?
Everybody drop your phones and ask the long-term question. Has anything changed since last year?
In these real economies? I suppose the U.S. economy is closer to full employment, whatever that means. Maybe employers will pay up, maybe not. Europe’s gain has been the U.S.’ 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.
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Count me with the old-fashioned, slow-shuffling zombies (newspapers hidden in those clothes).
10-year T-note this week, way up before Friday’s payroll data:
10-year T-note 30 months back. Taper Tantrum, overshot decline, and rebound:
German 10-year, one year back. Its move and counter-move more extreme than ours.
The euro. No big reversal upward, but in the deepest part of the rate decline, many forecasters saw the euro falling to its all-time low near $0.90. To trigger the bond reversal, all the euro had to do was stop falling.
The 2-year T-note is the Fed-predictor. Chart is two years back. Bonds are rocketing all over the place, but the 2-year has correctly called for little Fed action ahead.
Note the last little up-tick in Friday’s payroll report. If that’s a trend-changer reinforced in the next couple of reports, the Fed will act, and we’ll begin to hear the dreaded, “behind the curve.” I still think global pressure will cap U.S. incomes.
The Atlanta Fed’s GDP model is still not the least bit impressed:
We would not be complete without a comment on Greece. There is no deal because one is not possible. Never has been. Greece cannot commit its newborn children to lives in servitude paying on bonds held by the ECB and IMF, nor can Germany accept writing off most of the debt (it isn’t owed to Germany, but the whole stupid managment of the euro is German mismanagement). Sooner or later, somebody is going to get cornered, and hello, drachma.
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