Good morning, aloha and greetings, fellow market wizards
and welcome back our founder, mentor, guide, spiritual guru, wellness adviser etc etc, Izzy Kaminska
Howdy. How’s your week been?
Have you been engaging in any funghi retrieval?
my personal hygiene standards are very high, so no
Because I have, somewhat unsuccessfully. Terrible pickings at the moment, but hoping for something better than this later today:
actually, we have a few on our back lawn so you are welcome here anytime
Apparently (i was told yesterday) in france you can take your pickings to the chemist, and they will tell you which ones are safe and which ones are not.
I just depend on my dad.
unless he hates you in which case
It’s been very busy here because there’s so much going on in mkts to discuss, but less so in my other walk of life, the wine shop.
I’m watching a consumer slowdown in real time. I’m the living embodiment of ‘death of the high street’
death ON the high st
Too many mead inquiries? Tho given by the location of your shop I do think that gives some substance to the claim that this is a “Richsession”, with middle classes and up being hit most of all.
(Mead is very popular in Poland btw)
it’s not popular with me but let’s not go there again
people ask for the strangest things… Himalayan malbec
(long and tortuous investigation, revealed the person had misheard the name of a brand)
it was Amalayan malbec
butterscotch schnapps, a woman with a picture of some obscure local bellywash she’d had on holiday in Benidorm 5 yrs ago. Where could I find it? Answer: probably Benidorm is your best bet
as i said, they ask for the strangest things
you’d be a good wine merchant, Izzy
Well don;t know about that. Anyway. Looks like market wise we can all relax because….because Uncle Sam will save the day. US GDP has put in a stunner of a show in the third quarter. Here’s ING on yesterday’s number:
Right after an uneventful ECB announcement, US GDP figures beat estimates and confirmed the growth differential between the US and its key developed peers is significantly wide – and widening. As discussed in this analysis by our US economist, the GDP surge to an annualised 4.9% in 3Q was primarily due to consumer and government spending. We don’t expect such strong performance to be repeated in the fourth quarter, where we’re forecasting 1.5% growth. For now, the evidence of the strong growth momentum into the last part of the year is adding fuel to the higher-for-longer rate narrative.
The dollar’s reaction was quite muted: we don’t think this was due to any impact from the ECB, but rather to the 3Q US PCE figures, which came in lower than expected at 2.4%, and potentially jobless claims climbing back to 210k. There is also a building trend for the dollar to find less and less upward momentum after some strong releases. That is consistent with the overbought condition of the greenback and the notion that we might be close to the peak in US activity data optimism. In this sense, we could see data outside of the US (i.e. in the eurozone or in China) having a greater impact on global market dynamics as they have done in the past few weeks.
@johnk – Kew Gardens
wine merchant to the bourgeoisie
But back to US GDP. Janet Yellen for one made an astounding comment vis a vis this yesterday. Bloomberg had the headline as
Yellen Says Yield Surge Is Due to Strong Economy, Not Deficits
The actual quotes were:
“I don’t think much of that is connected” to the US budget deficit, Yellen said at an event in Bloomberg’s Washington office Thursday. “We’re seeing yields go up in most advanced countries.”
The increase in yields — which has taken benchmark Treasury rates to the highest levels since before the global financial crisis — is instead “largely a reflection of the resilience people are seeing in the economy,” she said.
“The economy is continuing to show tremendous robustness and that suggests that interest rates are likely to stay higher for longer,” she said.
So what do you reckon Julian? Stunning success show? Or Potemkin Village?
Janet Yellen attributing the rise in US yields of late to an economy that is “doing very well” ? Well
as Mandy Rice Davies once pointed out, ‘She would say that, wouldn’t she?’
The death of the US consumer has been predicted many times before. The resilience is astonishing.
The economy’s main growth engine — personal spending — jumped 4%, also the most since 2021.
But I bet none of them have the raw survival skills that come with mushroom foraging expertise
sometimes, my day job feels like that, rummaging about in the mud for not very much
It’s not just the consumer, though, in the US, 78% of companies reporting beat 3Q consensus, compared with 57% in Europe.
Pasquariello, my GS guy, (although I doubt he describes himself as such) wrote this week about how govt data seemed to be a lot better than corporate data but 3Q results from the S&P have given the latter some impetus and the overall performance of Big Tech largely justified the higher valuations. The crowded trade was crowded for a reason.
big tech delivered
So is the argument that high yields are a function of high growth potentially accurate here? The problem, I personally think, is that the bang from all the IRA spending is about to knock straight into the reality that the green transition doesn’t gel with ever higher rates.
higher yields are, I suspect, more a function of market trepidation about the extent of issuance next year, (remember that $1.78 TRN figure?) as well as intl buyers
(I’m thinking the Chinese and Russians here) looking to diversify. When DXY turns lower, I expect gold to rip because that’s the direction in whicch they are diversifying
Did you see Siemens Energy yesterday?
I saw the share price move but lacked the sufficient intellectual curiosity to explore why.
i was searching online for mead
You’d think Europe’s biggest windfarm producer would have seen its shares perk up in light of all this business from the green transition, but no:
It was down about 35 percent yesterday on news it was now negotiating with the German government for guarantees for its long-term projects.
that’s not very phlegmatic
Here’s an interesting chart someone posted in the Blind Spot Discord group about it:
So, I suspect, somebody told some porky pies when they argued that renewable energy was cost-competitive with fossil fuels. If it was, the above shouldn’t be happening.
In reality, many of these long term projects aren’t viable at 5% interest rates. (Which is why some are calling for central banks to introduce a two-tier rate market, with the idea that green projects get cheaper funding on the basis that they will ease supply-side constraints more quickly.)
(Tho JR would know all about this I understand since he has the paperwork to prove his expertise in ESG)
well, while floundering about my career, I started studying for a CFA in ESG
I got 3 modules in, realised the answer to every question is ‘what would Greta say?’
and lost the will to live
I gave up
Apparently, it’s becoming understood that the “S” is now going to stand for “Security”
Wang Yi in the US meeting Blinken, presumably to argue about what Biden and Xi will argue about next month.
The summit next month is very important for both presidents.
botyh of them need to look, well, erm, presidential and successful n stuff
Fentanyl is high on the agenda, apparently. The drug behind the opioid epidemic mostly comes from Mexico which I knew but I didnt realise most of it originates in China.
Ah, that’s because you don’t read the Blind Spot! Because we’ve been talking about the fentanyl triangle for a long time 🙂
lacking a subscription clearly informs my all-round ignorance all these years
Here’s just one of a few posts about it ????
(eek, that didn’t link very well)
it wasn’t so much a blind spot as full-on blinkers
Anyway, let’s expand on that equity point you raised earlier.
I’m going to enforce better compartmentalization for the purposes of a streamlined transcript: DIVIDER
(delete everything I type?)
No – just an intro to segue into Treasury talk
(ive been streamlined that before)
so… looks like the equity markets aren’t buying the US growth story. S&P 500 is continuing its downward trend, as is the NASDAQ and the DJIA.
Here’s a good little round up from UBS on the earnings performance to date:
A combination of disappointing mega-cap tech earnings, weaker guidance,
and elevated bond yields has weighted on equities. The decline has been
fairly broad-based with nearly 64% of S&P 500 constituents falling since
last Friday. Since last Friday’s US equity market close, the S&P 500 has fallen
2.1% and the tech-heavy Nasdaq has declined 2.9%. The S&P 500 index
has now dropped by almost 9% since its July peak.
• The average week-to-date move for the “Magnificent Seven”
was –4.9% since last Friday. The “Magnificent Seven” account for
some of the heaviest-weighted constituents within the S&P 500 index,
and their earnings announcements this week have been mixed. Among
these seven constituents, Alphabet posted the largest drop in the S&P
500 (–9.7% week-to-date), as markets responded to its management’s
comments about unpredictable customer spending intentions. Concerns
over similar pressures flowing through to other companies weighed
on many S&P 500 stocks. Meanwhile, reaction to Microsoft’s earnings
release was strong, making it among the top 10 gainers on Wednesday
(+3.1%) following its quarterly report, which showed solid beats, led by
upside to revenues and margins, expense control, market share gains
in its cloud business, and strong bookings. Meta’s earnings were better
than analysts’ expectations, but the stock declined Thursday (–3.7%)
after management guided below analysts’ expectations for 2024. Post
Thursday’s close, Amazon reported an earnings beat, but questions
were raised about the outlook for corporate spending on cloud services,
as well as consumer spending within online stores (–0.5% in after-hours
On the yield discussion I thought this comment from Mark Haefele and team in the same note was bang on, note the bit I’m emphasizing:
In our view, the outlook for Treasury yields will ultimately depend on the
growth trajectory of the US economy. Much of the momentum behind
the rapid increase in Treasury yields has been due to technical factors that
should abate. Notably, the Federal Reserve’s shift from quantitative easing
to quantitative tightening has removed a significant source of buying,
while issuance is trending higher due to the increasing US budget deficit.
However, if this trend were to persist, we would expect action from the
Fed to preserve financial stability by ensuring the proper functioning of the
Treasury market. As a result, we expect economic fundamentals to reassert
themselves. Regardless of whether the landing is ultimately hard or soft, we
think US and global economic activity will slow and inflation will moderate
over the next year—boosting demand for high-quality bonds.
“Proper functioning of the Treasury market” – clock that?
It’s a great idea. But it will never catch on. Whatever will they think of next?
Markets are still adjusting to higher yields. That’s a process and not an event. After fifteen years of financial repression, it’s no surprise the recalibration of mkts to the repricing of money is a lengthy and turbulent procedure
And yet, looks like markets are also beginning to anticipate the return of the plunge protection team.
@johndc77 – there’s a lot of ignoble rot in my shop
Now, bear with us. Because it’s going to get a little WONKY.
going to? it already was
The UBS ref seems to me a mind meld with what cbankers are already talking about. And what I would say was already flagged by Standford’s Darrell Duffie at Jackson Hole in August.
The paper of note is this one:
is that the same piece I referenced the other day?
it gets a lot of traffic that piece
oh right our traffic. Lol
twice in 2 days – what are the chances?
The IT geeks at the KansasFed are probably having palpittations about an incoming denial of service attack. ????
But back to the point. Yes, I’ve talked about this on the Blind Spot a number of times already, but it is in my opinion the first step towards normalising the idea of what will soon become U.S. yield curve control under the guise of a Fed “market-function purchase program”.
denial opf plausibility
For the avoidance of any doubt. I’m going to repeat this very loudly and to the point.
type slowly because i cant read fast
What we are looking at here is the likely initiation of US YIELD CURVE CONTROL policy.
Here’s the key passage:
After investigating these implications, I discuss improvements in Treasury market structure and other measures that could increase the market’s intermediation capacity under stress. These include broader central clearing, all-to-all trade, post-trade transaction reporting, substituting the Supplementary Leverage Ratio rule with higher risk-based capital requirements, and official-sector market-function purchase programs.
It’s worth noting that Sweden’s Riksbank this week announced its intention to provide greater overnight liquidity access to CCPs. (kind of related, as they are having a really tought time at the moment.)
chinese communist parties?
Not the chinese variety
(And RIksbank also has announced this week that it will need some ridiculous amount of taxpayer money to plug its balance sheet hoel. But that’s another story)
But going back to the “market-function purchase program” specifically, Duffie cites a lot of other relevant work to support the argument that sometimes you have to do de facto QE even when rates are supposed to be going up.
And there is a precedent from 2020 as the below Fed paper points out (while admitting this turned in QE):
The most striking aspects of the market functioning purchases were their innovativeness
and their unprecedented speed and scale. In terms of speed and scale, the purchases quickly
reached over $100 billion per day and totaled over $2 trillion between March 13 and April 30 alone.
In terms of innovativeness, the Fed varied the pace and distribution of purchases based on
observable measures of market functioning, reflecting the particular motivation for the purchases.
It also adjusted the settlement timing of some MBS operations, allowing market participants to
quickly obtain cash for their MBS sales, reducing funding pressures in the market. The Fed also for
the first time purchased agency commercial mortgage-backed securities (CMBS) to support the
smooth functioning of this important market (Park, Gouny, and Liu, 2020).
that will go viral, for sure
There’s also Duffie’s original paper on it all here where he introduces the idea of fiscal buybacks:
Talk about quasi fiscal operating norms being established!
you speak fluent banker
It’s a curse. Trust me.
Anyway here he explains why “Market-function purchases” aren’t the same as QE. (Got it, DEFINITELY NOT QE)
nothing like it at all
While highly over-simplified for illustrative purposes, this example motivates the role
of market-function purchases, as distinct from quantitative easing. Even if dealers have
the capacity to keep markets relatively liquid, the market for government securities can
nevertheless be destabilized by fire sales.11 Many ultimate buyers may be unable or
reluctant to commit large amounts of capital on short notice. Price impacts could be
large enough to cause a further unwinding of levered positions, potentially leading to
an adverse feedback loop. As we have discussed, this seems to be roughly what
happened in the UK gilt market in late September 2022, when the Bank of England’s gilt
purchases stabilized the market.
oh, yes, it’s exactly the same
“An expectation of official-sector support for government securities markets under stress
could induce some investors to take additional leverage in normal times or could
reduce the impetus to improve the structural resilience of the market for government
And here’s how it connects to YCC:
ycc? young chinese communissts?
Yield curve control Julian!
ok, i’ve got this
When in doubt, always assume it’s a communist acronym 🙂
To implement open-market purchase operations, many central banks and fiscal
authorities conduct reverse auctions of a specified total quantity of a given security or
some specified sector of securities. In some jurisdictions, trades are negotiated
bilaterally with dealers. For example, with the ECB’s Pandemic Purchase Program, most
purchases were conducted bilaterally with dealers. In a reverse auction, purchases are
awarded to those bidders offering to sell at the highest yields (lowest prices). This
quantity-based auction approach has been used in the Fed’s Large-Scale Asset Purchase
(LSAP) programs and in its purchases of Treasuries in response to the situation in
March-April 2020. In an alternative price-based approach, a yield is announced and
designated market participants are given the right to sell at that yield. This can be done
on a full-allotment basis, as with “yield curve control,” which is the approach taken in
March 2020 by the Reserve Bank of Australia “to address market dislocations. The
Bank of Japan has conducted yield-curve control on a routine basis.
Which is another way of saying we will buy the securities from the dealers willing to accept the lowest bid first and fill the trade upwards from there. Or, we will announce our target yield and give everyone the chance to be filled at that rate
and what about the fiscal dimension?
And here’s the fiscal argument. Basically, Duffie argues in some circumstances it makes more sense for these sorts of “market-function” purchases to be conducted on the fiscal account rather than the central bank balance sheet, to help preserve the notion of central bank independence. A fiscal authority could alternatively indemnify the purchases against potential losses:
not the physical dimension
(no Olivia Newton John here!)
Related to the approach of having market-function purchases conducted directly on the fiscal account, a central bank can be indemnified by the fiscal authorities for the associated gains and losses. For example, when the Bank of England purchased gilts to
address severe market disruptions in September 2022,42 it was explicitly indemnified in advance by the UK government for the associated gains and losses, with the stated intent of supporting the independence of the central bank.
Indemnification, however, implies a degree of coordination between the fiscal and monetary authorities that could,
in some jurisdictions, cut against independence of the central bank. In the end, it may be difficult to avoid some degree of coordination. Whether or not indemnification by a
fiscal authority of market-function purchases by the central bank is useful or reliable may vary across jurisdictions. Tucker (2018) writes that “a degree of explicit cooperation and coordination is unavoidable if overall policy is to be coherent,” and
“Suspicions are more readily assuaged if the need for coordination with government has been countenanced and telegraphed in advance.” In some jurisdictions, indemnification related to asset purchases is implicit because profits and losses from central bank operations are remunerated to the fiscal account.”
Sorry for all the block quotes but they’re important for the sake of historical archive!
@helmholtz – yeah i suspect so
Heavy stuff right? But it all comes down to potato potataho type logic. When is QE not QE, and when is a cbank really independent and when is it not? There’s way more i can say about this, but i will leave it for blind spot newsletter. Or maybe do some sort of voice note.
There are at least three other key connected themes that are worth signposting (but which we won’t have time to go into today). The first is the question of LCLoR and have we reached it yet.
What’s LCLoR? Sounds like a zoomer acronym for some kind of comedic response
(am i with dario or Izzy here?)
Lowest Comfortable Level of Reserves which was the threshold that was penetrated in September 2019 and which caused the successive repo market flip out.
ah yes, we sort of mentioned this yesterday
(yes, cough cough)
Anyway there’s a good chance we’re approaching it now. And this, by the way, is why Im so obsessed with intraday liquidity and payments gridlocks and the return of Herstatt Risk. You can read about the Fed’s conclusions about what happened here:
As you can see here, intraday liquidity for managing payments is today a major driver of demand for a Lowest Comfortable Level of Reserves:
Which is a good point to bring in the ECB. Which has arguably been performing “Market-function purchase programs” since at least 2011.
Herstatt Risk? Plays left back for Dortmund?
ECB yesterday… holding borrowing costs at this level for long enough will make a “substantial contribution” to bringing consumer-price gains back to the 2% target.
Christine Lagarde said any discussion of when to cut interest rates is “totally premature.” As we wrote earlier on this week, I don’t think central banks really ever plan to get inflation back down to 2, something around 4% makes more sense in terms of inflating away the debt
but prepping the mkt for this is fraught with peril and misinterpretation and will be the most gradual and painstaking of policy shifts imaginable
Though inflation only works at inflating away the debt if it’s “surprise inflation”. Or as Helmholtz said, negative real rates are set by policy, which is controversial in an inflationary environment.
That said the argument to lift the target is now becoming very compelling. And it’s not just Jason Furman arguing this anymore.
Mohammed El Erian made a similar point at his book launch a couple of weeks ago, but he also stressed cbankers would be very unkeen to go ahead with it out of fear it looked like a desperate move.
Though what Lagarde also said, which made me raise my eyebrows a lot, when responding to the FT’s Martin Arnold question about central bank losses at the Riksbank:
“As a Eurosystem and as ECB we have one mission which is price stability. We do not have as a purpose to show profits or to cover losses. It will be actually wrong if our decisions were guided by our P&L accounts rather than MP purposes.”
Which i found quite extraordinary. And goes towards all teh jedi mindtricks about how “cbanks are different”
No time for details on that, but check out the latest Blind Spot newsletter as to why i think she’s wrong. And why we are in the domain of quasi fiscal operations and that means greater not lesser coordination with the fiscal authority. As per above.
I note ‘The Bank of Japan has conducted yield-curve control on a routine basis’
which explians why the yen is where it is – ie through 150
something we’ve discussed in this parish a few times of late
one outcome of the blowout US GDP number was further dollar strength… with delightful consequences for the top third of Japan’s 30 biggest companies who now reap an extra $10bn in aggregate revs from yen weakness.
A lot of Japan’s biggest companies are exporters and making hay from yield curve control
if i can mix my metaphors
The biggest beneficiary is Toyota, deriving Y45 billion of operating profit for every yen decrement against the dollar
Wow. That’s quite a stat.
Is Toyota btw still the preferred vehicle for initiating militant insurgencies?
yes, it;’s also the preferred mode of transport for Taliban executioners when they drive off to the local sports stadium to decapitate or lapidate someone to death for adultery
You can’t buy PR like that.
it would be a very interesting ad
would work on Kabul cable tv
something we’ve been discussing of late…
has been the relatively phlegmatic approach of global mkts to the execrescence of violence in the ME
i saw this superb piece by Clocktower group
Who are clocktower?
an alternative asset management platform in public and private mkts
they explain very cogently why
While the Hamas terrorist attack is unprecedented in scale, it pales in comparison to the existential risk that Israel faced from the 1948 Arab-Israel War, the Six-Day War in 1967, and the 1973 Yom Kippur War. As such, the two macro legends running for the hills – Jones and Dalio – have fallen into the trap of trading off of headlines. We would remind both that Israelis and Palestinians have been fighting the same fight for centuries.’
(they’re not right about everything because israel hasn’t existed for centuries)
one thing Clocktower are very good at articulating is how financial markets are totally amoral
they remind investors that they are operating – now – in a multipolar geopolitical environment.
‘As predicted by political science theory and historical record, multipolarity is indeed a fertile ground for military conflict, but for investors, a higher threat environment is not synonymous with a bear market in risk assets. In fact, the two multipolar environments of the past two centuries led to both significant bull markets in risk assets and technological breakouts on an unparalleled scale’
and here is the salient line
geopolitical risk premium is the derivative of actual geopolitical risk.
What that means is that the stabilization of conflict, even if at a high rate of casualties and military conflict, causes geopolitical risk premium embedded in related assets to collapse. The market becomes desensitized to the conflict and moves on.
WAR IS GOOD FOR THE STOCK MARKET
yes, that’s great publicity for the Blind Spot
advertisers will be flocking like swans to associate with that headline
Though, have you seen all those videos of zoomers worrying about the draft being reinstituted and saying there’s no way in hell they can fight as they’re all overweight or on meds?
and the buzz cuts
so i suspect that creates a market for the Terminator series
Clocktower’s view view is quite heretical. They believe that Israel is targeting north Gaza in order to show that it is doing “something.
Israel is reacting with domestic politics on its mind
Second, Israel does not have sufficient intelligence on which to act against regional enemies, namely Hezbollah and Iran. In fact, the operation in Gaza is designed to be dramatic precisely so that Israel can avoid taking any action against anyone else. It satisfies the domestic political desire for revenge without putting Israel at risk of a wider conflagration. The bottom line here is that the logic of a ground incursion into Gaza is so severely lacking, other than from the PR/political perspective, that we could even see Israel chose not to undertake it, as a military spokesperson recently suggested.
Iran and Hezbollah are unlikely to escalate – both too frightened to do so owing to retaliation from US and IDF respectively
The reality here is that neither Iran nor Hezbollah really care about the fate of Palestinians. If they cared, they would have done something about the plight of Palestinians over the past seventy years
Hamas is hoping that Israeli brutality will lead to widespread protest against governments in the region that have largely ignored the situation in Palestine. While Hamas would love to see such protest in Gulf states and Saudi Arabia, that is highly unlikely to happen given strong government satisfaction in these countries.
Hezbollah and Iran are likely to retaliate directly in one way or another, although Clocktower expect their retaliations to be largely designed for popular consumption at home, not for effect (sort of like Tehran’s reaction to Soleimani’s assassination).
The question for investors, however, is whether any of these would change the balance of power in the Middle East. We suspect the answer is no, for the time being. As such, most geopolitical risk premium is to be faded.
That sounds super interesting, and i will have to properly give it a read.
I think we are nearly out of time.
Just to say, more on the importance of cbank losses in my newsletter this week. But also, don’t forget to come back on Monday at 1030 am. And do spread the word. these sessions are always best when they’re interactive. And don’t be frightened to push back with comments.
Next monday I’m at a weird conference all day in Greenwich called the ARC forum.
I might send some sneaky pics your way
another weird conference. they seem to proliferate in your life
As the doting mother of a 6yr-old, how is Halloween prep going?
ah, very good! Trick or treating is big in my house.
Tho we live next door to some nuns, so i worry about upsetting them.
As the anti-Christ I’d be delighted to rub the nuns’ noses in it
so to speak
on that diabolistic note, bon weekend
Bon weekend, and happy mushroom picking 🙂