Mint – Blain’s Morning Porridge - September 9 2013
The numbers all go to 11. Right across the board. That’s one more than 10.”
A disappointingly weak US jobs number and minimal inflation signals - does that mean the taper will be delayed or that Treasuries are a screaming buy below 3%? The taper is a bit like the bogeyman that lives under the bed.. it scares the fervid imaginations of small children.
In the real world: when QE slows (probably this month) it will clearly have a real effect, but rate behaviours are normalising and how much bond yields rise depends on market perceptions of economic recovery as much as the Fed turning down the distortion level.
Were Friday’s payroll data a buy signal for Treasuries? A significant number of big firm strategists say US bonds could now correct and a rally all the way back to 2.25% on the basis the economy remains weak and low rates remain the long-term prognosis. (That would be a massive reversal of the biggest rout in recent bond market history!) The lack of an inflationary threat, and the failure of the supposedly booming US economy to generate substantial jobs growth should leave bonds less worried – goes the theory.
On the other hand, US corporates are sitting on massive cash piles and seeing profit generation hit boom-time levels. When does that translate into an expansionary hiring frenzy? Or has the economy used the last five years since the Lehman debacle to set a new efficiency frontier that simply excludes cheaper labour? How will the revolution in cheap power feed through to the economy?
And you can’t look at countries in isolation. The global economy is changing – this morning we’ve got Japan GDP up 4% on rising personal spending (who would have predicted that 2 years ago!) and exports higher. Plus Japan won the Olympics giving a massive leg-up to Abe goodwill. (Hence the Nikkei bounce!) And China looks less a threat on the back of decent inflation data.
Look at the whole picture and the global economy looks increasingly less fraught – unless of course you are an EM nation suddenly wondering where the money that was funding the deficit has gone. It’s gone back to western economies! (As the FT points out, more global investment cash has gone into Europe this summer than any time previously!)
The sheer volume of new issuance in the last two weeks by firms in the US and Europe strongly suggests corporates are building war chests and/or raising cash while rates remain low. The big bond story this week will be the multi-tranche, multi-billion Verizon deal… if it's priced cheap...it will work.
Perhaps, there should be a greater degree of "listen" to what the central bankers say - i.e., they repeatedly tell us they will hold rates at historically low levels for the long term and until growth is firmly established - but markets aren't convinced that forward guidance will keep rates low.... They much prefer to see the money... Show me the money.... Show me central banks continue to distort markets though QE, otherwise we follow our instincts. (Bottom line – folk ain’t sure they can trust central bankers.)
In the UK the 10-year gilt broke 3% last week on the back of stronger economic expectations – despite what Carney tells us. Even European bonds are lower on the possibility Draghi's forward guidance of low long-term rates will prove unsustainable. (And I can’t wait for the point when the Bundesbank is demanding higher euro rates as German growth leaps ahead of a general European recovery..) At some stage perhaps an accommodation between markets and central banks will be reached - but markets will always try to second guess central banks. Such is the way the invisible hand works.
My guess is bond markets are unlikely to rally much. Economic performance will be enhanced as policies shift from simple monetary stimulae like QE to more interventionist fiscal policies designed to increase investment and growth – I think I’m going to stick in the Boom camp till persuaded otherwise.
On the other hand (again), I note Professor Sir John Vickers is calling for bank capital to double and leverage levels to be further constrained. Marvellous.. reducing the amount of funding banks have available to lend is bound to stimulate economies (US Readers – Sarcasm Alert). Actually, I agree with Sir John… restricting bank lending ahead of a boom will open up the market to further competition to provide investment funds to corporates – taking economic growth out the hands of banks can only be a good thing! (Regular readers will know we’re working on a number of schemes to increase direct funding to SMEs including sponsorship of a new private placement market.)
Meanwhile, what about the sideshow called Italy? Looks like Berlusconi’s seat on the Senate Committee is vulnerable. If he loses it, then new elections. They are likely to give a very different result, but possibly as inconclusive as the last ones. The non-party 5-Star no longer shines as brightly… doing nothing achieved nothing.
Out of time..
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