Friday Paper Charts
July 27th, 2023
I can’t believe how much slower this week has been than others. Perhaps the excitement about upcoming central bank meetings has made the time progress more slowly. There is enough philosophical content in the whole spectrum of how one experiences time. Sometimes it runs fast, while on other occasions, it doesn’t seem to move quickly enough. My short thought is that if one experiences something new or is intensely focused on the present, time, for some reason, just doesn’t seem to move that quickly. That explains maybe this week where back to back to back central bank meetings plus a few nights out just littered the calendar and therefore slowed things down. More on this topic soon!
This week also kept me busy with posting new articles:
ATW opined on some of the upcoming central bank meetings
“On bullshit” covered the subject in detail and gave some ideas about how to detect it.
“Inverse optimal control monetary policy” analysed the old theoretical Taylor rule framework and adapts it to today’s monetary policy and likely path forward.
My “FOMC Thoughts” was published after was is now perceived to be this cycle’s last rate hike.
The ECB meeting didn’t lead to any larger fireworks. La Madame L explicitly confirmed that the committee has an open mind for the September decision, which will be data-dependent, adding focus to Friday's CPI reports for France and Germany.
Overnight, the BoJ surprised markets with an adjustment to their YCC policy by effectively widening the band from 50 bps to now 1%. This was leaked in a Nikkei article yesterday which caused a swift U-turn in global markets.
Given JGB yields in 10-year maturities settled at 55 bps after hitting 57 bps, is there scope for bonds to suffer further and bring down global bonds with them? It will all depend on how successful they deem their operations to be in containing further JPY weaknesses. If this should not materialise, they might resort to using other tools and ultimately also use rate hikes as a last resort to bolster their currency. As a low-yielding currency, the JPY is often used as the funding leg for global speculators. Borrowing in JPY and buying higher-yielding currencies and corresponding assets proved to be a very successful strategy until now. This might dampen risk appetite stemming from those funding strategies going forward as some volatility is injected just as markets felt to have gotten the all-clear.
Overall, the search for the final hike and, therefore, likely peak in rates continues. On a relative scale, the US has front-loaded already quite a dovish turn compared to other developed central banks out there.
The relative pricing still seems somewhat overly optimistic, in my view. I find it hard to believe that a plausible scenario could unfold where the Fed is in easing mode while other central banks still tighten. The window for this is very short, and therefore much fragility has to be given to such a view. This underpins my somewhat bullish overall USD thesis in general.
Given that there is a theme building, are the charts confirming such a scenario forming? Let’s get straight to it.