Unless inflation slows down aggressively, all these ''pivot'' attempts are only going to backfire through steeper curves, loosening financial conditions and most importantly hits to credibility.
So say we do go into Quadrant 1 on the "Forward-looking macro indicators". What exactly does it mean to go long Developed Markets vs. Emerging markets? Same question going short Value vs. Growth. You go long the latter & short the former?
Really appreciate the insight and your work, Alf. Two questions to ponder 1. What would this scenario look like for the US if other central banks did pivot but the fed did not. And 2. would the FED continue QT under this circumstance or be forced to pivot based on the answer to the first question.
Hi! That would send yield differentials higher and so USD/xxx higher too.
This might increase systemic risks (repo/credit blowups), which are the only credible events that might lead the Fed to re-think their policy aside from sharply dropping inflation.
So you took profits on Russell 2000 short on this push higher, what do you think further on Russell 2000, its still the most vulnerable of the others and still inflation is very high so why change of heart on this position? Shouldnt you be adding more at higher levels as the Fed just said that they are looking for credibility to be regained and last month as well, Powell made an oath-like promise that it would work.
Alfonso what do you think about TLTRO's terms redefined.: could the TLTRO funds currently parked at ECB used to buy euro govvies instead of offered for redemption at ECB? And in effect serve similar purpose/effects as U.S. Treasury twist operations = support euro gov nonds market? Appreciate your expert view.
What if they don't repay these funds but buy another asset - e.g. short term gov bonds - schatz instead? (asset for another asset swap). I can envision the banks could be motivated to enter such transaction based on current (expected) rates , low duration of schatz and probably also no regulatory obstacles. Your view?
Thank you very much Alf. Always spot on, well documented and pretty understandable. I’m a big fan. I was however wondering whether it’s fully fair to compare real rates today vs. the 90s? Isn’t the debt to gdb much higher today thus making a 100pb above neutral as restrictive for the economic actors as a 300bp back then ?
I always compare today's real rates relative (!) to r* and past real rates relative to r* back then, indeed.
As debt levels, demographics, productivity etc influence where the equilibrium real rates are, it doesn't make sense to take absolute yields as a yardstick but always to compare them to prevailing equilibrium rates.
Today's r* in Europe is around -50 bps, which means that if history is any guide the ECB should hike until real rates are at least +150/200 bps.
Thursday they told us +50 bps (200, maybe 250 bps nominal vs 2% inflation they hope to achieve) will be enough - I doubt it.
Great breakdown today! Swaps are a bit over my head still, but because of your teachings, I've been understanding them more as I've been curious. Seasonality Charts from Moore's Research from 1985 to 2017 shows that the DXY tends to go higher into November.
With the news events scheduled for next week and the tone of ECBs stance on monetary policy, We might just see continued downside movement in the EURO going into November. For now, sidelines for me. Incredible portfolio ROI btw...awesome stuff! 😎
And/or an article that describes how you've created this dashboard and your trade tracker.
I think part of the success of your method is the strict process, tracking and profit/loss criteria you follow. I think we'd all benefit greatly from learning about how you do this.
Remember all that excitement at the start of the month because the RBA only hiked 25bps instead of 50bp
Australia's sobering CPI inflation data:
Annual inflation jumped to 7.3% from 6.1% on the back of a monthly rate of 1.8% (above the consensus forecast of 1.6%).
The annual trimmed mean (core) inflation rate came in at 6.1%, well above the 5.6% consensus forecast.
Indeed!
Unless inflation slows down aggressively, all these ''pivot'' attempts are only going to backfire through steeper curves, loosening financial conditions and most importantly hits to credibility.
PPIs also exceeded expectations to the upside in Australia. It's not very good.
Not only Australia, also Italy, Germany, Japan, etc. Higher inflation everywhere
Why would you put more fuel on the inflationary fire? Inflation is still rising!
You have to rise rates higher and maintain them higher for a long time
*ITALY OCTOBER EU-HARMONIZED CPI RISES 4.0% M/M; EST 1.4% - BBG
*ITALY OCTOBER EU-HARMONIZED CPI RISES 12.8% Y/Y; EST 9.9%
GERMANY'S NRW OCT. CPI RISES 11% Y/Y (highest inflation since 1950s)
BBG *GERMANY'S NRW OCT. CPI RISES 1.2% M/M
*Well above Pan German CPI consensus for a 0.6% m/m and 10.1% y/y
JAPAN CORE CONSUMER PRICES UP +3.4% IN OCTOBER (highest inflation increase in 33 years...)
Preaching to the choir 🙌
So say we do go into Quadrant 1 on the "Forward-looking macro indicators". What exactly does it mean to go long Developed Markets vs. Emerging markets? Same question going short Value vs. Growth. You go long the latter & short the former?
Not every transition between Quadrants is the same, but in principle DMs > EMs and growth > value.
Again, if the data and model point towards a durable transition I will update my thoughts with the set of info available than.
Excellent content Alf and it is much appreciated!
My pleasure, John!
Such a pleasure to get your thoughts, thanks Alf!
It is my pleasure!
Thank you Alf!
Welcome, Peyton!
Really appreciate the insight and your work, Alf. Two questions to ponder 1. What would this scenario look like for the US if other central banks did pivot but the fed did not. And 2. would the FED continue QT under this circumstance or be forced to pivot based on the answer to the first question.
Hi! That would send yield differentials higher and so USD/xxx higher too.
This might increase systemic risks (repo/credit blowups), which are the only credible events that might lead the Fed to re-think their policy aside from sharply dropping inflation.
Very articulate
Thanks, Stephen.
Where can I find the 1y1m OIS rates in real time? Is that a specific charting software you are using?
Thanks
I'll fix that by providing all these fixed income derivatives data to you guys.
Mark Nov 10, 2022 on your calendar :)
Brilliant, thanks!
So you took profits on Russell 2000 short on this push higher, what do you think further on Russell 2000, its still the most vulnerable of the others and still inflation is very high so why change of heart on this position? Shouldnt you be adding more at higher levels as the Fed just said that they are looking for credibility to be regained and last month as well, Powell made an oath-like promise that it would work.
Hi Mohamed!
I took profits because I use a systematic approach to risk management and trailing profits/losses. and my target was hit.
Medium term I still remain defensive, and waiting for better setups.
Alfonso what do you think about TLTRO's terms redefined.: could the TLTRO funds currently parked at ECB used to buy euro govvies instead of offered for redemption at ECB? And in effect serve similar purpose/effects as U.S. Treasury twist operations = support euro gov nonds market? Appreciate your expert view.
When banks repay TLTROs, they shrink their liabilities which means also their asset side must shrink.
In the best case that's just reserves parked at the ECB that disappear.
In the worst case that's bonds that now must be sold.
What if they don't repay these funds but buy another asset - e.g. short term gov bonds - schatz instead? (asset for another asset swap). I can envision the banks could be motivated to enter such transaction based on current (expected) rates , low duration of schatz and probably also no regulatory obstacles. Your view?
Hello everybody, can you tell me please what kind of money is paid as interest when a bank is engaged on a repo ??
Is it "reserve money" or "real money for economy"?
Thank you very much in advance.
It depends from the counterparty.
If the counterparty is a bank, it's money for banks (reserves).
Otherwise it's not.
Thank you very much Alf. Always spot on, well documented and pretty understandable. I’m a big fan. I was however wondering whether it’s fully fair to compare real rates today vs. the 90s? Isn’t the debt to gdb much higher today thus making a 100pb above neutral as restrictive for the economic actors as a 300bp back then ?
Hi Seb, and great comment!
I always compare today's real rates relative (!) to r* and past real rates relative to r* back then, indeed.
As debt levels, demographics, productivity etc influence where the equilibrium real rates are, it doesn't make sense to take absolute yields as a yardstick but always to compare them to prevailing equilibrium rates.
Today's r* in Europe is around -50 bps, which means that if history is any guide the ECB should hike until real rates are at least +150/200 bps.
Thursday they told us +50 bps (200, maybe 250 bps nominal vs 2% inflation they hope to achieve) will be enough - I doubt it.
Thanks for putting into context the recent move in the markets!
Glad you enjoyed it, Adam!
Great breakdown today! Swaps are a bit over my head still, but because of your teachings, I've been understanding them more as I've been curious. Seasonality Charts from Moore's Research from 1985 to 2017 shows that the DXY tends to go higher into November.
With the news events scheduled for next week and the tone of ECBs stance on monetary policy, We might just see continued downside movement in the EURO going into November. For now, sidelines for me. Incredible portfolio ROI btw...awesome stuff! 😎
''Swaps are a bit over my head still, but because of your teachings, I've been understanding them more as I've been curious''
This sentence makes me very happy :)
There are some odds that because of the huge debt levels much less tightening might flip over the table back to QE and ZIRP, maybe even deflation.
In a very leveraged system it's good practice to think in non-linear terms, yes.
Alf loved this one! Very good.
Is it possible to view the volatility adjusted market dashboard in real time?
Working on making it available :)
That would be terrific.
And/or an article that describes how you've created this dashboard and your trade tracker.
I think part of the success of your method is the strict process, tracking and profit/loss criteria you follow. I think we'd all benefit greatly from learning about how you do this.