“She’s the one they call Dr. Feelgood, she’s the one that makes ya feel alright.”
I know, Motley Crue is not for everybody and I’ve substituted She for He, but I lay out the lyrics just days before we hear from our monetary Dr who is not just an academic doctorate. Ben Bernanke and Alan Greenspan went to the same med school where markets LOVED the monetary drugs that prescribed over the years. We’ll see on Friday whether Yellen believes it’s time to reduce some of the dosage of medication.
Importantly the set up is gaining some more drama after two of the three most important members of the FOMC Troika seem to be laying the verbal ground work for a rate hike soon. We know Bill Dudley said last week “we are edging closer towards the point in time when it will be appropriate to raise rates further” and said “yeah, I think it is possible” when asked about September being a possibility. And over the weekend we have Vice Chair Stanley Fischer saying that employment is “close to most estimates of the full employment rate of unemployment” and core PCE inflation, at 1.6%, is within hailing distance of 2% – and the core CPI inflation rate is currently above 2%.” An important point is that Fischer is mentioning CPI which no other Fed official, including Yellen and Dudley, have done for a while. We know core CPI has been above 2% y/o/y for 9 straight months. He then said “So we are close to our targets.” If we take him at his words, a fed funds rate at .375% doesn’t equate to being “close to our targets,” aka, it’s time to raise rates again and soon. Why wait past September to hike if this is what he really feels?
Now we don’t know for sure if Mr. Dudley and Mr. Fischer alerted Mrs. Yellen to the content of their thoughts before they expressed them or if she even agrees with them but if Yellen concurs on Friday, the short term rate markets will have to adjust, along with many other markets, especially the brain washed equity markets. Fast forward to September 21st, if she agrees but doesn’t follow through with a September rate hike, whatever credibility the Fed has left will be gone for good. If she disagrees, then we have a key fracture in the halls of FOMC leadership. If she agrees and raises rates in September, we will have some fireworks AGAIN. Just as we did after QE1, QE2, QE3 ended and the first rate hike occurred. Buckle up. Motley Crue also sang a song called “She’s got the looks that kill.” Looks or words on August 26th and/or on September 21st could kill the post Brexit rally where markets are woefully unprepared for any interest rate surprises higher. Rate hike odds for September are up to 26%, where they were two weeks ago. The 2 yr note yield is up to .76%, just 2 bps from matching where it was the day of the UK vote.
The BoJ Governor Haruhiko Kuroda won’t admit defeat and seems to want to keep doubling down on his policy. In an interview published over the weekend he said there was a “sufficient chance” they do more in September and also said “The degree of negative rates introduced by European central banks is bigger than Japan. Technically there definitely is room for a further cut.” I’ll repeat a quote from Henny Sender of the FT that she gave back in February, “It is an odd world where the failure of unconventional monetary policies leads to more, rather than less, of the same.” The yen is weaker on the Kuroda comments and the Nikkei rallied by .3% but the Topix bank index was flat as the last thing banks need of course is a deeper trip into negative rates. The 10 yr JGB yield though is higher by 2 bps to -.06, the least negative in two weeks.