This Could Really Happen

I’m going to start off by repeating that I continue to believe that global interest rates have bottomed and that the post UK vote referendum was the final blow off. I say this again because more evidence continues to build of the logistical and credibility limits the BoJ and ECB (the current center’s of monetary insanity) are reaching in their QE programs. The 10 yr JGB yield closed overnight at its least negative in 6 months at just -.015%. The 20 yr yield was up a sharp 5.5 bps to also a 6 month high at .44%. The selloff is spilling over into Europe after Europe’s Draghi driven selloff yesterday. The German 10 yr yield is up to its ‘highest’ level in 7 weeks. Also of importance, the 10 yr Gilt yield has gotten back all of what it lost since the BoE announced another round of QE. It was .80% on the Wednesday before Mark Carney put his Superman costume on. This is all dragging the US 10 yr yield up to 1.63% which matches the highest since June. We are all one bubblicious bond market now (the biggest financial bubble we’ve ever seen) and hold onto your hat if this bubble is beginning to shed air which I believe it is.

The big news today (behind much of the selloff in US equities) is that voting member Eric Rosengren, historically a dove, repeated his desire (was hawkish two weeks ago) for a rate hike notwithstanding the soft data over the past week.

“A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery…Underlying domestic strength is likely to be sufficient to engender continued improvement…Modest increases in wages and salaries seem to me consistent with tightness in labor markets beginning to appear more strongly in the wage data.”

Bottom line, this is important because here we have is a voting member, a dove and someone that is calling for a rate hike even after the recent string of weak economic data. Bond yields spiked on the headlines. The US 10 yr yield in particular is up to 1.67%. It closed at 1.75% the day of the UK vote before the results came out. The 2 yr at .79% is not priced for a hike and the US stock market is certainly not.

And speaking of the Fed. What do we make of Fed Governor Lael Brainard’s quickly scheduled Monday speech at 1:15pm on the US economy and monetary policy? Considering she is such a dove it of course has raised eyebrows as to why the last minute speech right before the Fed’s quite period is installed before the next meeting. After all it was on July 25^th when the NY Times ran a story with this:

“Lael Brainard, donning a global lens, champions low rates at Fed.” “Ms. Brainard has become the leading voice among Fed officials for a concern widely shared among left-leaning economists: that the central bank will raise rates too quickly, potentially stifling economic growth.”

I’d be shocked if she all of a sudden changed her dovish mind in light of the recent weak economic data and also risks a large market selloff right before the election that she is publicly involved in.

And finally, Federal Reserve Governor and thus voting member Daniel Tarullo was very wishy, washy on CNBC. He acknowledges mediocre data but also said that “no one should focus on particular pieces of data.” He said he’s in the “show me” camp but he said he “wouldn’t foreclose on the possibility of a rate hike this year.” He also said “I don’t think anybody knows where full employment is” and wants to see “actual evidence that inflation will rise.” The core rate of CPI above 2% for 9 straight months is apparently not something he looks at but instead is stuck on PCE.

Bottom line, Tarullo committed to nothing and certainly didn’t tilt toward a hike like Rosengren and Williams did but also he didn’t rule it out. He doesn’t seem one to have much conviction on anything and thus may just go along with the crowd in September. In the meantime, yields in Europe and the US are at the highs of the day. The German 10 yr bund yield in particular is back to zero, up a sharp 7 bps.

Bottom Line:

Rate hike odds for September are at 32% vs 22% on Wednesday and vs the same 32% last Friday before the ISM services release.