Infinite Easing

Until “further progress” is made
On joblessness, Jay won’t be swayed
From infinite easing
Which stocks should find pleasing
Explaining how he will get paid

As well, one more time he inferred
That Congress was being absurd
By not passing bills
With plenty of frills
So fiscal relief can be spurred

We’re going to keep policy highly accommodative until the expansion is well down the tracks.”  This statement from Chairman Powell in yesterday’s post-meeting press conference pretty much says it all with respect to the Fed’s current collective mindset.  While the Fed left the policy rate unchanged, as universally expected, they did hint at the idea that additional QE is still being considered with a subtle change in the language of their statement.  Rather than explaining they will increase their holdings of Treasuries and mortgage-backed securities “at least at the current pace”, they now promise to do so by “at least $80 billion per month” in Treasuries and “at least $40 billion per month” in mortgages.  And they will do this until the economy reaches some still unknown level of unemployment alongside their average 2% inflation target.

What is even more interesting is that the Fed’s official economic forecasts were raised, as GDP growth is now forecast at 4.2% for 2021 and 3.2% for 2022, each of these being raised by 0.2% from their September forecasts.  At the same time, Unemployment is expected to fall to 5.0% in 2021 and 4.2% in 2022, again substantially better than September’s outlook of 5.5% and 4.6% respectively.  As to PCE Inflation, the forecasts were raised slightly, by 0.1% for both years, but remain below their 2% target.

Put it all together and you come away with a picture of the Fed feeling better about the economy overall, albeit with some major risks still in the shadows, but also prepared to, as Mario Draghi declared in 2012, “do whatever it takes” to achieve their still hazy target of full employment and average inflation of 2%.  For the equity bulls out there, this is exactly what they want to hear, more growth without tighter policy.  For dollar bears, this is also what they want to hear, a steady supply increase of dollars that need to wash through the market, driving the value of the dollar lower.  For the reflatonistas out there, those who are looking for a steeper yield curve, they took heart that the Fed did not extend the duration of their purchases, and clearly feel better about the more upbeat growth forecasts, but the ongoing lack of inflation, at least according to the Fed, means that the rationale for higher bond yields is not quite as clear.

After all, high growth with low inflation would not drive yields higher, especially in the current world with all that liquidity currently available.  And one other thing argues against much higher Treasury yields, the fact that the government cannot afford them.  With the debt/GDP ratio rising to 127% this year, and set to go higher based on the ongoing deficit spending, higher yields would soak up an ever increasing share of government revenues, thus crowding out spending on other things like the entitlement programs or defense, as well as all discretionary spending.  With this in mind, you can be sure the Fed is going to prevent yields from going very high at all, for a very long time.

Summing up, the last FOMC meeting of the year reconfirmed what we already knew, the Fed is not going to tighten monetary policy for many years to come.  For their sake, and ours, I sure hope inflation remains as tame as they forecast, because in the event it were to rise more sharply, it could become very uncomfortable at the Mariner Eccles Building.

In the meantime, this morning brings the last BOE rate decision of the year, with market expectations universal that no changes will be forthcoming.  That makes perfect sense given the ongoing uncertainty over Brexit, although this morning we heard from the EU’s top negotiator, Michel Barnier, that good progress has been made, with only the last stumbling blocks regarding fishing to be agreed.  However, in the event no trade deal is reached, the BOE will want to have as much ammunition as possible available to address what will almost certainly be some major market dislocations.  As I type, the pound is trading above 1.36 (+0.8% on the day) for the first time since April 2018 and shows no signs of breaking its recent trend.  I continue to believe that a successful Brexit negotiation is not fully priced in, so there is room for a jump if (when?) a deal is announced.

And that’s really it for the day, which has seen a continuation of the risk-on meme overall.  Looking at equity markets, Asia saw strength across the board (Nikkei +0.2%, Hang Seng +0.8%, Shanghai +1.1%), although Europe has not been quite as universally positive (DAX +0.8%, CAC +0.4%, FTSE 100 0.0%).  US futures markets are pointing higher again, with all three indices looking at 0.5%ish gains at this time.

The bond market is showing more of a mixed session with Treasuries off 2 ticks and the yield rising 0.7bps, while European bond markets have all rallied slightly, with yields declining across the board between 1 and 2 basis points. Again, if inflation is not coming to the US, and the Fed clearly believes that to be the case, the rationale for higher Treasury yields remains absent.

Commodity markets are feeling good this morning with gold continuing its recent run, +0.7%, while oil prices have edged up by 0.3%.  And finally, the dollar is on its heels vs. essentially all its counterparts this morning, in both G10 and EMG blocs.  Starting with the G10, NOK (+1.0%) is the leader, although AUD and NZD (+0.8% each) are benefitting from their commodity focus along with the dollar’s overall weakness.  In fact, the euro (+0.3%) is the laggard here, while even JPY (+0.4%) is rising despite the risk-on theme.  This simply shows you how strong dollar bearishness is, if it overcomes the typical yen weakness attendant to risk appetite.

In the emerging markets, it is also the commodity focused currencies that are leading the way, with ZAR (+0.9%) and CLP (+0.75%) on top of the leaderboard, but strong gains in RUB (+0.7%), BRL (+0.6%) and MXN (+0.5%) as well.  The CE4, have been a bit less buoyant, although all are stronger on the day.  But this is all of a piece, stronger commodity prices leading to a weaker dollar.

On the data front, I think we are in an asymmetric reaction function, where strong data will be ignored while weak data will become the rationale for further risk appetite.  This morning we see Initial Claims (exp 815K), Continuing Claims (5.7M), Housing Starts (1535K), Building Permits (1560K), and Philly Fed (20.0).  Yesterday saw a much weaker than expected Retail Sales outcome (-1.1%, -0.9% ex autos) although the PMI data was a bit better than expected.  But now that the Fed has essentially said they are on a course regardless of the data, with the only possible variation to be additional easing, data is secondary.  The dollar downtrend is firmly entrenched at this time, and while we will see reversals periodically, and the trend is not a collapse, there is no reason to believe it is going to end anytime soon.

Good luck and stay safe