The Week End Blog is back! And so are central banks. If you thought their toolkit was empty, guess again. The ECB neatly demonstrated that central bankers have become notoriously skilled in pulling rabbits out of a hat. Buying corporate bonds and an ingenious TLTRO scheme, which allows banks from the ECB at negative rates, were Draghi’s rabbits. You magician!
The #Draghi effect! Eurozone credit spreads tightening after #ECB announces it will buy corporate debt. https://t.co/NTADzR8mhp
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jeroen blokland (@jsblokland) March 14, 2016
The #Draghi effect! Eurozone credit spreads tightening after #ECB announces it will buy corporate debt. https://t.co/NTADzR8mhp
—jeroen blokland (@jsblokland) March 14, 2016
Far less magical, but not necessary less dovish, was Yellen’s speech on Fed policy. No change in rates, as expected, but a big dovish move in the dots. Instead of four, the FOMC now expects ‘just’ two rate hikes this year. The result, a major leg down in the USD. Isn’t that ironic? The guy firing bazookas on one side of the Atlantic, defeated by the girl ‘just taking it easy’ on the other side.
The trade weighted #USD dollar is down 1.5% since the #FOMC decision and updated dot plot yesterday. $DXY https://t.co/ciYR1O8EUt
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jeroen blokland (@jsblokland) March 17, 2016
The trade weighted #USD dollar is down 1.5% since the #FOMC decision and updated dot plot yesterday. $DXY https://t.co/ciYR1O8EUt
—jeroen blokland (@jsblokland) March 17, 2016
So, could the Fed be behind the curve? Well, the jury is still out on that. For sure, the inflation issue in the U.S. is dwindling. Core CPI is above average.
Behind the curve? #inflation https://t.co/nVqRtexUVJ
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jeroen blokland (@jsblokland) March 16, 2016
Behind the curve? #inflation https://t.co/nVqRtexUVJ
—jeroen blokland (@jsblokland) March 16, 2016
By the way, if you think the divergence in monetary policy automatically means the U.S. Dollar will start to strengthen again, you might be wrong. In previous Fed hiking-cyles (yes, we have entered one) the Dollar fell, on average.
For those betting on a stronger U.S. dollar, the odds are against you!
jeroenbloklandblog.com/2016/03/16/for… https://t.co/UJVzGk04lh
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jeroen blokland (@jsblokland) March 16, 2016
For those betting on a stronger U.S. dollar, the odds are against you! jeroenbloklandblog.com/2016/03/16/for… https://t.co/UJVzGk04lh
—jeroen blokland (@jsblokland) March 16, 2016
Emerging markets are probably busy building Yellen a statue , as they love the smell of a weaker U.S. dollar. Aided by rising commodities as well, emerging equity markets are actually outperforming.
Emerging markets, while fundamentally flawed, love a weaker #USD. #FOMC #Yellen https://t.co/VBvfyc6ZXE
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jeroen blokland (@jsblokland) March 17, 2016
Emerging markets, while fundamentally flawed, love a weaker #USD. #FOMC #Yellen https://t.co/VBvfyc6ZXE
—jeroen blokland (@jsblokland) March 17, 2016
Certainly, the case for an underweight in emerging markets is now less obvious. But the fundamentals still look pretty poor. The greenback will have to continue to weaken and commodity prices have to continue to rise to keep the EM rally alive.
Fundamentally, things still look pretty weak in EM. https://t.co/0NeSNcsmdB
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jeroen blokland (@jsblokland) March 14, 2016
Fundamentally, things still look pretty weak in EM. https://t.co/0NeSNcsmdB
—jeroen blokland (@jsblokland) March 14, 2016
And don’t forget about the growing emerging debt pile.
Emerging Market #debt accumulation in one chart! https://t.co/7fAh78vusm
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jeroen blokland (@jsblokland) March 15, 2016
Emerging Market #debt accumulation in one chart! https://t.co/7fAh78vusm
—jeroen blokland (@jsblokland) March 15, 2016
Something else. High Yield spreads have tightened a whopping (always liked that word) 170 basis points in just over a month. In part because of the significant rebound in oil prices, in part because investors wrongfully expected the world to end back in February. High yield offered and offers good value for money.
ICYMI! The global high yield spread has tightened a whopping 170 bps in just over a month. https://t.co/G3JeTndsrp
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jeroen blokland (@jsblokland) March 15, 2016
ICYMI! The global high yield spread has tightened a whopping 170 bps in just over a month. https://t.co/G3JeTndsrp
—jeroen blokland (@jsblokland) March 15, 2016
Finally, a ‘positive’ note before you slide into your weekend. If you get those economic numbers wrong most of the time, don’t worry. The people at the IMF, who have dedicated their lives to forecasting GDP growth, aren’t doing much better than you are. Forecasting is hard!
Forecasting #GDP growth is hard! https://t.co/dQPbhgPDxj
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jeroen blokland (@jsblokland) March 13, 2016
Forecasting #GDP growth is hard! https://t.co/dQPbhgPDxj
—jeroen blokland (@jsblokland) March 13, 2016