Games that people play
Abraham George Macro Musings
Last week’s inflation report clearly changed the market build-up towards higher levels. The market appears to have made up its mind on the Fed hiking by a full point in its FOMC minutes on 21 Sep 2022.
The ten-year yields almost traded to the June high of 3.5%. In June that was a big issue as it put pressure on global interest rates that many could not cope with. Italian yields ran up to 4.28% and Spanish yields to 3.21%. Those were dangerous territories and the ECB quickly sensed the contagion impact that it could create.
They quickly responded with an emergency meeting. They quickly designed a new plan to defend against the rise of these weaker eurozone sovereign debt yields. It was another QE plan with a different name (transmission protection instrument). As my friend pointed out QE is like the song “Hotel California”: you can check out but you cannot leave.
While the Spanish and Italian bonds are trading lower than the June levels, they are in areas where the ECB is actively managing it. The level of the US 10-year has also put tremendous pressure on the Japanese bond yields. Through their ‘yield curve control’ program the BOJ is forced to print Yen and buy an unlimited amount of JGBs to push bond prices higher and yields lower.
While we think the US Fed is busy tightening monetary policy and applying QT the other two major central banks are busy pumping liquidity into the global economy.
The major central banks are walking on eggshells. Every 100 points the Fed increases rates they are almost adding $300 bln to an already growing US deficit.
Though the Fed has been hiking rates its bigger role has been to manage its narrative through ‘tough talk’. They are fully aware that they cannot raise rates to the level of inflation. Instead, their goal and efforts have been to manipulate consumer and business behaviors. It is just the opposite of what they were trying to do during the GFC and the pandemic when they were trying to promote spending, investing, and hiring. Now they want to stop spending, investing, and hiring.
To this effect, the corporate sector is also trying to help the Fed. On the 15th Sep FedEx, the biggest logistics company in the world decided to pre-announce its earnings. It wasn’t good. The CEO of FedEx gave a very gloomy outlook on CNBC and went on to say that he expects a worldwide recession.
All this is being made a few days ahead of the Fed meeting. Actually, when is FedEx scheduled to announce earnings formally? It is after the Fed decision.
Is FedEx giving some cover to Fed to under-deliver on interest rates? We will know soon. In July, Walmart provided a business update three weeks before their scheduled Q2 earnings. They warned about inflation, lower margins, and a steep EPS decline.
This also came two days ahead of the Fed meeting. While the Fed followed up with the expected hike of 75 basis points, Powell surprised the markets with a couple of intentional statements. Powell said they had reached a neutral level on rates and they would no longer provide any further guidance on rates but their actions will be more data-dependent.
In two weeks the markets rallied by 10%. By the way, Walmart positively surprised on earnings three weeks after making those gloomy predictions.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.