Everyone seems to be certain that rates are too low and assets are too high and the Fed is either clueless or malicious. For my part, I’m not young enough to think I know what’s going to happen in the future.
There is an unusually high volume of prognosticating going around at the moment. Everyone seems to be certain that rates are too low and assets are too high and the Fed is either clueless or malicious. For my part, I’m not young enough to think I know what’s going to happen in the future. My highest ambition is just to decipher what’s happening in the now. What I do know is that the Fed has got risk assets up against a wall. Can we survive it? Let’s see if some charts can help us figure it out.
In-the-know people are worried about the yen:
One US dollar now buys you 128 yen, up from 115 at the start of the year. That’s partly because the Bank of Japan has been buying unlimited quantities of JGBs from investors who then sell the yen they receive for dollars to buy higher-yielding Treasurys. The concern is that if the Japanese currency falls too much — 140? 150? — the BoJ will have to reverse that process, sending the yen higher and Treasurys lower. If Japan starts selling Treasurys at the same time that the Fed stops buying them, things could get ugly. I tend to think it’ll all work out fine, but I always think that. (Because it usually does!)
Cars vs. houses:
Everyone’s still worried about inflation, of course, and here’s the chart to watch: Used car prices (blue line) have been a big contributor to CPI, but the worst is presumably behind us. Rent prices (red line), however, show up with a lag, so the worst is still ahead of us. Can used car prices fall faster than used house prices rise? That may be the key to how aggressive the Fed gets with rate hikes and quantitative tightening.
The market expects the Fed to get aggressive:
As per this chart from @MacroAlf, the futures-implied terminal rate for Fed funds is up to 3.33%. Reminder: We’re still only at 0.50%. That’s a lot of hiking to come, but it’s coming for a good reason: Things are pretty good!
Things are pretty good:
The rise in 10-year yields (red line) has been commensurate with the positive trend in economic data (blue line), as @yardeni charts. This is what we want: higher rates because macro data is good and not because the Fed just wants higher rates. But Powell remains determined to make things less good, as per his comments yesterday: “It is appropriate in my view to be moving a little more quickly…I also think there’s something in the idea of front-end loading.”
Can the US economy take it?
The housing market likely can: There are only two months worth of supply on the market, the lowest on record.
Consumers can probably take it, too:
The US consumer is in fine fettle with unemployment near long-term lows as a percentage of the labor force. The bad news is that means the Fed may think it needs to force a bear market in risk assets to get us to stop spending.
In case you were under the mistaken impression we’re already in a bear market:
Nasdaq may be down 19% YTD, but animal spirits remain high enough that there are people willing to spend $100,000 on pixelated JPEGs of owls.
Someone even accidentally paid $720,000 for this one:
Whoever coded the bot that spotted the buyer’s mistake (240 ETH instead of 24 ETH?) earned a quick $540,000.
Moral of the story: Things are good, but if you really want to make it, you’ll have to spend all weekend hanging around in NFT discords and coding arbitrage bots.
Or you could just enjoy yourself.
I suggest the latter.
Either way, have a great weekend, ageless wonders.
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Andy Constan and host Alfonso Peccatiello take us on a deep dive of the widely-misunderstood financial plumbing behind the Fed's recent QT initiatives.
