Pascale’s Perspective

  • Rates and the Limits of Monetary Policy

    Pascale’s Perspective

    November 13, 2019

    Fed Chair Powell’s congressional testimony was possibly overshadowed by other matters before Congress, but significant nonetheless. He reiterated the message from the last Fed meeting: the mid-cycle adjustment (3 rate cuts in 2019) is over, and the Fed is pausing. It was like a victory lap after stock markets hit record highs this week and he commented that the “economy remains consistent – moderate economic growth, a strong labor market”. The futures market is predicting “no cut” until well into 2020. So we seem to be finally at the “neutral rate” of about 1.50% (note that many Fed participants pegged the neutral rate to be about 3.50-3.75% in recent years). And the Fed stands ready to act if “developments emerge that cause a material reassessment”, so we are back to watching the data. Powell put his audience (Congress) on the spot. He mentioned that the present rate of deficit spending is “unsustainable” and that the USA’s debt burden will make it difficult for future Congress’ to actually engage in fiscal policy (stimulus, infrastructure) during the next downturn. He was basically saying that monetary policies have reached their limit (note that he shot down any talk of negative rates in the U.S.) and that fiscal policy is lagging and hamstrung by the budget deficit. However, Congress is busy trying to pass another stopgap 30-day funding bill to avoid a government shut-down before Thanksgiving.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • “Meet The New Yield Curve, Same as the Old Yield Curve”

    Pascale’s Perspective

    November 6, 2019

    Remember all of the recent doom and gloom predictions and market volatility when the yield curve inverted back in August? The 2 year bond yield drifted above the 10 year yield. This traditional “recession predictor” caused large selloffs in equity markets and ironically drove long term bond yields down, further aggravating the inversion. After last week’s Fed cut and other stimulus, the effect has been to push short term bond rates below the 10 year. Note that, the Fed’s recent repo market liquidity injections involve buying short term T bills, driving those yields lower. On the long end, the 10 year yield has been rising due to, wait for it, stop me if you’ve heard this before, anticipation of a trade deal between China and the US (if only they could decide where to meet and whether to call it “Phase 1”). Today’s 2 year T closed at 1.61% and the 10 year T closed at 1.82%. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Are We There Yet? Yes, But “There” Has Moved

    Pascale’s Perspective

    October 30, 2019

    Today’s Fed announcement and subsequent press conference by Chair Powell was a textbook case of well communicated policy. Basically, the Fed announced a 0.25% rate cut and indicated “that’s it” for this round of cuts. And markets didn’t freak out as they usually do when the punch bowl is being taken away. This “mid cycle adjustment” consisted of 3 rate cuts (July, September, October), the first rate cuts in a decade. Today’s Fed statement removed the key phrase “will act as appropriately to sustain the expansion” That may have roiled markets, but Fed Chair Powell then said the words that soothed markets worldwide: “I think we would need to see a really significant move up in inflation, before we would consider raising rates”. With worldwide inflation basically “stuck” at about 1.0-1.5% (well below the 2% Fed target), this basically provided a “ceiling” at today’s short term rate of 1.5%. It also helped pushed 2 year treasury bonds down to 1.60%, further “un-inverting” the yield curve back to a normal shape. Well done Mr. Powell – the 10 year closed at 1.78%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Going Negative?

    Pascale’s Perspective

    October 23, 2019

    The Fed Futures market indicates a 94% chance of a 0.25% rate cut next week. A December rate cut is also priced in to market expectations. 30 Day LIBOR is now 1.82% (appropriately since the Fed Funds target is now 1.75-2.00%). This means LIBOR should close the year out at 1.25%, leaving very little room for further cutting (assuming the U.S. does not “go negative” on rates). That assumption may be in question as a leading Fed economist analyzed 5 other central banks that instituted sub zero rates starting in 2012. The U.S. Fed held rates at near zero from 2008-2015. The paper suggested that the U.S. recovery would have benefited from negative interest rates, so the next recession may feature sub-zero in the U.S. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Negotiations Take Center Stage

    Pascale’s Perspective

    October 16, 2019

    Both Brexit and US/China trade talks have been sources of uncertainty all year. The news on each has fluctuated between positive and negative which has caused market volatility. This has weighed on bond markets and the Federal Reserve’s outlook (as evidenced by the recent Fed minutes). A case in point was last Friday’s high level US/China meeting and the subsequent announcement of progress towards a trade agreement. This optimism caused the 10 year T to spike about 10 bps and Fed futures rate cut probability dropped from 90% to 70%. This week, the US/China trade talk is less positive (more work needs to be done), while Brexit negotiations seem to be going well in advance of a critical deadline. The 10 year T is at 1.73% (after hitting a high of 1.79% this week), the futures market likelihood of a rate cut is back up to 90%. Inflation: Today’s NY Fed survey of the public’s expectation of long run inflation is at an all time low. It seems that people expect the “new normal” to last a while longer. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Minutes, Powell Remarks Reveal A Divided/Reluctant Fed, “Trick or Treat”

    Pascale’s Perspective

    October 9, 2019

    Highlights of today’s release of the September 2019 Fed meeting minutes: (1) Fed members are wary of futures markets that indicate multiple rate cuts in the next 6 months (note that the CME markets indicate an 93% chance of a rate cut on Halloween). They feel that market expectations may be “ahead” of reality. The danger is that if the Fed doesn’t match the expectation, major selloffs in stock markets will occur; (2) The Fed will start buying treasuries again in order to inject more liquidity into the system in the wake of the recent near meltdown in the overnight lending “repo” markets. However, don’t call it “QE (Quantitative Easing)”, Powell referred to it as an “organic” process that is more “data dependent”, (they will put out fires as needed); (3) Powell discussed “profound changes in the economy” and how existing metrics and reports may be inadequate; (4) Trade disputes are a huge concern, over 25 mentions of trade and tariffs in the meetings, members are concerned about the effect of tariffs on economic activity. US/China trade deal expectations are very low, expect another “kick the can down the road” announcement on Friday, more talks and a delay in the Oct 15 scheduled tariff increases, but no “major breakthrough”. Stay tuned.

  • Markets and the Fed Are “Data Driven” and the Engine Light is On

    Pascale’s Perspective

    October 2, 2019

    This week’s economic reports are pointing in the wrong direction: US Manufacturing dropped to the lowest reading in over 10 years, global trade is slowing to its weakest since 2009 (not helped by today’s tariff announcement between US and Europe), commodity prices and inflation remain below targets (remember the oil spike due to Saudi production interruption? Oil is down $10 a barrell in the last 2 weeks). The US economy’s main engines are manufacturing, service sector and consumers. Therefore, tomorrow’s service sector data (aka the ISM nonmanufacturing index) will be highly watched. The US consumer has remained strong lately. However, look for the Fed to cut rates for sure if weakness in those sectors is reported. The 10 year T hit a recent low of 1.59% today. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Markets Shrug off Politics, Concentrates on Trade

    Pascale’s Perspective

    September 25, 2019

    What a difference a day makes. Yesterday, the combination of a weak consumer confidence report, the potential opening of impeachment hearings and US/China trade uncertainty (the cancelling of the Chinese delegation’s farm tour) caused investors to run into safe assets. The 10 year T dropped to 1.63%. The consumer weakness is especially significant: in recent months manufacturing and corporate investment has been lagging due to trade uncertainty while US consumer activity has been the critical bright spot. With holiday shopping season almost upon us (doesn’t it get earlier every year?), consumer behavior will be critical and closely watched. Today, all that was in the rear view mirror. This morning the markets were seemingly unconcerned about developments in Washington. Instead investors were concentrating on indications that a trade deal is (again) close at hand with news of imminent agricultural purchases of US farm products by China.  The 10 year T jumped to 1.74% as stocks rallied. At GSP we are seeing a glut of fixed rate loan requests as borrowers are rushing to lock in historically low rates. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Divided Fed Cuts Rates as Cash Shortages Roil Overnight Lending Markets

    Pascale’s Perspective

    September 18, 2019

    It’s been a busy week for the Fed.  Overnight Markets:  Monday and Tuesday saw the overnight borrowing rates spike to 10%, up from a normal rate of 2%.  Note that the highly watched rate set by the Fed is the Fed Funds target rate which is enforced via open market operations and other Fed tools but it is not set in stone.  Overnight lending amongst financial institutions is a critical factor in the financial markets.  Banks and other institutions use it to raise cash for daily operations and the loans are secured by Treasuries.  This week’s cash crunch was caused by a confluence of events including: corporate tax payments due Sept 15, large issuance of treasuries last week ($78 billion issued with only $24 billion matured, draining $50 billion of cash from the system), post crisis regulations mandating larger cash reserves held at institutions, etc.  The recent debt ceiling deal and US budget deficit is increasing the supply of treasuries substantially.  High overnight borrowing costs well in excess of the target rate are dangerous as it implies that the Fed doesn’t have control of the rates it is setting.  To its credit, the Fed acted swiftly yesterday and today, injecting over $100 billion into the financial system and overnight rates have calmed down.  Today’s Announcement:  Today’s 0.25% cut was expected and Fed Chair Powell’s press conference was closely watched for signs of future cuts.  Note that the futures market indicates a 42% chance of a cut in October.  The move was by no means unanimous (7-3).  Two voters wanted no cut with the extremely dovish member Bulliard alone advocating for a 0.50% cut.  Powell indicated that future actions are data dependent and stressed that the economy is strong with the exception of trade uncertainty.  It seems some Fed members believe we are at the “Goldilocks” neutral rate now. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Rise as “Fear Trade” Subsides

    Pascale’s Perspective

    September 11, 2019

    Today’s announcement that the U.S. is delaying the next round of trade tariffs continues a trend of positive global news in September (Brexit, Hong Kong, etc).  Yields are up from their recent lows, the 10 year T is at 1.70%. Tomorrow’s ECB meeting and announcement is highly watched as Draghi nears the end of his term and is expected to announce his final round of Quantitative Easing.  There is some “drama” as mixed messages are being received from different ECB factions.  But with Germany tipping towards recession, some accommodative measures are expected. The markets will react based on how the reality matches the predictions already priced in.  Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Global Fears Recede but the Data is Turning

    Pascale’s Perspective

    September 4, 2019

    This week is the opposite of last week, headlines are better but economic reports are troubling.  This week has seen the British Parliament take a major step towards averting a chaotic “no-deal” Brexit and a Hong Kong withdraw of the controversial extradition proposal that caused massive protests.  This should have caused a “relief” selling of treasuries and higher yields.  The ISM Manufacturing index fell below 50% (contraction) for the first time in years.  Is this an aberration or are manufacturers pulling back in today’s volatile trade environment?  The next few manufacturing reports and anecdotal information will be closely watched.  The 10 year T is at 1.46%, just 10 bps above its all time low.  Inflation (or the lack thereof): last week’s PCE was 1.6%, well under the Fed’s 2.0% target; oil prices are dropping and may test the $50/per barrel key technical level.  This week’s employment report (Friday) will be closely watched on the heels of the poor ISM. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Near All Time Lows, Sentiment is Diverging From the Data

    Pascale’s Perspective

    August 28, 2019

    The 10 year Treasury is now at 1.46%, just 10 bps above the all-time low (summer 2016). The bond market continues to ignore U.S. economic reports and concentrate on global fears. Remember when positive Consumer Confidence and Durable Goods reports would drive yields up? Those days are in the rear view mirror as the markets are “obsessed” with gloom on the horizon. US/China trade: the consensus is that China is preparing for a long dispute. Brexit: The suspension of Parliament (suggested by Boris, approved by the Queen) could result in a messy and disorderly split between the UK and the EU, with unforeseen consequences that are hard to quantify. Hong Kong: another potentially volatile situation in a major trading hub. We are seeing many lenders trying to figure out spreads and floors on fixed rate loans. Many are flooring rates near 4.00%, while others are quoting and closing under 3.50% on 10 year money (!), Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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