Curve, inflation plays flying
Earlier this morning, I published a piece predicting that the Fed under "Helicopter" Ben Bernanke won't tighten rates until the cows come home.Today's jobs report only underscores my certainty in this matter.
The currency and bond markets are getting the message loud and clear, with breakouts, breakdowns, and crazy activity visible all over the place. A sampling:
* Forget the yen and the euro. Look at the Korean won, the Indonesian rupiah, the Indian rupee, or the Philippine peso. They're all breaking out against the buck. You can see the same thing happening in South America, with the Brazilian real and Chilean peso about to blow the doors off the dollar.
* Back-month Eurodollar contracts are flying. December 2010 EDs up 9 ticks to 98.78 at last check, for instance. That means Fed tightening is being priced OUT of the market.
* The yield on the 2-year Treasury Note was recently down 7 basis points to 0.95. Meanwhile, the yield on the 30-year Treasury Bond was recently UP about a bp to 4.69%. Result: The 2s-to-30s spread just hit 373.8 basis points, the highest in the history of my data, which goes back to 1980.
* And inflation concerns? Well, the 10-year TIPS spread has jumped to 246.5 bps. That's the highest going all the way back to July 2008.
What's the umistakably clear message from the capital markets: 'Fed -- wake up! Start hiking rates." But as I noted, they won't ... until it's too late.
The currency and bond markets are getting the message loud and clear, with breakouts, breakdowns, and crazy activity visible all over the place. A sampling:
* Forget the yen and the euro. Look at the Korean won, the Indonesian rupiah, the Indian rupee, or the Philippine peso. They're all breaking out against the buck. You can see the same thing happening in South America, with the Brazilian real and Chilean peso about to blow the doors off the dollar.
* Back-month Eurodollar contracts are flying. December 2010 EDs up 9 ticks to 98.78 at last check, for instance. That means Fed tightening is being priced OUT of the market.
* The yield on the 2-year Treasury Note was recently down 7 basis points to 0.95. Meanwhile, the yield on the 30-year Treasury Bond was recently UP about a bp to 4.69%. Result: The 2s-to-30s spread just hit 373.8 basis points, the highest in the history of my data, which goes back to 1980.
* And inflation concerns? Well, the 10-year TIPS spread has jumped to 246.5 bps. That's the highest going all the way back to July 2008.
What's the umistakably clear message from the capital markets: 'Fed -- wake up! Start hiking rates." But as I noted, they won't ... until it's too late.
posted by Mike Larson at
1:40 PM
3 Comments:
Fed wake up? They are so awake they are climbing the walls. We are against the zero boundary with an imputed negative real interest rate and there is nothing the Fed can do more than they have done; frankly they have already done too much as it is. Technocrats can only go so far before they commit felony and, in the end, cannot compensate for an ideologically riven, corrupt and paralyzed political system unable to establish rational fiscal policy.
Shorter version: Something better move in the right direction on the fiscal policy front or the floor is going to collapse in this country and inflation will not be the greater of our worries; indeed, we may wish we had more of it before we are done.
By
RW, at January 8, 2010 at 9:45 PM
Mike, how can I contact you?
By
Michael Kahn, at January 11, 2010 at 11:15 AM
Don't forget about the soaring entitlment outlays in the comming years. The most important reason why the fed can't raise rates, is not because of high employment, its because of 7.7 Trillion in debt and trillion dollar budget deficits that will only get much worse in the years to come.
The Fed also must keep consumer and business loan interest rates low. Higher rates would make real estate unfordable resulting in a collapse of RE prices. This in turn would send millions of RE owners to walk away from thier underwater properties, triggering a second financial melt-down.
By
Anonymous, at January 18, 2010 at 1:30 PM
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