Looser As We Get Tighter?
As we noted in our FOMC preview moments ago, it would be a huge surprise if the FOMC does not deliver an announcement on tapering. At a pace of $15bn/ month, it means the taper will end next June.
So with tapering in the bag, market attention understandably has turned to when the Fed will lift rates from the zero lower bound, and as today’s Chart of the Day from DB’s Jim Reid shows, the US hasn’t been immune from the global repricing of central bank hikes. The first full increase to the fed funds rate is priced shortly after the anticipated conclusion of the taper, which is a couple of quarters earlier than market pricing suggested the last few times the Fed met.
Looking at the rest of the table, it is striking that financial conditions have remained so easy, despite the policy rate repricing and imminent tapering. The S&P 500 is at all-time highs and 9% above pre-June FOMC levels while 10-year Treasury yields are only modestly higher than where they were then. This is of course abetted by declining real yields, which has offset much of the rise in breakevens. Staying with inflation, Oil is up +15.9% since the June FOMC. Credit has been stable and Bloomberg’s core index of financial conditions have slightly dipped but remains historically very loose. Their additional “plus” index that also adds asset price bubbles (tech, housing etc) is looser now than back in June.
The one potential fly in the soup has been flatter curves, with 5s30s -59bps below June levels. This is one of the few warning signs from the global front-end moves of late. One to watch carefully going forward in what are otherwise still very loose financial conditions considering the hawkish pivot seen by global central banks of late.
Wed, 11/03/2021 – 13:27