Notes From Underground: The Soft Bias of Low Expectations

Tomorrow is the first Friday of the month so it is known on trading desks as UNEMPLOYMENT Friday — or Unenjoyment Day for some — as volatility will reign in the early part of the trading day. As we have discussed ad nauseum volatility is the predominant theme as all the world’s central banks discuss the removal of QE, as well as raising the cost of money through returning nominal rates from a steep NEGATIVE REAL YIELD to some normal zero or hopefully a POSITIVE REAL YIELD. But headline inflation reveals that all central banks have a great task ahead in an effort to reach what POWELL and others refer to as normalcy.

Over a 40-year period, REAL YIELD for the 10-year Treasury NOTE is close to +2%. Currently, the effective real yield on the 10-YEAR is close to a REAL YIELD of NEGATIVE 2% so either the FOMC needs to get aggressive, the economy tips into deep recession or the FED STARTS QT AND RAPIDLY SHRINKS ITS BALANCE SHEET, UNDOING THE RAMPANT SPECULATIVE LEVERAGE IN ALL CLASSES OF ASSETS and take the medicine of asset deflation with all its potential systemic risks. On Thursday, the perceived HAWKISH stance of the ECB and its president’s “bombastic” press conference led to a rapid rise in EUROPEAN yields as the algos sold all duration debt instruments. At one point, Italian 10-YEAR YIELDS ROSE 20 basis points at one point.

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The December 22 EURIBOR futures rose 19 basis points to close at a POSITIVE 1.5 BASIS POINTS from -17 BASIS POINTS the previous day. The media was proclaiming “HAWKISHNESS” of two rate rises before year end, thus taking the ECB deposit rate from -.50% to zero. The EURO CURRENCY was lower following the ECB Statement but reversed as the Lagarde press conference proceeded sending the EURO up 1.2% versus the DOLLAR and even more on the YEN and SWISS crosses.

Listening to the press conference, I failed to find the HAWKISH stance that the market was pursuing Lagarde. Each comment fomented a rise in European rates sending all global bond prices LOWER. As one who respects MARKET ACTION I kept my fingers off the computer and tried to discern where I erred. I still can’t find Lagarde’s hawkish demeanor.

To solidify the view, think about President Lagarde’s final comments in the press conference when asked to COMPARE the FED and the ECB‘s attempts to confront inflation. At the December press conference Lagarde called such comparisons ODIOUS. This time there was no vituperative language but this simple caveat as why the ECB would be more reticent to end QE and begin raising rates. Lagarde noted that the MASSIVE FISCAL STIMULUS in the U.S., which led to a 30% increase in U.S. demand since the pandemic. The Europeans experienced nothing similar, so therefore demand has merely returned to pre-pandemic levels. Lagarde, please help us understand how your policy is hawkish in comparison to today’s BOE decision or even last week’s FOMC.

It seems the Hawkish outlook stems from a leak out of the ECB Governing Group that the meeting had experienced dissonance about the slow pace of changing monetary policy. If Lagarde is suffering the slings and errors of the hard money members look for the GOLD to gain against all fiat currencies for the issue going forward will be CENTRAL BANK CREDIBILITY. Sorry, ZERO RATES at the time of 5% headline inflation is just not monetary stridency.

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