Notes From Underground: Taking a Look at the Plumbing

I had the pleasure of sitting down with Joseph Wang, one of the better Fed/interest-rate plumbers, who also has a deep knowledge of all things global macro. Listen closely to the latest podcast as he reveals the many shades of the inner workings of the Fed, especially those insights on Governor Christopher Waller. There are certainly areas where we disagree, which is to be expected, but that is what makes the effort by Richard Bonugli to do these podcasts so richly rewarding.

As always, I advise not rushing into any of our recommendations but to do your own work in context and of course in and levels of risk you are comfortable. The purpose as always is to sift through the amalgam of data/info and find profitable opportunities as we provide a deep dive into context and nuance.

Tuesday’s CPI data was a bit hotter on some levels but overall close to consensus. The equity, bond, dollar and precious metals were on a veritable roller-coaster ride as various asset closes tried to push back against higher interest rates. The two-year US Treasury ran the board at times as it is the barometer of FED intentions.

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The headline release resulted in yields going higher but quickly reversed as the market read slowing OER into the release but later refuted that as the TWO-YEAR TREASURY FUTURES closed on its high with the Dec23 eurodollar futures confirming the sentiment, closing at 0.94705, an effective yield of 5.295% and the highest since the tightening began. The interesting outcome of the US rate rises being followed by the ECB, BOE, BOC and maybe BOJ. But the Footsie made all time highs, as did S&Ps in the US. The NIKKEI is coiling to go higher but caution is advised as to see how it plays with the new BOJ leadership.

Rates are higher and liquidity is being diminished via QT and yet asset prices ignore for now. BANK OF CANADA Governor Tiff Macklem indirectly challenged Fed Chair Jerome Powell when he said last week the BOC would pause after its recent increase to 4.5% on its benchmark rate. Governor Macklem will now be challenged as the Canadian jobs data was released last week was a blowout. The consensus was for 15,000 jobs and it was 150,000 with a 5% unemployment rate. Navigating this global environment is no easy task but as Joseph Wang discusses in the podcast, Canada is a different situation than what Powell confronts.

The point is the terrain is difficult and if the BOC pauses in an effort to measure the impact of the lagged effects of monetary policy then maybe the FED can also. Maybe equity markets know the real value of money.

In a speech by Dallas Fed President Lori Logan Tuesday, she followed Powell’s recent comments by reiterating: “Both of these tools [interest rates and QT] push up interest rates for consumers and companies throughout the economy. Financial conditions have, therefore tightened significantly. The 10-year nominal Treasury yield has risen about 2 percentage points, and mortgage rates have risen nearly 3 percentage points, since the start of 2022. Importantly, in recent months, real medium-term rates as measured by the yields on TIPS have averaged above 1.5%. That is a significantly restrictive level given that most estimates suggest the neutral real interest rates below 1percent.”

This is important because we now have a view as to why Powell continues to day financial conditions have tightened over the last year. Enjoy the podcast as it is another deep dive by Richard Bonugli into the realm of global macro.

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