The Excuse For Today’s Sell-Off Trade Wars! Fuhgedaboudit!
Happy days are here again! First, it was rising inflation and rising yield fears; now it is the looming trade wars. The whole things with the tariffs aren’t new news; in fact, it is old news. So why is now the time for the market to go into freakout mode? I dunno, it never seemed to care before. But the tariffs seems more like posturing and a political game of chess. In fact, there are reports tonight that the US is holding talks with China on fair trade.
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All of this volatility the past few weeks tells us just how fragile the stock market is, and that maybe the critical take away here. Who knows what could rattle the markets next?
The thought of 4 rate hike from William Dudley, the NY Fed governor, mentioned today surely didn’t help either. But the Fed isn’t going to raise rate 4 times in 2018; it ain’t gonna happen.
The trimmed mean PCE inflation rate was up 1.69 percent y/y at the end of January. Sound inflationary? It is not. The effective fund’s rates today stands at roughly 1.4 percent, think about what four rate hikes would mean? Think about where 3 rates hikes would be? You would have an effective funds rates at 2.15 percent to 2.4 percent, for a trimmed mean PCE rating of 1.69 percent? It seems excessive, especially since years of low rates and trillions in QE hasn’t stoked inflation.
A 2.4 percent effective funds rate, would push the yield curve to near inversion, if not invert it. The bond market speaks loud, 10-year yields have backed off their highs and fell to 2.8 percent today, the dollar weakened, failing at significant resistance.
The problem is that we live in a global market, and the US is no longer an island unto itself. The ECB and BOJ at this point would love nothing more but the Fed to keep raising rates, with hopes of the dollar strengthening, and the euro and yen weakening.
As long as the European and Japanese yields stay low, our rates will be desirable to bond buyers abroad. That will cause buyers from overseas to buy our bonds, and keep a lid on the long-end of the curve from rising too much.
The Fed can raise rates as much as they want but they are fighting a losing battle as long the ECB and BOJ keep NIRP in play.
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