Crunch Time
FOMC preview, housing is breaking, another complicated GDP report, revenge of the old economy
Next week’s note may be delayed until Sunday due to travel plans, we will release an October employment report preview on Tuesday.
Crunch Time
The headline of the video clip of our CNBC appearance on Tuesday was that Fed tightening is making the European energy crisis worse. It was a wild week in European rates space, with the combination of expectations of the Fed slowing the pace of rate policy hikes, preliminary October EC manufacturing purchasing managers surveys at recessionary levels (45.8 from 48.4 in September), a recognition by ECB President Lagarde following an expected 75bp hike that ‘significant slowdown will deepen in 4Q and 1Q23’, as well as reports that three council members apparently voted for 50bp, all combined to trigger a 46bp drop in 10-year German Bund yields. The rally came to a halt on Friday morning following preliminary readings for October French CPI of 7.1% from 6.2% in September, Italian CPI of 12.8% from 9.4% and German CPI of 11.6% from 10.9%. On the other side of the world, October Tokyo CPI increased from 2.8% to 3.5% as the government announced a $200 billion spending package of inflation related support payments and the Bank of Japan expanded QE in the long end of JGB curve and denied that their yield curve control program was contributing to yen weakness the Ministry of Finance has spent $50 billion combating. Following confirmation that the new Chinese Central Committee is staffed with Marxist ideologues, the People’s Bank of China coerced the state banks into large exchange rate intervention that stopped the freefall in the offshore yuan, at least temporarily. There are consistent themes running across the globe, where excessive fiscal spending created unsustainable levels of sovereign debt that was facilitated by excessively easy monetary policy during the globalization disinflation era. Subsequently, without central bank purchases of government debt, and as long as the FOMC is raising rates aggressively and shrinking their balance sheet passively ‘in the background’, even as leading indicators of inflation fall sovereign debt market instability is likely to persist. It’s crunch time for the Fed, in this week’s note we work through why we think we’ve reached peak hawkishness and risk-on environment is likely to persist.