Fra Steen Jakobsen Saxo bank:
It’s the first Friday in the month and we will all be watching non-farm payroll despite all of us acknowledging that FOMC policy is entirely driven by non-economic factors like a need for them to create a “margin call” on the market. Vice-chair Fischer is clearly concerned about the elevated valuations although Chairman Yellen is still pretending to believe in labor market data. Looking at the recent data and even the projections among some of the FED governors it’s hard to see the evidence for a hike in June but market buys the propaganda machine of FED and its mouthpieces on TV and in the print press.
Federal Reserve Bank of Atlanta – GDPNOW
Despite the “evidence” Fed will probably still hike in June or September and then be on standby for rest of 2015 and probably 1H 2016. The market is AGAIN buying the hike – There seems to great propensity to sell bonds among CTA and hedge funds all of them playing the momentum and forgetting the lessons from Japan. Needless to say I remain with my sub 1.5% 10-Y US growth sometime between Q2 and Q3 which co-indices with my JABA models projected cyclical low for US (and global economy)
JABA forecasting model from Q1-2014
Source: My Q1 JABA model outlook 2014
The projected 10-YR move – (From March 2014 projection and JABA model
Overall I called the European recovery early and was very alone in early January (CNBC link) – Now I am scared to death by being joined by ECB’s President Draghi who pre-QE implementation called for a victory lap for “his policies” – I am never prone to celebrate anything really, but I certainly never celebrated a victory before a game was played despite having won the pre-math press conference.
Draghi will like Greenspan ultimately be seen as someone who was out of touch with the reality of the economy as he is the quintessential central banker conducting policies with a 20/20 rear mirror vision Draghi one year ago declared that deflation would never happen in Europe!) Though the rear mirror is also how they make their economic outlook meanwhile the “micro economy” and its agents continues to look through front window. The consequence is that most of ECB staff’s projections for this and next year is pure fantasy:
The US as shown above is slowing down – China just downgraded their GDP to 7% (In reality its below 5% if not 4%) and emerging market is hit by weak commodities and massive US funding with their currencies making multiyear and decades low – Hardly the stuff that Europe’s export engine needs? The lead-lag of this dictates Euro data should start to weaken in April and continue into Q3 as well, by which time the world is again synchronically accepting that 2015 is another lost year for growth. 2016 is the year of recovery. 2015 sees both main world growth engines: US and emerging market slowing. End of story.
Meanwhile the “market liquidity” is getting smaller and smaller and the systemic risk is increasing as bank (guaranteed by ECB) owns more government debt than ever before in history. This is chart from NATIXIS Economic research report: “Has the global financial system become safer?”:
18% of GDP worth of bonds is owned by the bank up from 10-13% range pre financial crisis.
More importantly the “sole buyer” of risk today is lesser regulated “Institutional investors” – watch this chart, specially on equity. Never have the institutional segment owned more stocks – talk about chasing the momentum – remember this increase in ownership happens as expected return in a normal business cycle would dictate exactly zero return for next 3,5 and only a small upside for next 10 years.
The next problem for financial market is exactly these institutional investors. Negative yield is bad for banks, but worse for insurance and lifers. Don’t forget 70% of Life insurance companies in Japan went out of business during their depression and low yield. Getting cash premium in having to pay for it – negative deposit rates – while your portfolio valuations for fixed income and stocks simultaneously make all time high protects them for next six months but it will impossible target to beat 1,3,5 and 10 years for now as both new premium and expected return is ZERO! Watch out for this sector if Japan is a lesson (and it is!)
Note how US inflation expectations is rising……..Improvement in European condition now “stopped improving….”
