It is not just in the US, that things are suddenly moving VERY fast on the monetary policy and interest rate pricing front.
In the UK, short rates (2y) have moved 40bp in a month. It is the fastest repricing we have seen in more than a decade. Yes, WOW!
In some G10 countries, we have gone from thinking about multi-year forward guidance (and QE expansion), to thinking about a rate hikes.
Norway and New Zealand have already hiked, and in the UK a rate hike next month is being debated.
In EM space, central banks are not only getting going with tightening, they are aggressively accelerating the pace at which tightening is being delivered.
Similarly to how the economic cycle is faster than any we have previously experienced (the recession was a few months as opposed to a few years), the monetary policy cycle seems to be super-charged too, in many countries.
There has been a huge debate about whether inflation is transitory, and the data is certainly putting 'transitory voices' on the back foot, and markets are pricing the outlook differently now (although the debate is far from settled).
Back in the 2013 period, taper was hinted in May 2013, and implemented in Dec 2013. But it took another two years before rates were actually moved above (effectively) zero.
In this cycle, taper is now widely expected in Nov/Dec 2021, and the market is already pricing rates lift-off by mid-2022 (this is what has shifted earlier in recent weeks).
(So a lag of six months in this cycle vs 2 years in the 2013-2015 cycle start).
So we are at crunch time for central banks. Do you move policy fast, in line with a fast moving cycle. Or do you stick with a patient approach, focusing on the long history of inflation undershooting, and aim to run the economy hotter then normal?
Different central banks will have different approaches; we can already see that. And whether some central banks will actually make a mistake will depend a lot on inflation persistency.
Inflation persistence sounds like a concept out of an economic textbook, or a boring econometrics paper. But it is now a concept that everybody (investors, policy makers, consumers) need to care about a great deal.
Macro investing had a boring few years in 2018-2019. But macro is back, with potential to drive everything. The shocks we are facing are big, and there are many of them in play at the same time.
And different central banks will react differently, causing yield curve surprises.
I will leave it at that. This is not a normal economic cycle. And this will not be a normal monetary policy cycle either. It is starting to play out. But there will be more to come. END.
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There is a lot of debate about these various measures of inflation expectations. And it is worth thinking hard about their signaling value, including what is the process behind generating the forecasts
It seems to me, that the key point is, that there may be a break in the process for making such forecasts.
- From simply using the target as the anchor, as opposed to a model.
- To having your econ view potentially override the target
Around the world, we are seeing (economist) inflation forecast starting to really break higher. But mostly for 2021 and 2022, while in G10 (they are still anchored in 2023).
There used to be many arguments why the dollar was NEGATIVELY correlated to oil
1/ The US is more energy intensive 2/ Petro-dollar flow supports other currencies 3/ Other central banks are more sensitive to headline inflation (=energy) than the Fed
And this is how it looked like pre-GFC, EURUSD and oil prices looked nearly identical on the chart (I have admittedly picked the most extreme period, around 2007).
In other words, the USD used to be strongly negatively correlated to oil prices.
Is it a coincidence that bitcoin has broken $50K at the same time as the news media is full of stories about a potential US default as a function of failure to raise the debt ceiling in October?
The chart shows that $BTC (white) spiked exactly as US T-bill yields (yellow) spiked
That is, bitcoin prices moved sharply higher exactly at the same time as short-dated T-bill yields (those maturing after October 18, when Yellen has said Treasury funds will run out) spiked, and embedding a 'default premium'
We cannot prove anything statistically in a sample of one, and if we look at how the dollar is trading, we do not have a global USD decline (the dollar has generally been firm in recent weeks), so it is not a slam-dunk conclusion.
First, I am not a person who always worry about inflation. I have been observing how central banks in the period 2008-2019 persistently OVERestimated inflation. Hence, I am always skeptical when I see a confidently aggressive inflation forecast.
Second, the link between money supply and inflation is very far from simple, even if some textbooks (and many observers) pretend it is simple. It is not the money supply growth that is fundamentally new in 2021.
I run a business @ExanteData. I have always been thinking of the price of our product/service as only a function of its quality.
But now, as some our our cost rise rapidly (heath care up >10%, IT equipment > 30%), I start thinking that there has to be a cost adjustment too.
It is just an anecdote. But when the supply chain issues and other cost pressure are so broad and long-lasting, it is not crazy to think that there will he 2nd and 3rd round effects from the inflation we observe now.
My inflation expectations have been (in my head) rounding to roughly zero for the last five years. It has not been a feature of my price setting. And now I am observing stuff that makes me think differently about cost, and appropriate pricing.
Last week was a serious one. Today, I will try to go in the other direction.
This is partly because a FinTwit guy (see proof below) just said I have ‘humor’ & because I hope to make the next @donnelly_brent top 10 list for funny twitter people.
I may be joking about all this, maybe not (your call)
Economists being funny is all about managing expectations, and I am certainly not joking about that.
I will tell you one brief anecdote, and you will see what I mean.
Here we go...
1/ Some years ago, I went to one of those formal lunches at the Harvard Club (the one in the middle of Manhattan). Lots of mahogany, butler-like staff, and the invited group was sitting around a rectangular table in one of the private dining rooms upstairs.