It is exactly a month since Evergrande was the only thing anybody could talk about.
Hence, it is a good time to recap market dynamics since Sep 20.
Where is the contagion sticking, and where have we recovered (many places, but not all)
THREAD
First, the Chines currency has substantially OUTPERFORMED over the past month. While the EUR and the JPY are down 2-4% vs the USD, the CNY is up around 1% against the USD.
This fits with how they want their currency to behave 'reserve currency like'.
Second, while a crisis normally generates yield declines in major markets, this has NOT been the case in China. Chinese 10Y rates are UP over the past month, as expectations for mon easing has been disappointed (and in sympathy with the global trend).
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.