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David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

    Here is the text of a bulletin from Bloomberg on today's Fed Meeting.

    Here are the Key Takeaways from today's FOMC events:

    The FOMC hiked rates a fourth time this year to a decade high, ignoring President Trump’s criticism, and lowered its outlook to two hikes from three next year.

    Powell specifically endorsed the dots, citing them in his press conference as a guideline for the committee and a useful tool.

    The committee tweaked its guidance to ``some further gradual increases’’ -- a more hawkish development compared with the alternative of dropping the guidance.

    Powell said all meetings are live for possible moves next year, but gave no strong hints as to when the Fed would raise next.

    There was unanimous support for the hike.

    Powell said that Trump's comments had no impact on policy and that the Fed is committed to doing what it thinks is best.

    Powell said financial conditions caused a slight downgrade in 2019 forecasts but no real change in the outlook.

    Markets took FOMC and Powell as hawkish, with the yield curve flattening and stocks falling.

    Read entire article

    What a Big Deficit You've Got There, Mr. President

    This article by Justin Fox for Bloomberg may be of interest to subscribers. Here is a section:

    It’s also important to note that the natural tendency in a growing economy, absent any tax changes, is for revenue to rise. Real revenue dropped in 2016, but that was because of the mini- recession that had started the year before. Revenue has risen during every other year of the current recovery. This year the economy is growing at what may turn out to be the fastest pace since the 2000s, around 3 percent, yet revenue is down. Some of that economic growth is surely due to the tax cuts and to this year’s spending increases, but it’s clear that the Tax Cuts and Jobs Act has so far displayed none of the magical revenue-increasing properties that some of its supporters claimed for it last year. If we take last year’s revenue growth of 1.1 percent as the — very conservative — baseline, it would seem instead to have so far resulted in a revenue decline of 3.5 percent, or $109 billion.

    Federal spending, meanwhile, is up an inflation-adjusted 2.9 percent so far this year. That’s bigger than the revenue decrease but smaller than last year’s 3.5 percent increase. Overall, my read of the two charts above is that the overall shift since 2015 from shrinking deficits to rising ones has been mainly about rising spending, but the increase in the deficit this year has been mainly about the tax cuts.

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    Bank of France Trims Growth Forecasts as Protests Drag

    This article by William Horobin for Bloomberg may be of interest to subscribers. Here is a section:

    Still, the central bank said 1.5 percent growth was a level that would help the country close a gap with euro-area peers. It expects consumers to drive growth next year thanks to a rise in spending power, supported by tax cuts.

    “French growth should remain above its average of recent years: That is still a rather favorable economic situation,” Villeroy said.

    The central bank’s forecasts do not take into account Macron’s planned tax cuts. But it said the measures could also support consumer spending next year.

    In the Les Echos interview, Villeroy also commented on the European Central Bank’s decision to end its net asset purchases. He said a “gradual normalization” of policy is justified by euro-area figures, but the central bank remains flexible in uncertain times and has powerful instruments available.

    Read entire article

    The Fed and monetary Policy

    Thanks to a subscriber for this note by Leon Tuey which may be of interest. Here is a section:

    Few months ago, Jerome Powell, the Fed Chairman expressed the desire to smooth out past wild swings in the economy by fine-tuning its monetary policy.  Those are not mere words, but the Fed is already putting it into practice.  Note the statements made by the various Fed members. 

    In the past, after the election, the Fed would slam the brakes to clean out the excesses.  After the Mid-term election, it would start to stimulate the economy.  Hence, the “Four-Year Cycle”.  The Fed has been tapping on the brakes instead of slamming them.  Hence, the slowing in the economy.  Many, however, are jumping to the conclusion that a recession will take place next year.

    The Fed’s new goal is not easy to achieve, but if successful, the U.S. will experience a period of unparallel prosperity and the stock market will continue to climb to heights no one ever believe possible.

    Despite its importance, few paid attention to Powell’s announcement.

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    Email of the day on Crowd Money, late cycle moves and credit

    As you have repeatedly mentioned in recent audios, we are at a very interesting time in markets. The coming weeks may potentially offer us a guide as to whether markets are pricing in a recession in late 2019/2020 or whether this maybe further delayed by the Fed and the US administration setting a looser policy tone sooner rather than later.

    As David has always urged “don’t fight the Fed”.

    Being away from my desk enjoying the delights of the Caribbean, I have taken the time to re-read your most illuminating book Crowd Money which you published back in 2013 and I read back in 2014 (again in the Sunny Caribbean).

    I have to mention that a good many of your observations have come to pass and my holdings in a number of Autonomies who are also Dividend Aristocrats have been a core holding of my balanced personal portfolio. I have noted with interest the recent late cycle outperformance of these holdings compared to previously sexy growth stocks.

    I would recommend to the collective to take the opportunity to read or re-read Crowd Money at a time when market strategy is in flux.

    You have also made reference to the possibility of GE corporate debt being downgraded to junk. I attach a link to the UK Investment Manager M&G ‘Bond Vigilantes’ website and their comments relating to the US corporate debt market and with specific reference to GE’s strategy to deleverage and preserve their IG status.

    Hope this is of interest.

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    2020 Rate Cuts, Unimaginable Last Month, Show Up in Bond Market

    This article by Liz Capo McCormick and Edward Bolingbroke for Bloomberg may be of interest to subscribers. Here is a section:

     

    “What is the most striking aspect of this move is the extent of it in just two days and how the acceleration came out of nowhere right after a supposed amicable meeting between the U.S. and China,” Peter Boockvar, chief investment officer of Bleakley Financial Group, said in a note. “It’s almost as if the bond market screamed out, ‘It’s too late, the growth slowdown underway can’t be reversed.”’

    The curve is flattening because even though cuts have moved on to traders’ radar screen the year after next, the Fed is still expected to lift rates this month and tighten further next year. Inversion has preceded every U.S. recession for the past 60 years.

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    Email of the day on my central bank total assets chart:

    You have mentioned that the graph showing central bank assets is one of the most important. Consequently, I wondered how the fact that they are reducing this tied in with your moderately optimistic views on the stock market. Do you think the US Fed Reserve will continue to reduce its balance sheet given recent market turmoil?

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    The Big Picture

    Thanks to a subscriber for this report from Societe Generale which may be of interest. Here is a section: