This is a tale of two Central Banks: The US Fed and the European Central Banks. And their respective commercial banks.
First, The Federal Reserve. US commercial banks recovered from the global financial crisis, although not completely.
But for the ECB, such is not the case for European banks.
Indeed, this a tale of two Central Banks.
The Citi Economic Surprise Indices measure data surprises relative to market expectations. A positive reading means that data releases have been stronger than expected and a negative reading means that data releases have been worse than expected.
Unfortunately for the USA, it has a negative economic surprise measure, followed closely by the Eurozone (also negative). The “leader” in the Economic Surprise Derby is … Emerging Markets. ALSO negative.
As a sign of meh economic growth, market implied policy rates are 2.38% for the USA, -0.40% for the Eurozone and -0.06% for Japan.
The expected Fed Funds target rates are trending downwards.
Eurozone expected target rates are negative.
Even Australia is downward trending. Like an overcooked shrimp on the barby.
True, the lofty expectations for the US economy are not being met.
The global economy is in a rollercoaster pattern.
And unfortunately the G10, US and Emerging nations are on the downward side.
This might explain Larry Kudlow’s call for a 50 bps drop in the Fed Funds Target Rate. At least Trump’s nominee for The Fed’s Board of Governors was previously the President of the Kansas City Federal Reserve. And CEO of Godfathers Pizza! Conditional on the US Senate approving his appointment, “Welcome to the party, pal!”
European bond volatility (according to the Merrill Lynch 3-month EUR option volatility estimate) has plunged to the lowest level on record.
A similar chart for the US bond market is the Merrill Lynch Option Volatility Estimate for 3-months shows exactly the same thing. The US bond market is grinding to a halt.
Note that the US MOVE 3-month estimate hit a low in May 2007, just ahead of The Great Recession of 2007-2009.
The ECB’s Mario Draghi has decided to raise the dead (as in Modern Monetary Theory) by reviving the ECB’s Targeted Longer-Term Refinancing Operations.
Mario Draghi revealed the biggest cut in the European Central Bank’s economic outlook since the advent of its quantitative-easing program as policy makers delivered a new round of stimulus to shore up growth. The ECB president said the euro-zone economy will expand just 1.1 percent this year, 0.6 percentage point less than forecast in December.
The central bank will revive its Targeted Longer-Term Refinancing Operations to encourage banks to provide credit to businesses and consumers, and will hold interest rates at current record-low levels at least through the end of the year, several months later than previously indicated.
The Euro declined on Draghi’s announcement.
And most Euro area 10 year sovereign yields are down 5 basis points or more.
Draghi must not read from the Modern Monetary Theory (MMT) book!
An interesting chart of the 30-year sovereign yields less Fed Funds rate reveals that much of the world is in a state of global yield curve inversion. (Graph courtesy of the great folks at Crescat Capital).
While the US is not in a state of yield curve inversion (except for the 1-5 segment), the US remains (for the moment) is positive territory.
I prefer using the 10-year Treasury Note for curve analysis rather than the 30-year Treasury Bond.
One might observe that Treasury volatility measures are quite low … again.
So, yield curve inversion is the same all over the world. The US seems to be on track to invert as well.