The Crazy World Of Libor, Swaps And Treasury Yield Curves (Fire? or Ice Axe Cometh?)

Financial markets are experiencing “The Crazy World of Libor, Swaps and Treasury Yield Curves.” 

In other words, all three curves have a downward sloping section, all at different times, but all short-term (less than 6 year maturities).

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What uncertainties are in financial markets and the unlying economies, you may ask? How about trade (e.g., US and China trade flows), Brexit, China’s recession, Japan’s ongoing stagnation (despite negative interest rates), Italy and Germany’s slipping into darkness, not to mention uncerainty about The Fed’s path for balance sheet unwind.

The Fed’s balance sheet is a particular concern since the 10-year Treasury Note yield began to rise when the unwind began, but rates have gone DOWN when the unwind got serious in 2018. Or is Fed Chair Jerome Powell really “The Iceman”?”

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Here is a photo of Fed Chair Jerome Powell weiliding his “ice axe.”

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Storm Ahead? Baltic Dry (Shipping) Index Founders In Rough Trade Sea

The Baltic Dry Index seems to be signalling declining shipping costs … or foundering trade between the US and China.

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The Baltic Dry Index is a composite of the Capesize, Panamax and Supramax Timecharter Averages. It is reported around the world as a proxy for dry bulk shipping stocks as well as a general shipping market bellwether.

Yes, the BDI is measuring some distress for China Imports YoY in USD.

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No, that isn’t the SS Minnow foundering.

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(Un)Willing! Bank Willingness To Lend To Consumers Drops To Zero (Recession Alert!)

It seem s that banks willingness to lend to consumers hass fallen. Perhaps it should be an index of “Willing.”

Bank willingness to lend to consumers, a prime driver of Federal Reserve monetary policy, typically slumps to zero before a recession.

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Yes, as The Fed continues to unwind its balance sheet, bank willingness to lend to consumers is melting.

The Federal Reserve Open Market Committee (FOMC) looks at the bank willingness to lend numbers.

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Goin’ Down! Fed Continues Balance Sheet Shrinking Of $14.2 Billion (Unwind Reaches $434 Billion, Remains on “Autopilot”)

As Bruce Springsteen famously mumbled, The Fed’s Balance Sheet is “Goin’ Down.”

As of Feburary 6, 2016, The Federal Reserve of New York further shrank The Fed’s Balance Sheet by $14.2 billion.

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This week it was $11.665 billion of US Treasury Notes and Bonds and $2,525 billion of US Floating Rate Notes. For a grand total of $14.2 billion reduction in liquidity.

Now The Fed has unwound $434 billion of its prodigious balance sheet.

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While other central banks filling their punch bowls ever further.

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So, The Fed is continuing its draining of the monetary punch bowl on autopilot.

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The Death Of Risk Parity Strategies Was Premature (Pay Attention To The Fed!)

The S&P Multi-Asset Risk Parity Index measures the performance of a multi-asset risk parity strategy that allocates risk equally among equity, fixed income and commodities futures contracts.

The risk parity strategy by firms such as AQR Capital suffered a big set back when The Fed started raising the Fed Funds Target rate near the end of Janet Yellen’s term as Fed Chairman. Risk parity recovered but then suffered a second knock-down as Powell continued raised the target rate and the balance sheet began shrinking.

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But as The Fed looks in full retreat, the Risk Parity index has rallied.

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Has The Fed surrendered?

Three-Month Libor Fixing Falls by the Most Since May 2009 (Signal That The Fed Might CUT Their Target Rate?)

One of the world’s most important borrowing benchmarks staged its biggest one-day decline in a decade on Thursday.

The three-month London interbank offered rate for dollars sank 4.063 basis points to 2.697 percent, the largest one-day slide since May 2009. The move may reflect a benchmark that’s making up ground following a repricing of short-end Treasuries and associated instruments in the wake of the Federal Reserve’s dovish pivot in recent weeks.

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The 3-month LOIS spread (3-month Libor – Overnight Indexed Swap rate) has been receding … again as of Feb 5th (Libor rates on Bloomberg as not updating on Feb 7).

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Typically, Libor rates rise ahead of Fed rate hikes. While the “catching up” explanation is likely, it is also possible that Libor is signalling a cut in the Fed Funds rate coming up.

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The stock market is pleading for SLOWDOWN in monetary normalization.

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Yes, it is possible that Libor is signalling that The Fed will try to give more oxygen to financial markets.

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Former Fed Chief Yellen Says Rates Could Next Move Up or Down (Implied Rate Forecast Is Down, US Treasury Curve Downward Sloping From 1-3 Years)

My favorite Bloomberg headline of all time is: “Former Fed Chief Yellen Says Rates Could Next Move Up or Down.” Wow, how insightful. But of course, she was refering to The Fed Funds Target rate which she kept at 25 basis points seemingly forever. However, current Fed Chair Jerome Powell could either raise, lower of keep rates constant, depending on the state of economy.

But then again, both the ECB and Bank of Japan are currently at zero (ECB) and below zero (BOJ). The US Fed is headed in a direction that differs from other central banks.

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While Powell has been increasing The Fed Funds Target rate AND shrinking The Fed’s balance sheet, Europe is drowning in negative target rates (Eurozone, Switzerland, Sweden, Denmark) as is Japan.

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But in terms of central bank balance sheets, only the US is shrinking their balance sheet.

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There are currently around $9 trillion of bonds trading at negative interest rates.

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As we stand today, the US Treasury yield curve is downward sloping at tenors 1-3 years.

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The current implied policy curve for The Fed is declining (meaning Fed Fund rate cuts are implied in 1-3 years.

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So, former Fed Chair Janet Yellen thinks rates could go up or down.

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The Average Adjustable-rate Mortgage Is Nearly $700,000! (Misleading Because Mortgage Refis Are Essentially Dead)

MarketWatch has the tantalizing headline of “The Average Adjustable-rate Mortgage Is Nearly $700,000.”

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True, the average loan size for ARMs (adjustable-rate mortgages) is substantially higher than for FRMs (fixed-rate mortgages).

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But here is a catch. Mortgage refinancing applications are virutally dead.

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Mortgage purchase applications are relatively sedate but rising following the financial crisis with new rules governing bank lending such as QM (Qualified Mortgage) and other Consumer Financial Protection Bureau (CFPB) rules.

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A more relevant chart that the one posted by MarketWatch is a comparison of average loan size by purchase applications and refi applications. Note that following the financial crisis, average loan size for purchases is higher than for refi applications.

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For the week ending 02/01/19, mortgage purchase applications SA declined 4.58% while mortgage refis were up 2.6% from the preceding week.

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The bottom line is that the MarketWatch piece, while tantalizing, is fundamentally misleading. Mortgage refi applications are nearly dead and mortgage purchase applications are rising again, but are no where near the 2000-2007 levels.

So, who killed mortgage refinancing applications?

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These guys! (Paul Volker can be excluded from the blame list).

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“Bond King” Gross Retires, Dudley “Amazed and Baffled” About Fed’s Balance Sheet Unwind And World’s Largest Pension Fund Suffers Catastrophic Quarter (Boogie In The Dark?)

I feel like investors are doing the “Boogie In The Dark” when it comes to understanding this broken market.

What’s going on?

First, bond king Bill Gross (formerly of PIMCO then Janus-Henderson) has thrown in the towel after 50 years.  His success at PIMCO was in the greatest bond bull run in modern history. But his Janus fund started near the peak of The Fed’s QE3 balance sheet expansion. Then his fund underperformed when The Fed started unwinding their balance sheet (and raising their target rate). Translation: The Fed got bond king Gross dizzy … and he retired.

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And that brings me to the former New York Fed President William Dudley.

(Bloomberg) — Former Federal Reserve Bank of New York President William Dudley said he’s “amazed and baffled” at the attention the wind-down of the U.S. central bank’s balance sheet has been receiving from investors, pointing to other culprits as the likely cause of recent volatility in financial markets.

Amazed and baffled? Just ask Bill Gross about the importance of Fed’s wind-down.

Then we have the world’s largest pension fund, Japan’s Government Pension Investment Fund that lost 9.1 percent, or 14.8 trillion yen ($136 billion), in the three months ended Dec. 31. The decline in value and the rate of loss were the steepest based on comparable data back to April 2008. Domestic stocks were the fund’s worst performing investment, followed by foreign equities. Assets fell to 150.7 trillion yen at the end of December from a record 165.6 trillion yen in September.

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But who helped break the market by distorting asset prices and returns? The Federal Reserve and other global central banks.

With so many uncertainties in global market (Brexit, trade wars, Venezuela’s meltdown, The Fed’s uncertain policy path, Italian debt crisis. etc., …

(Bloomberg) — Italy is preparing to sell as much as 1.8 billion euros ($2.1 billion) of state-owned real estate as it seeks to rein in soaring debt, people with knowledge of the plan said.

investors should hedge their risk exposure across markets … or move to cash or short-term Treasuries. In other words, take out some insurance.

Lastly, down in Virginia, we are suffering through yet another embarrassing governor (Northam) after McAuliffe and his electric call debacle.

Bye, bye Bill Gross. I can’t stand to see you go.

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Q1 2019 S&P 500 Earnings Growth Rate Forecast To Be NEGATIVE (Markets Drive Me Crazy!)

The Markets Drive Me Crazy!

Q1 2019 &P 500 Estimated Earnings growth rate is -0.8%.

Q1 2019 eps growth rate

And the CHANGE in S&P 500 Quarterly Earnings Per Share (EPS) is … -4.1%.

Change in Q1 EPS feb 2019

At least healthcare, utilities, industrials and real estate are forecast to have positive earnings growth.

earnings growth by sector

Meanwhile, low volatility share’s valuation is nearing its historic high.

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After a record January for stocks, this is not a good thing.

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