Intervention By Any Other Name
CLUB/EDGE client post May 5th; Focus on BOJ & MOF yen intervention.
» CLUB/EDGE client post Sunday May 5th 1:00 PM
Treasury and Fed are still stimulating, albeit quietly.
BOJs latest Intervention was loud & expensive & right on cue.
Both central banks are showing diminishing rates of return.
Craig and I agree: Fed ‘hides behind the dual mandate but their primary mandate is smooth UST market functioning’.
Case in point:
What do September 2019 repo crisis, March 2020, October 2022 (gilt crisis), March 2023 (SVB), and October 2023 (term premiums / yields rising) have in common?
Fed/Treasury intervened in each of these crisis events - 5 times in less than 5 years - to save their UST market.
Craig highlights:
The time line between these actions keeps getting narrower and narrower and it's happening after periods of $ strength each time.
And then there are the in-between periods, like last week when the combined efforts between Fed (scaling back QT and discounting the risk of rate hikes) with Treasury (bond buying program with less bond issuance) served as a form of easing, together with a well-time BOJ/MoF yen intervention to tap down US dollar and yields - just in time to bid up stocks and bonds!
But the problem doesn't go away - convincing the US Government to spend less or Fed to reduce their balance sheet or Treasury to allow price discovery in longer-duration notes/bonds. And as a result, inflation does not drop into their 2% level.
Fed/Treasury leaving too much liquidity in the system is the reason for the continued entrenched inflation, not to mention wealth inequality.
Craig sums up well:
They would have been better off using the balance sheet more aggressively to tighten financial conditions. The Fed was quick to add to the balance sheet, buying trillions of assets during QE period post Covid but has been slowplaying the "QT" working down the balance sheet passively so as not to disrupt financial markets. That has kept too much liquidity in the system which has meant lower risk premiums, term premiums muted, ignited animal spirits, unanchored inflation expectations and made it more difficult to slay inflation.
If the Fed would have engaged in actual QT and the selling of assets rather than just rolling off maturities, they would have been more successful. They should have actually done this before they even started their rate hiking campaign as higher interest rates this cycle has only been even more stimulus because households and corporations locked in low borrowing costs during Covid while the US government has had to borrow more expensively. This has sent out interest rate "stimmys" to the wealth and powerful cashed up companies, keeping consumption and inflation more elevated than in prior tightening cycles.
They should have went with LIFO monetary policy whereby you cuts rates to zero and then you do QE when things are bad and then when its time to exit, you do QT first and then you raise rates. They completely screwed this up and are still screwing this up by tapering QT here again to make sure banks are gonna be ok.
The Fed has been wrong every step of the way and will continue to be wrong and inflation probably will never get back down to 2% on a sustainable basis with these massive fiscal deficits at 6%+ of GDP and debt to GDP levels at greater than 120%. We are just going to inflate the debts away. The question is whether we do it slowly or rapidly.
Yentervention
I had just posted Monday the 29th under #macro-to-micro-support (in slack):
Weston Nakamura had literally just penned a post earlier that week explaining why he expected more YENTERVENTION. I had just been discussing Friday the 26th in my live trading room how very, very extended the yen was so a snap-back wouldn't surprise.
Bigger problem is that the BOJ/MoF intervention is largely based on POLITICS not economics. So it won't likely stick, and each successive round will have a diminishing rate of return.
Translation: USDJPY is very likely headed higher in time.
The main factor shaping the value of the yen now is the gap between American and Japanese interest rates. The bigger the rate gap, the more that investors move money from Japan to the US and other countries. To do that, they have to sell yen, which lowers its value.
Japanese corporations may be enjoying the competitive advantage and profits made from higher inflation. But consumers in Japan don't as their purchasing power keeps falling.
Per Richard Katz:
Equity strategist Rie Nishihara of JP Morgan, if the yen stays weaker than ¥157, the resulting rise in import prices could lift overall inflation enough to wipe out any gains in real wages this year. In February, real (after-inflation) wages fell year-on-year for the 23rd consecutive month.
On April 26, the BOJ announced that it would not reduce the pace of JGB purchases. Few days later the BOJ spent ~$60B to intervene in the depreciation of JPY on Monday and then again immediately after Powell reiterated his dovish views Wednesday.
The result: long-term interest rates in Japan will be going higher with the US.