Internal Fed disruptions are being impacted by foreign exchange shifts.
To revisit something we noted in our Monday Commentary: External Factors Weigh on U.S. Equities, it was especially interesting that the December S&P 500 (CME:SPZ14) future dropped so quickly below its 1,970.70 Sept. 15 trading low last Thursday on the more hawkish comments (earlier than previously suggested FOMC rate hike) from Dallas Fed President Fisher. And the other very telling point of interest at that time was the response of the core government bond markets. In most recent cases, govvies would typically weaken on any mention of earlier Fed rate hikes, yet Thursday they rallied to new highs for their recovery from tests of support two weeks ago.
As noted previous, this is a sign the govvies know any early rate hike would be bad for a still troubled global economy. And since Thursday more dovish Fed officials have countered what Fisher had to say, especially dovish Chicago Fed President Charles Evans at the National Association for Business Economics meeting in Chicago on Monday. Also interviewed Monday morning on CNBC, Mr. Evans said any removal of highly accommodative policy should “…err on the side of patience…” So what’s going on here? And how does it relate to real world conditions and those core government bond market trends?
All of it fits in with various geopolitical disruptions that now include the pro-democracy street protests in Hong Kong. Those are added to the existing troubles in Ukraine (most critical for Europe) and the Middle East. And as we have noted repeatedly of late, a lot of that only further weighs on the lack of confidence on stubborn economic weakness outside the United States.
Europe is a basket case that is not getting any help from an ECB that is constrained by the lack of any unified government bond market. That significantly limits its ability to provide the QE the Euro-zone so desperately needs to fend off recession and potential deflation. The latest indication is this morning’s German Manufacturing PMI actually slipping slightly back below 50.00. Asia remains mostly weak as well along with emerging markets.
As such it is no surprise the primary government bond market response to Mr. Fisher’s hawkish views on Thursday was to rally on the expectation that any earlier than expected FOMC rate hike would be folly; a really bad idea in a still fragile global economy facing geopolitical challenges as well. This would seem more so parting comments attempting to reinforce previous points from the retiring Fed hawks (Mr. Fisher and Charles Plosser) on the way out the door.