Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Macro Digest: ECB hits the panic button
Steen Jakobsen
Chief Investment Officer
Summary: Eurozone growth is crumbling, Europe's polarised politics will only increase the misery, and the ECB's response is to throw more money at the banks. This solves nothing – a reckoning awaits.
The Nobel-prize winning physicist Richard Feynman devised a brilliantly simple test for assessing knowledge and familiarity with facts:
If you cannot explain something in simple terms, you don't understand it.
On the basis of his performance today, European Central Bank president Mario Draghi has clearly failed the Feynman test. And not only is the ECB hitting the panic button, the risk to to the downside remains! (For more background, see my pre-ECB note from this morning.)
Our overall macro path from here is as follows:
Now the Global Policy Panic theme I outlined in December is complete. Next up in H2-2019: The Global Fiscal Panic (or Welcome to the MMT).
First the People's Bank of China caved, then the Fed, then the Bank of England, and as always, the ECB came last. Totally predictable.
What’s also predictable is that TLTRO is really only meant to “buy time” from the expected kick in of MMT / fiscal expansion (in the guise of infrastructure) in H2. Hence the move to September. After the European Parliament elections in May the focus will be on creating more spending inside the populist/MMT camp. This political bloc will succeed precisely because the ECB is now incapable of doing anything to counter its own monster of a market that is completely without price discovery.
Between now and H2 the data will continue to worsen because the global supply chain is broken. Europe will lose the most because it benefited the most! The OECD's recent sober outlook inow looks like high-end growth projection.
If you cannot explain something in simple terms, you don't understand it.
On the basis of his performance today, European Central Bank president Mario Draghi has clearly failed the Feynman test. And not only is the ECB hitting the panic button, the risk to to the downside remains! (For more background, see my pre-ECB note from this morning.)
Our overall macro path from here is as follows:
Now the Global Policy Panic theme I outlined in December is complete. Next up in H2-2019: The Global Fiscal Panic (or Welcome to the MMT).
First the People's Bank of China caved, then the Fed, then the Bank of England, and as always, the ECB came last. Totally predictable.
What’s also predictable is that TLTRO is really only meant to “buy time” from the expected kick in of MMT / fiscal expansion (in the guise of infrastructure) in H2. Hence the move to September. After the European Parliament elections in May the focus will be on creating more spending inside the populist/MMT camp. This political bloc will succeed precisely because the ECB is now incapable of doing anything to counter its own monster of a market that is completely without price discovery.
Between now and H2 the data will continue to worsen because the global supply chain is broken. Europe will lose the most because it benefited the most! The OECD's recent sober outlook inow looks like high-end growth projection.
So….. what does it all mean?
Short-term:
• BTP & Club Med spreads should improve. The slowing growth makes Germany partner with Italy and the ECB, hence “indirect support” just increased into lower inflation and lack of yield.
• Our 1.03/1.05 EURUSD call has increased odds probably from 50/50 chance to 60/40 (Position through CHEAPEST volatility EVER!
• Banking sector (SX7E) should do well next week-ish, but do note – banks already anticipated this with YTD returns of 14%
• Dollar strength could shift momentum out of commodity & EM through rising DEBT load from stronger USD.
Medium-term:
• European Parliament elections create more event risk – and increase in call for fiscal spending.
• Inflation expectations could start to rise slowly (from H2 -start).
• Data can not sustain the built-in overconfidence in sentiment – turning the needle down onthe price of money really makes ZERO difference. TLTRO really is just “state support” in the Keysian way.
Long-term (H2-2019):
• Europe will enact fiscal panic. The Eurozone budget deficit to GDP @ -1% in 2018 – the ECB and the Eurozone will see this a “free money”. Don’t forget low inflation is the biggest risk in a central bank's outlook – not lack of credit, inequality or market valuation.
• MMT – learn, educate yourself – not hard – I promise!
• EUR hits 1.03/1.05
• Germany joins Italy in recession.
• 10yr Bund yield goes to – 50 bps.
• EU equity will be dirt cheap in relative and absolutely terms.
• There could be a big opportunity for Europe to implement longer vision for Europe because of the growth crisis. I see Europe “needing” a crisis to redefine itself.
Despite the above, safe travels to you all,
Steen
Short-term:
• BTP & Club Med spreads should improve. The slowing growth makes Germany partner with Italy and the ECB, hence “indirect support” just increased into lower inflation and lack of yield.
• Our 1.03/1.05 EURUSD call has increased odds probably from 50/50 chance to 60/40 (Position through CHEAPEST volatility EVER!
• Banking sector (SX7E) should do well next week-ish, but do note – banks already anticipated this with YTD returns of 14%
• Dollar strength could shift momentum out of commodity & EM through rising DEBT load from stronger USD.
Medium-term:
• European Parliament elections create more event risk – and increase in call for fiscal spending.
• Inflation expectations could start to rise slowly (from H2 -start).
• Data can not sustain the built-in overconfidence in sentiment – turning the needle down onthe price of money really makes ZERO difference. TLTRO really is just “state support” in the Keysian way.
Long-term (H2-2019):
• Europe will enact fiscal panic. The Eurozone budget deficit to GDP @ -1% in 2018 – the ECB and the Eurozone will see this a “free money”. Don’t forget low inflation is the biggest risk in a central bank's outlook – not lack of credit, inequality or market valuation.
• MMT – learn, educate yourself – not hard – I promise!
• EUR hits 1.03/1.05
• Germany joins Italy in recession.
• 10yr Bund yield goes to – 50 bps.
• EU equity will be dirt cheap in relative and absolutely terms.
• There could be a big opportunity for Europe to implement longer vision for Europe because of the growth crisis. I see Europe “needing” a crisis to redefine itself.
Despite the above, safe travels to you all,
Steen
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