The good news for global “markets” is that the eurodollar curve suggests some further relief from the persistent “tightening” that has gripped the “dollar” system since July. The bad news is that the curve is now less enthralled with the idea that the FOMC might actually raise rates as they say they will. That includes ignoring several assurances offered just this week that the “recovery” remains on track. I suppose that means, at least in this period, that oil prices are suddenly more believable than economists.
In just two weeks’ time, the July 2017 eurodollar futures contract has gained about 72 basis points in price (meaning the interest rate has fallen by 72 basis points, from 2.61% on September 30 to just 1.93% today), a pretty astounding move in its own right. Since 2017 has largely been the pivot by which the policy window has turned during the past two years of ZIRP promises, that seems like some very serious doubts about not just the proclivity of the FOMC to actually follow through with forward guidance but also what that means for actual growth not in some distant decade (as secular stagnation puts it) but very close to now.
Given the fireworks across credit markets recently, especially today, that may not be all that surprising. It does, however, highlight yet again just how little the corner is that the QE people have painted themselves toward. If they actually try to raise rates the world falls into a very disruptive state, with more than a little potential blowback into the US given that there is no such thing as a closed system economy. If they don’t commit to that course, “markets” will lose that assumed psychological assurance that all is well and getting better. In other words, what “market” signal will be gained from an FOMC that changes its mind about ZIRP; or, perish the thought, QE5? The lesson from the ECB’s desperation this year is, I think, very illustrative of that potential.
It may not quite be a “no win” scenario but it is getting uncomfortably close to that. This was always going to be problematic, and even the Fed itself noted as much on many, many occasions. The difference between DSGE models and what we find today is the absence of actual growth and the clear failure of monetary policy to achieve even close to its original aims (outside of asset bubbles which are now more than a little hindrance). Again, robust growth was supposed to have occurred by now giving the Fed and its fellow central bank planners worldwide great margins for “exiting.”
Having gained very little of what was expected in the economy, including a very evident rebuke of “aggregate demand” philosophy, I think we are about to find out just how narrow the margins might actually be at this point. If eurodollars are an indication, it’s not going all that well. Of course, that really isn’t a surprise given that the curve, and almost every other bond curve worldwide, has been flattening since taper was started. So the difference now is about how soon the potential revelation might arrive and how low, exactly, secular stagnation might actually be.
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