- Oddsmakers in the United Kingdom have consistently posted very long odds for U.K. exit from the European Union.
- The flip in polls to Leave upended financial markets.
- Closer to home, Fed Chair Yellen acknowledged that forces holding down interest rates will be protracted.
So, the interest rate for U.S. mortgage borrowers is determined by London bookies? So it is, and for one more week.
And the result, briefly, rising now: U.S. 10-year T-note to 1.55 percent and mortgages near 3.50 percent, both five-year lows (note that overseas money prefers Treasurys to mortgage-backed securities, the yield spread widening).
Rate movements, domestic and global, are usually driven by new economic data. Last week’s movements were unusually powered by individuals, and even more unusually, individuals acting on principle.
Brexit: Leave or Remain
Bookies first: Oddsmakers in the United Kingdom have consistently posted very long odds for U.K. exit from the European Union. Until early June, opinion polls had forecast a narrow victory for Remain, then suddenly flipped to a substantial lead for Leave.
Polls there struggle as here in the age of cell phones to canvass representative slices of voters likely to vote — long gone the reliable days of home landlines. The bookies still have Remain ahead.
The flip in polls to Leave upended financial markets. First, a run on the pound could get out of control. Then, markets don’t like uncertainty, period.
Exit could embolden others to leave the EU, and even abandon the euro. And the world has a creaky feel to it, held together by central bank mucilage and shinplasters — don’t anybody jostle it!
The Brexit trade reversed last week on the unspeakable news that Jo Cox, 41-year old MP, mother of two, Labor supporter of Remain and a bright light of Parliament, had been shot and stabbed to death by a 52-year-old neo-Nazi howling his support for Brexit.
All the more shocking in the UK because only 21 homicides by firearm there in the last year — an ordinary Saturday night in Chicago. Unspeakable or not, global markets instantly assumed the assassination would knock back Brexit.
We’ll have election results here next Friday morning. If Brexit, like so many things, “Buy the rumor and sell the fact,” no big immediate deal. The world has had a lot of time to prepare.
If Remain, the EU and euro will still be in the same trouble, the mere fact of a close-result exit referendum damaging to both failed structures.
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Where will long-term rates go?
The most important long-term event: Chair Yellen’s five-stars-for-principle performance on Wednesday. “We are quite uncertain about where rates are headed in the longer term.”
Any Fed chair can turn on Greenspan’s fog and smoke machine, but it takes guts to speak truth, likewise implicit acknowledgement that Fed forecasting has been terrible for the last half-dozen years. The Fed has forecast a rapid return to 2 percent inflation, and Fed funds rate normalized to 4 percent ever since 2012.
Despite half of the twelve regional Fed presidents eager to raise the cost of money, the Fed will do so only as opportunity presents: a real threat of inflation or a strong rise in incomes. Previous analysis abandoned, and with it a steady series of hikes.
Soon after Yellen, Bank of Japan Governor Haruhiko Kuroda announced “no new stimulus,” which triggered a run into the yen, down to 104/$ and Japan’s 10-year to a new all-time low of negative 0.20 percent.
Kuroda said he was fully aware of the consequence of no-stimulus when everyone was expecting more (acting on principle!), but the BOJ’s power is now so limited that it must hold in reserve until Brexit is known, in case of global panic upon Leave. Yen under 105 will force BOJ action (Japan’s exporters cannot survive a yen so strong), but devaluation there will beget the same elsewhere.
Like China, steadily devaluing, not so much to boost exports as to soften flight from the yuan. Principle in China is a domestic matter, not concern for foreign devils.
Handicap it all…once again, we are so fortunate to be here. We are distracted by battles of principle around Trump, but prospects for his election are so poor that markets do not (yet) trade on what-if worries. What a luxury to feel economically independent of political hijinks, much as we wish for political economic fixes!
Here…brave Yellen acknowledged that forces holding down interest rates will be protracted. Excellent.
Those words ended an unfortunate period at the Fed expecting previously normal patterns to return. Our long-term rates will continue to follow overseas ones wherever they go, nobody driving.
The U.S. 10-year T-note, five years back.
The U.S. 10-year T-note, five years back. This week we touched the lowest-low since the all-timers in 2012. Drops below here will be slow and halting, with bouts of volatility, but nothing to prevent further declines.
The 10-year in the last week. Clear as day the drop after the Yellen’s press conference on Wednesday
The 10-year in the last week. Clear as day the drop after the Yellen’s press conference on Wednesday, continuing into Thursday with Kuroda’s overnight “no stimulus,” then the reversal after Thursday’s assassination.
The Fed-predictive 2-year T-note, back two years.
The Fed-predictive 2-year T-note, back two years. The market’s estimation of a shallow slope for future hikes has now broken altogether, just flat ahead.
Above are the newest “damned dots,” Fed Governors estimating the future location of the Fed funds rate at each year-end ahead.
Above are the newest “damned dots,” Fed Governors estimating the future location of the Fed funds rate at each year-end ahead. Three things:
- The projected slope has dropped a little more than one percentage point in the last three years of scattergrams, but then and now markets think absurdly too high.
- However, if you toss out the top six dots, the votes of iron-headed hawks, you get a more realistic view.
- And, oh my. Note the single, lowest dot, voting for no change at all through 2018.
On Friday, St. Louis Fed president James Bullard said, “That’s me,” and gave a born-again rationale for change of heart to emergency ease without end. He has changed his mind before with some drama, and seemed a dim bulb, the sort you might elect regional president so he would quit bugging you. Yellen had a fine week, and when the world settles down the Fed may find a way to lock future Bullards into the restroom during their entire terms.
This is the Fed’s own index of the labor market.
This is the Fed’s own index of the labor market. It may be poor data, or a poorly-conceived index, as no other significant data are pre-recessionary. But its steady decline is cautionary.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
