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Sponsored Repo: Salve for a Constrained Repo Market, or Potential Funding Destabilizer?
A series of imbalances have arisen in money markets in the decade since the financial crisis, including September’s dramatic spike in overnight repo rates. We believe market participants’ increased reliance on overnight funding and banks’ reduced ability to intermediate money markets under post-crisis regulations were key drivers of this spike – and continue to leave repo markets vulnerable.
The End of the Beginning
While the election result reduces Brexit uncertainty significantly, it doesn’t eliminate it. Will there be an extension of the transition period? How will any deal affect the economy? In the meantime, UK banks and sterling, especially wounded since the 2016 referendum, still offer value, while low-yielding gilts look unattractive relative to other government debt, such as U.S. Treasuries.
Treading Carefully: Risk and Opportunity in CLOs and Bank Loans
A Shift in Approach Could Help Keep Short‑Term Markets Liquid
China CPI Breaks 3% PBOC Target: What Does It Mean for Policy?
Impeachment Could Be Both Bad News and Good News for Trade Policy
These are extraordinary times in Washington, D.C., in which President Donald Trump is only the fourth president in U.S. history to face an impeachment inquiry. Regardless of the outcome, the impeachment proceedings will likely dominate Washington for the foreseeable future.
U.S. Equities: Calm on the Surface, Turbulent Within
September Fed Meeting: Divisions Over the Path of Policy
As expected, the Federal Open Market Committee (FOMC) reduced the fed funds range by another 25 basis points to 1.75%–2.00% at its September meeting, making this the second cut since the Federal Reserve stopped hiking interest rates last December. However, we see two bigger takeaways from Wednesday’s meeting. First, Fed officials remain divided on the appropriate near-term path for interest rates; and second, the Fed could announce a change to its current balance sheet policy as early as October.
Saudi Oil Site Attacks Exacerbate Tightening Supply, Add to Price Risk Premium
Oil prices surged Monday after attacks on Saudi Arabia’s Abqaiq processing plant and Khurais oil field Saturday suspended more than half the country’s oil production. While the ultimate impact will depend on a combination of the extent of damage, the U.S. and Saudi response, and whether further attacks occur, the current production decline will exacerbate the tightening in the oil market that was already underway and could add a more lasting geopolitical risk premium to prices.
Oil Supply Outlook: Is Your Barrel Half Full or Half Empty?
Disruption in the Eurozone: Challenges of an Arranged Marriage
Global Fetters: Insights From Jackson Hole
While Federal Reserve Chair Jay Powell’s speech at the Jackson Hole Economic Policy Symposium last week didn’t break any new ground other than confirming market pricing for further near-term rate cuts, several academic papers presented at the symposium and Bank of England Governor Mark Carney’s luncheon speech provided deeper insights into global monetary linkages that have become an increasing headache for central bankers both in the U.S. and elsewhere. While a brief blog post won’t do justice to all of these contributions, here are my main takeaways.
Yield Curve Inversion: Markets Are Correct to Price In Higher Recession Risk
On 14 August, the yield spread between two-year and 10-year U.S. Treasury bonds moved below zero for the first time since February 2006. Though it has since widened back to positive territory, the move was significant because such “inversions” of the yield curve – in which short-maturity yields exceed those for longer-maturity bonds – have preceded nearly all recessions dating back to the 1950s. The move has also, understandably, made investors more wary of the economic outlook.
Summer of Discontent: Market Volatility Underscores Fragility of Aging Expansion
The proximate causes of the volatility have been building sources of uncertainty, initially from a Fed press conference that appeared less accommodative than markets had hoped and then from escalating tensions between the U.S. and China given a surprise tariff announcement by the U.S. and an unexpected currency adjustment by China.
Trade Tension Flare‑Up: Not So Surprising
Any hope for a quiet August in Washington was dashed when President Donald Trump took to Twitter last week announcing he would move forward with imposing 10% tariffs on about $300 billion of Chinese goods on 1 September. This threat comes in addition to the 25% tariffs already imposed on $250 billion of Chinese imports to the U.S.
U.S. Dollar Policy: Through the Looking Glass of U.S. Currency Intervention
President Donald Trump has claimed many times that China has unfairly manipulated its currency. Recently, he lashed out against the European Central Bank (ECB) for hinting at additional monetary policy stimulus because it might drive the euro lower against the dollar. Consequently, investors have become keenly attuned to the possibility of a shift in the strong dollar policy that has been in effect through several U.S. administrations.
Signs of Stress in U.S. Economy Bolster Expectations for Fed Rate Cut
The Federal Open Market Committee (FOMC) is poised to cut the policy rate at its meeting on July 30–31, but members of the committee are divided. Markets are pricing a 25 basis point (bp) cut, and we believe that is the most likely outcome, but we also see a meaningful chance of a 50 bp cut.
Core CPI Inflation Beats Expectations, in Awkward Timing for the Fed
U.S. core consumer price inflation (CPI) was firmer than expected in June, with a 0.3% rise that boosted the year-over-year rate to 2.1%. The timing of the strong print is somewhat awkward for Federal Reserve officials who have signaled a willingness to cut interest rates in July.
Off‑Target: Central Banks and the Mystique of 2%
Central banks around the world are pivoting toward easier monetary policy. In some countries this means rates are falling below previous record lows, and in the U.S. the Federal Reserve has paused a rate-hiking campaign and now appears more likely to lower rates than raise them further.
In a World of Disruptions, Flexibility Matters
Oil Sell‑Off Sparks Investment Opportunities
In recent weeks, renewed trade concerns, slowing oil demand, and a notable acceleration in implied U.S. oil production have spurred a material sell-off in oil. Similar concerns caused oil prices to drop at the end of last year, which prompted OPEC+ (i.e., the Organization of the Petroleum Exporting Countries plus 10 additional oil-producing nations) to cut production, reversing policy set earlier in the year of increasing output ahead of a reintroduction of sanctions on Iran.
Interest Rate Outlook: Fed Evaluating Risks to U.S. Economy
As U.S. Federal Reserve officials enter the communications blackout period ahead of the June 18–19 FOMC (Federal Open Market Committee) meeting, bond markets are pricing in a modest chance (roughly 12%) that the Fed will cut interest rates by 25 basis points in June, and a much higher (roughly 88%) chance of a cut by the subsequent meeting in late July (source: Bloomberg as of 10 June 2019).
Key Takeaways From PIMCO’s Secular Outlook: Dealing With Disruption
Our base case for the global economy over the secular three- to five-year horizon sounds relatively benign – at least at first sight. We foresee a continuation of lackluster economic growth on average. We expect low inflation to persist and central banks to keep interest rates at or below New Neutral levels.
The Pivot in U.S.-China Trade Policy May Herald Long Term Tension
In any trade negotiation, the last few innings are usually the most fragile since that is when more difficult issues are addressed, and the U.S.–China negotiations in early May are certainly proof. We had shared in the growing optimism that a deal would be secured given the political appetite on both sides, although we did note the inherent fragility of late-stage negotiations. Even with that caveat, however, the hardline pivot over the week of 6 May and the U.S. decision on 10 May to increase tariff rates on Chinese goods have taken virtually everyone by surprise, including us.