View from London: Janet Yellen, What She Says and Will She Stay?
08/25/2017 2:55 am EST
The key risk for markets is in rates with the US 10-year yields still firmly in the downtrend with 2.19% and 2.24% tight boundaries for the next momentum trade, writes Bob Savage, CEO of Track Research in his Friday commentary from London.
Forget the hawks and the doves, whether Janet Yellen stays at the helm of the FOMC if asked is the most interesting question and debate at Jackson Hole. The idea that ECB Draghi will upstart the Fed debate over its succession plan is not rational.
The politics of the day in the US and the need for continuity and stability anywhere it can be found are clearly in play. Whether Gary Cohn wants the job or not, whether Janet Yellen wants to stay or not, that is what reporters should be asking and what President Trump should be deciding now, so that by December the clarity for such plans can be made public.
The heart of the issue is the pace of rate hikes into 2019 and this is the backdrop to understand the ECB Draghi speech and how it will affect the forex and bond markets.
The euro (EUR/USD) 1.16-1.19 has been the consolidation zone since the ECB minutes suggested that the EUR gains were an issue.
You can’t have a 10% rise in the EUR ignored by the central bank nor can you compare it to a 25bps rise in 10-year yields. The QE unwind for both the ECB and FOMC looms over the other key fear – market stability and credit spreads as the global markets have compressed yields to levels that don’t reflect the real risks of default and uncertainty.
We can start with the September fear of a US government shutdown – the odds of which logically should be zero given that Republicans control the Congress but are rising post the Trump Phoenix rally. One report put the odds of a showdown at 75%.
Political stories elsewhere matter but it's Friday and they become weekend fears.
Here is a short list:
1. A Thai court issues an arrest warrant for former PM Yingluck after she fails to show up for court - apparently fleeing the country – this postpones the verdict to Sep 27. She is banned from politics until 2020 and was fined $1bn for her government’s $26bn rice-buying program. The present military government fears protests and may delay the planned 2018 elections if unrest rises.
2. Turkey’s Erdogan urges German voters from Turkey to shun mainstream parties. Turks in Germany traditionally support the SPD but this is in doubt. This becomes a new risk to consider in the election for September 24. How Merkel builds a coalition after the vote remains the central question – and if it takes the same amount of time as the Dutch or Spanish – watch out. It also adds to the split between German and Turkey relations and makes complicated the NATO and other responses to Russia.
3. Polls narrow into Norway September 11 election – growth helps the center-right government. 2Q GDP up 0.7% q/q helps argues HSBC. The opposition Labor Party still is ahead in the polls, however, and the debate over how to use the Sovereign Wealth Fund remains key – as the charges of profligacy from the government without gains particularly in housing sticks.
As for the economic news overnight – Japan saw CPI edge up – as expected – and the BOJ cut its buying of bonds – also as expected.
The German IFO slips marginally, as does the French Consumer Sentiment.
None of this matters to markets today as the mood is about central bankers and geopolitical risks with it being the last Friday in August and more about vacations than positions.
All that said, the key risk for markets is in rates with the US 10-year yields still firmly in the downtrend with 2.19% and 2.24% tight boundaries for the next momentum trade – expect one of those if not both to break today into Yellen at 10 am.
Durable goods will also matter today but less so given the focus.