I look forward to the day my grandchildren ask me “Why didn’t you invest when interest rates were negative? It could have limited global warming as we burn today. ”
I will say then, “Very smart people thought that the public debt was too high. Negative rates were then an opportunity to reduce it” and they answer me “isn’t it a lack of foresight, of perspicacity?”
The climate challenge for future generations is more important than an accounting view of the public debt. We fear to leave them a debt too high that could constrain them. Not taking advantage of current opportunities is the best way to constrain their life and their future.
=> The recent volatility on financial markets, through lower interest rates, was the consequence of lower expectations on global growth after the White House announcements. In the coming week, there will be data on retail sales in the US (15), China (14) and UK (15). These data will show the robustness of the domestic demand. If these data are strong in the US and in China, financial arbitrage may be modified in favor of risky assets
=> GDP growth in Germany will be, in the Euro Area, the most important indicator of the week (14). The industrial production index dropped dramatically in the second quarter (-7.5% at annual rate) and this downturn is consistent with a negative growth figure (probably more than the consensus at -0.1%). The ZEW survey for August (13) will highlight the duration of this drop Employment figures in the Euro Area and the detail for GDP will be released on August the 14th.
=> Employment figures will be important as the unemployment rate is low now (7.5% in June) and the economic dynamics is lower.
Investors do not see how to exit from uncertainties. They rush on non-risky assets. The recession at the corner #monetarypolicy #recession
In the past, when all market rates on the US public debt were below the fed funds rate, this was a harbinger of a recession. The current period will not escape the rule. The decline in rates reflects a strong pessimism over the next few months and the incapacity to bet on the future.
A few months ago the ECB suggested a rate hike in the fall of 2019. It will finally be a rate cut in September. What is the forecast capacity of the ECB? Very weak, however the entire financial system is bent on the choices made by central banks.
That’s it, for the last 2 days the rate over the 30 years US has gone below the fed funds rate. All interest rates of the US curve are now below the fed funds rate. This reflects a terrible concern for the future. Investors no longer want to take bets on the future. It should be noted that the inversion of the curve no longer reflects a compression effect resulting from the rise in the Fed rate as expected last autumn, but an effect of poor expectations for the future. The two schemes are very different and the second is the most worrying.
Such a signal has always been a precursor of two points: the first is a decline in Fed rates. For macroeconomic reasons (the data are still robust) and for the credibility and independence of the US central bank, I hope that this rate cut will not take place in July (or even here) The second point is that this configuration of US interest rates is always a signal of future recession. Simply put, it is not only investors who have poor expectations about the future. The rapid fall in interest rates is simply a signal for the perception of the future. This one is not specific to financiers. The US recession will certainly take place in 2020. We can imagine that until then, the tenant of the White House will be firing on all cylinders to show that he has done everything possible to avoid this decline in activity during an election year. The pressure on the Fed is going in this direction, as is the pressure on China. But if he fails, there will be no shortage of scapegoats. Jay Powell, the Fed President, will be in the front row but also probably Xi Jinping, the Chinese President who will not have put all the goodwill necessary to reach an agreement with the US. “Heads I win, tails you lose”
How to read the end of the risk associated with the Brexit of March 29th? Look at the 10-year Bund rate. It dropped into negative territory with the risk of an immediate and brutal shock related to Brexit. With the UK’s exit from the EU postponed, this immediate risk disappears and the rate comes back into positive territory again