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1. Anatomy of an Equities CorrectionВт., 20 февр.[−]

Equities have bounced back from correction territory but how will the pace of Fed rate hikes, rising budget deficits and inflation impact stocks and bonds.

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2. La Ni?a: Calm Before the Storm in Ag Markets?Ср., 14 февр.[−]

Corn, soybean and wheat markets are witnessing an odd juxtaposition – the onset of a La Ni?a and exceptionally low options’ implied volatility (Figures 1 & 2). Why this is unusual is that corn, soybeans and wheat often experienced exceptionally high volatility (about 1.3-1.5x normal) during many of the past eight La Ni?a episodes (Figures 3, 4, 5). As such, one could wonder: are markets being complacent in the face of approaching danger?

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3. Could Equities Jitters Affect Pace of Fed Rate Hikes?Чт., 08 февр.[−]

Is a Fed rate hike in March a certainty? If the correction in equity markets is prolonged, the central bank could decide to postpone any increase until June.

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4. Three Least Likely FOMC Meetings to Hike RatesПн., 05 февр.[−]

The Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) did nothing at its January 31 meeting; however, Federal Funds futures are signaling as many as three rate hikes are probable in 2018. In this report, we take another perspective, and explain which are the least probable FOMC meetings for a rate hike. Our analysis suggests that the FOMC meetings ending on Wednesday, May 2, 2018, and Thursday, November 8, 2018, are unlikely to see rate hikes; and the summer vacation meeting on Wednesday, August 1, 2018, is not far behind as a snoozer. Here is the full story.

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5. Fed: End of an Era of Economists at the Helm?Пт., 02 февр.[−]

Dr. Janet Yellen’s term as Chair of the Board of Governors of the Federal Reserve (Fed) System ends in early 2018. While she could be reappointed for another four-year term as Chair, reading the tea leaves in Washington D.C. suggests a scenario where we may see a person from a business career take over the gavel. And not just as Chair. There are three vacancies on the Board of Governors, and we also expect a new Vice-Chair in the summer of 2018. That is, there is a potential for five new board members on a seven-member board, and some or all of those seats could be filled with business-career credentialed individuals instead of persons with academic or central bank experience. This could usher in a major cultural change at the Fed. Such a cultural shift might make a very big difference in how decisions about interest rate policy may be made.

Our intuition is that more business experience on the Fed Board of Governors and fewer economists will shift the debate away from academic interpretations of monetary policy and increase the focus on the interplay of rates and debt. More specifically, the high debt loads in the U.S. will create a bias for lower than otherwise rates, so that increases in debt-service expenses do not derail an economic recovery. Over the long haul, if this scenario prevails, a bias toward lower rates relative to inflation is likely to also lead to a weaker trend for the U.S. dollar as well. For a podcast on this topic by Blu Putnam, please visit:

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6. VIX-Yield Curve: At the Door of High Volatility?Пт., 02 февр.[−]

We freely admit: Figure 1 is probably the strangest chart that you will ever see, at least in finance. You may be wondering: did they throw blue spaghetti noodle on paper for inspiration and then write an economics article about it? Or, have they spent too much time with disciples of psychologist Timothy Leary, a proponent of experimenting with psychedelic drugs?

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7. Gold: Showing Strength Despite Rate-Hike SignalsЧт., 01 февр.[−]

More than any other factor, changes in expectations for U.S. interest rates play a key role in determining short-term movements in the price of gold, and to a lesser extent silver and platinum. During much of the past two years, the correlation between the daily change in the prices of gold and Fed Funds futures, expressed as an interest rate (100 minus price), has averaged at around -0.6 (Figure 1).

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8. La Ni?a: Grain Options' Implied Volatility LanguishesЧт., 25 янв.[−]

Grains are showing little concern for the La Ni?a in the Pacific Ocean, with options' implied volatility for corn and soybeans languishing.

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9. Equities: Are TOPIX and Nikkei Still Cheap?Вт., 23 янв.[−]

Three months ago, we discussed the impact of Abenomics on Japan’s economy. Japan’s economy, generally speaking, has been doing well. While there is plenty to quibble about, since Prime Minister Shinz? Abe assumed power in late 2012 Japan has had its best sustained growth since the 1980s. Unemployment fell to its lowest level since the early 1990s and inflation turned slightly positive. Not everything is coming up roses: the government still runs a substantial deficit although its smaller than before, and while debt levels remain colossal, they have stabilized.

Not surprisingly, Japan’s two main equity indices, the TOPIX and the Nikkei, turned in a stellar performance. Since Abe took office in late 2012, the TOPIX returned 180% while the Nikkei returned 195%. By way of comparison, the S&P 500® returned 110% over the same period of time.

Part of what boosted Japanese stocks to even greater returns than their American counterparts, is aggressive quantitative easing (QE) by the Bank of Japan (BoJ). Not only does the BoJ’s QE program dwarf that of the U.S. Federal Reserve (Fed) and the European Central Bank (ECB), (Figure 1), it also involves buying over $50 billion of Japanese stocks via exchange traded funds (ETFs) each year. This differs substantially from the ECB and the Fed whose buying programs stuck purely to fixed income products.

In addition to bidding up the equity market directly, the BoJ’s QE program also boosted the equity market indirectly by weakening the Japanese currency. Since Abe came to power, the yen has fallen 30% versus the U.S. dollar (JPYUSD), 25% versus the euro and 28% versus the renminbi. Not only has this helped to halt deflation and revive economic growth, it also made Japanese firms more competitive and increased the value of their foreign earnings and assets from a yen perspective. JPYUSD demonstrated a negative correlation with TOPIX for the past five years – Abe’s entire time in office. (Figure 2).

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10. Why Has Inflation Been So Subdued?Пт., 19 янв.[−]

With unemployment low and inflation expectations creeping higher, the U.S. Federal Reserve (Fed) may hike rates two or three times in 2018, and Treasury bond yields might drift a little higher. The big caveat is that this consensus scenario will only happen if inflation actually follows the script and starts to rise. Dr. Janet Yellen will no longer be Chair of the Board of Governors of the Federal Reserve System (Fed); however, the Jerome Powell-led Fed and bond market participants are likely to remain just as data dependent as was the Yellen-led Fed.

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