It’s “Natural”

in Credit by

Earlier today we said the following regarding the Fed and “optionality”:

“It’s all just a matter of counter cyclical breathing room. What’s becoming quite clear as we plunge ever deeper into the Keynesian rabbit hole is that zero really is the “lower bound.” These policies have literally stopped working altogether. In fact, as we’ve shown on any number of occasions, they’re starting to act counterintuitively (e.g. pushing FX higher instead of lower in Japan) as market participants effectively test policy makers in whom they’ve lost faith. It’s traders calling central bankers’ collective bluff.”

Well, as it turns out, Deutsche Bank absolutely agrees. Here’s the bank’s genius (no sarcasm there, for real) strategist with the breakdown:

“Post Jackson Hole, we see no additional source of uncertainty that would disturb the existing status quo. This suggests a continued bid for the long end, with possibility of some curve steepening both in the short and long term. Except for a short interruption in the beginning of 2015, the curve has been flattening for over two and half years, Fig 1, with 2s/10s UST slope declining from 260bp in 2014 to its present 80bp levels. The mode has been effectively curve twist, Fig 2, which has been a function of several factors, from policy mistake, strong USD to global economic slowdown and foreign demand catalyzed by negative rates abroad. In the last months, the flattening trend has slowed down and its further continuation would be somewhat difficult to argue without additional assumptions. Possible emergence of fiscal stimulus debates in 2017 is likely to increase steepening risk as we approach presidential elections.”


(Charts: Deutsche Bank)

“Vol has been discounting a likelihood of rates normalization in the near term. During the last three months, this possibility has been pushed further into the future with performance of the upper left corner reflecting residual uncertainty associated with one or two isolated hikes. This is consistent with the idea that a full hiking cycle is unlikely, just a few hikes intended to free some maneuvering space without disturbing the markets.”

Exactly. They’re just trying to give themselves as many basis points of optionality as they can because they know that as long as Kuroda and Draghi maintain the status quo, it’s dollar bullish and risk bearish.

Come on, just look at Kuroda’s own words (via Bloomberg):

  • Bank of Japan Governor Haruhiko Kuroda says “the bank will carefully consider how to make the best use of the policy scheme in order to achieve the price stability target.”
    Kuroda spoke Saturday in Jackson Hole, Wyoming, at annual policy conference hosted by Federal Reserve Bank of Kansas City
  • “We will act decisively as we move on”: Kuroda
  • Says the “zero lower bound is no longer insurmountable” as a policy constraint “in practice”
  • Kuroda: “It is natural to assume another lower bound exists”
    Says the current rate is “still far from such a lower bound”

Yes, how “natural.”

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