breaking up is hard to do - cfa institute · breaking up is hard to do monetary policy still in...

Breaking up is Hard to Do Monetary Policy Still in Drivers Seat

2017 Market Review

Marvin Loh

October, 2017

Managing Director

This presentation is the property of The Bank of New York Mellon Corporation, its subsidiaries or affiliates (“BNY Mellon”) and is provided

solely for informational and educational purposes. The contents of this presentation are confidential to BNY Mellon and may not be

reproduced or disseminated in whole or in part in any form without the express written permission of BNY Mellon.

2 Information Classification: Confidential

Central Bank Balance Sheets Cross $14 Trillion Mark

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

4

6

8

10

12

14

16

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

Sep-15

Dec-15

Mar-16

Jun-16

Sep-16

Dec-16

Mar-17

Jun-17

Sep-17

Totals Fed ECB BOE BOJ

Source: Central Banks, Bloomberg


Source: Bloomberg, Central Banks

2017 will see Strongest QE Flows

-0.21

0.49

1.71

0.60

0.59

0.21

1.06

1.69

1.94

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2009 2010 2011 2012 2013 2014 2015 2016 2017

Totals Fed ECB BOE BOJ


Volatility Remains Near Lows Across Multiple Asset Classes

Source: Bloomberg

30

50

70

90

110

130

150

170

190

210

230

Vix Essentially at all-time Lows indexed to 100 (1/1/10)

30

40

50

60

70

80

90

100

110

120

130

Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

MOVE

FX

but FX and FI also Near Lows Indexed to 100 (1/1/10)

Source: Bloomberg


Near Decades Loose Financial Conditions

-1.5

-1

-0.5

0

0.5

1

1.5

Rate Hike

Rate Hike

Rate Hike

Rate Hike

Bloomberg U.S. Financial Conditions Index

Source: Bloomberg


CAD/Oil Historical Correlations +0.8, Now Just -.20 Since August

Breaking Old Relationships

0.65

0.67

0.69

0.71

0.73

0.75

0.77

0.79

0.81

0.83

0.85

35

40

45

50

55

60

65

70

Jan-1

5

Feb

-15

Ma

r-1

5

Apr-

15

Ma

y-1

5

Jun-1

5

Jul-1

5

Aug-1

5

Sep-1

5

Oct-

15

No

v-1

5

De

c-1

5

Jan-1

6

Feb

-16

Ma

r-1

6

Apr-

16

Ma

y-1

6

Jun-1

6

Jul-1

6

Aug-1

6

Sep-1

6

Oct-

16

No

v-1

6

De

c-1

6

Jan-1

7

Feb

-17

Ma

r-1

7

Apr-

17

Ma

y-1

7

Jun-1

7

Jul-1

7

Aug-1

7

Sep-1

7

Oct-

17

Oil (LHS) CADUSD (RHS)

Source: Bloomberg


10 Year Spreads Now 93+% Correlated with Currencies (vs 65%)

Yield Differentials Drive Currencies

Source: Bloomberg

0.8

0.82

0.84

0.86

0.88

0.9

0.92

0.94

0.96

0.98

160

170

180

190

200

210

220

230

UST/Bunds

USDEUR

1.1

1.15

1.2

1.25

1.3

1.35

1.4

0

10

20

30

40

50

60

70

80

90

UST/CAD

USDCAD


ECB – Tapering Unavoidable

0%

5%

10%

15%

20%

25%

30%

35%

40%

ECB Ownership of Outstanding Bunds Skyrockets

Source: ECB and Bundesbank

4

5

6

7

8

9

10

11

12

Monthly WA Portfolio WA

Average Maturity of Bund Portfolio Collapses

Source: ECB, Bloomberg


Japan has already started the Tapering Process

77.5

88.5

99.510

10.511

11.512

Monthly Purchases Of JGBs by BOJ

Yield Curve Controls = Stealth Taper

Source: Japan Macro Advisors

20

25

30

35

40

45BOJ Dominant Owner of JGBs

Source: Japan Macro Advisors

60

80

100

120

140

160

180

200

220

240

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Japan

Greece

Debt Sustainability Crossed over Threshold Long ago

Debt as % of GDP

Source: Bloomberg


Source: Bloomberg

Fed Still sticks to its Guns – 3 in 2017/3 in 2018


Fed Projections Mostly on Track Noticeable Shortfall in Inflation


But Strong for Employment Data

Fed Projections Prove Inaccurate for GDP and PCE

0

1

2

3

4

5

6

7

2014 2015 2016 2017 2018

GDP UER PCE Core

Source: Federal Reserve, Bloomberg



Tightening does not mean Tighter Financial Conditions

Fed Funds and Chicago Fed Financial Conditions

0

1

2

3

4

5

6

7

8

9-1.5

-1

-0.5

0

0.5

1

1.5

2

NFCI Fed Funds (RHS)


Not Your Average Tightening Cycle (2s/10s Curve)

-100

-50

0

50

100

150

200

0 9

18

27

36

45

54

63

72

81

90

99

10

8

11

7

12

6

13

5

14

4

15

3

16

2

17

1

18

0

18

9

19

8

20

7

21

6

22

5

23

4

24

3

25

2

26

1

27

0

27

9

28

8

29

7

30

6

31

5

32

4

33

3

34

2

35

1

36

0

36

9

37

8

38

7

39

6

40

5

41

4

42

3

43

2

44

1

45

0

1994 (233) 1999 (155) 2004 (214) 12/2015 (?)

Source: Bloomberg


Rates – Recent Volatility Driven by Real Yields, Inflation Gains

Source: Bloomberg

1.2

1.4

1.6

1.8

2

2.2

2.4

2.6

2.8

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

10Y Yield (rhs)

Real Yields (LHS)

Inflation (RHS)


Fed Balance Sheet Run-Off Will Remain Much Higher than Historical Averages

0%

5%

10%

15%

20%

25%

30%

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

BS as % of GDP

$18 Trillion @ 6% = $1 Trillion

• Source; Bloomberg, World Bank, Federal Reserve

600

800

1000

1200

1400

1600

1800

0%

50%

100%

150%

200%

250%

300%

350%

Dec-0

2

Au

g-0

3

Ap

r-04

Dec-0

4

Au

g-0

5

Ap

r-06

Dec-0

6

Au

g-0

7

Ap

r-08

Dec-0

8

Au

g-0

9

Ap

r-10

Dec-1

0

Au

g-1

1

Ap

r-12

Dec-1

2

Au

g-1

3

Ap

r-14

Dec-1

4

Au

g-1

5

Ap

r-16

Dec-1

6

Cash in Circulation

Bonds/% cash

Historical Levels Imply $1.5 Trillion


Fed Owns 16% of Outstanding Treasuries

0-1 Years 1-2 Years 2-5 Years 5-7 Years 7-10 Years 10 & Longer Totals

Outstanding 3,863,708 1,976,554 4,693,675 735,818 1,134,837 1,854,968 14,259,560

Fed Holdings 102,594 773,573 652,507 176,722 80,629 540,611 2,326,636

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2.7% 39.1% 13.9% 24.0% 7.1% 29.1% 16.3%



USD Flows – Possible Turning Point

Source: BNY Mellon iFlow


EUR (USD Weakness) / GBP (News Flow)



CAD selling throughout rally led by - Canadians



MXN – EM Data Point



New Fed in 2018 Looms


DOVE NEUTRAL HAWK

Tarullo , Lacker, Fischer Excluded

Source: Federal Reserve System, BNY Mellon

All of a Sudden, a Hawkish FOMC – Late 2017 Edition

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breaking up is hard to do - cfa institute · breaking up is hard to do monetary policy still in...

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