With continued uncertainty around the world, it appears the next move by the Fed may be to cut interest rates.  Also, what has happened in Japan is stunning.

Weak Economy Equals Interest Rate Cut(s)
March 26 (King World News) – 
Here is what Peter Boockvar had to say as the world awaits the next round of monetary madness:  I know so many are pulling out the results of their data mining on what happens after the yield curve inverts. Does a recession follow? When does it not? If it does, when? What do stocks do after? I get it, historical context but what’s the historical context for 10 years of ZIRP, NIRP and massive QE? There isn’t much and why also so many other seasonal historical precedents have been thrown out the window. We have to take the current situation as it comes and then try to figure it out rather than blindly relying on what’s happened in the past. I hear too many saying that even if the inversion is followed by a recession, it usually doesn’t happen for at least a year. Maybe again, maybe not.

Continuing the comments from Fed heads this week, Boston President Eric Rosengren is “more optimistic” on the economic and inflation outlook than others and said “it is possible the next move would be up” with rates. On the other hand and covering his tracks, “I’m also quite willing to accept that if the economy weakens and the global economy weakens more than I’m anticipating, and the recent data could be consistent with that, then the next move could be down.”


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With the uncertainty of which we way go, he was fully on board with the pause. I think he’s terribly mistaken with this comment on inflation, “We’ve not been taking enough risk to allow the economy to clearly embed a 2% inflation rate.” Seven years of NIRP and a quintupling of its balance sheet is plenty of risk and please get off the obsession with achieving 2% inflation. If they focused on CPI instead of PCE, they’d be there and is a few tenths below 2% PCE inflation really a big deal? No and consumers don’t care for a higher cost of living and we are a consumer dependent economy.

SF Fed President Mary Daly speaks this afternoon. 

These Have Been Crushed
Somewhat influenced by the timing of the mainland lunar new year, Hong Kong’s exports in February fell 6.9% y/o/y, well below the estimate of a decline of 2.4%. Merging the exports to China over the first few months of 2019 still saw a decline of about 4.5%. Exports to the US dropped by 20.5%, to Japan by 20% and to Germany by 15%. Imports fell by 3.8% y/o/y which was a bit better than expected. Bottom line, exports were weak and reflects the global economic slowdown but we know that already at this point. The extent and degree from here is what we don’t know. 

The bond selloff we’re seeing in Europe and the US started in Japan with JGB yields getting less negative by 2 bps to -.065%. The Nikkei also got back 2/3 of what it lost on Monday. One influence on the Japanese stock bounce was that 1500 Topix companies go ex dividend tomorrow and buying today can get you that dividend. The Topix bank stock index also recovered much of what it lost. I talk a lot about the European bank stocks but Japanese ones have been crushed as well (see chart below).

Japan’s Bank Index Has Plunged 90% In 30 Years

Looking longer term, this bank index is down by 90% from 1989. This is what extreme easing leads to, the evaporation of profitability for one’s banks. I beg the Fed to study what has gone on in Japan and Europe before they respond with the next easing cycle which the market and myself believe will start later this year.

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