La prescription seemed complete for a increase in interest rates, long since crushed to historic lows. On the one hand, the economy was buoyant, especially in the United States; on the other side, inflation reared its head (at all levels: raw materials, producer prices, consumer prices…); on the other side again, public deficits at record levels were expected to attract risk-averse investors with more attractive yields…
But, like a souffle that deflates, the recipe didn't work. Over Use, with consumer prices rising by 5,4% over the year, the yields of T Bond they are down to 1,29%! In Germany, where consumer prices accelerated to 2,4% (12 months ago they were at -0,2%) the yields of Waist 10-year bonds fell another handful of basis points, to -0,35%. What is behind these anomalies?
Market psychology often defies rhyme and reason, but some answers can be attempted. Let's look at the first ingredient of the above recipe: the buoyant economy. The markets live solidly installed in the future, not in the present. And, as far as the future is concerned, the divinations are often little more founded than those of the haruspices, who relied on the lucky stuttering of the birds or on the distant counterweight of the stars. But, in this case, the fears that the Delta variant or the Lambda or… could undermine the recovery are not unfounded and, given that long-term rates are very sensitive to the weakness of the economy, these fears may explain the retreat.
Second ingredient: inflation. If, as many (not all) think, price rips are temporary, this too can explain the shrugs of rates: le expectations long-term inflation, the markets seem to think, do not vary, ei structural factors that keep a lid on price increases will set prices back on reasonable paths.
Third ingredient: i deficit public. Being risk averse is a double-edged consideration: on the one hand it can mean that we need to ask for more returns from those who are more indebted; on the other hand, it induces to be on the safe side. AND public bonds are in any case the safest. And then, not everyone is risk averse: the buyers of last resort – the central banks – do not risk. Even if rates were to rise and the value of the bonds they hold were to fall, they are not obliged to put the capital losses on the balance sheet, since they have the firm intention of holding them until maturity. And even if, in some complicated and unlikely case, they should record capital losses, it doesn't matter: central banks enjoy financial immunity...
Speaking Central banks, this phase of economic recovery (ignoring for a moment the threats of the new variants of SARS-2) has brought to light a big question that was not topical before. What will happen to anti-conventional policies (zero or sub-zero interest rates, bulimic purchases of public and private securities…) inaugurated (deservingly) by the guardians of the currency? There Fed – who is earning the gallantry of monetary policy “innovation hotbed” – has already replied: the inflation target (first term) remains at 2%, but, as already signaled last month, it will be a 2% across the cycle, leaving room for ups and downs. And he announced, like other central banks, that Qe's measures will gradually come to an end, but always in direct connection with the economic data: when this leftover is shipped, it will no longer need crutches. And meanwhile the Fed, as regards the second mandate (employment), is innovating in the sense that it wants one “inclusive” growth: puts his foot down on the distribution aspects, which until now had been ignored by the central banks.
Also the ECB innovate. The regular meeting on Thursday 22 July will be more intense than usual, as the monetary policy strategy for a post-pandemic Eurozone will be better defined. Here too, the 2% target for the inflation rate changes, albeit less markedly than the one proposed by the Fed. But the important thing is that the target is no longer "near but below 2%" (a target which called for expansionary policies when inflation was too low). Now the goal is 2% dry. This shows that if inflation were at 1,9%, in theory the ECB should work to bring it back towards the "Sacred Chalice" of 2%. But what if this generous effort pushes inflation above 2%? Lagarde lets it be understood, she seems to understand, that she would understand…
Another theme is that ofdigital euro, which the ECB studies and designs, like the rest of the other central banks, some of which (the Chinese and the Swedish) are already ahead in these digital currency projects. It's about adding more weapons and ammunition to the Coin Guardians Armory and Magazine. There are arcane issues related toefficiency of payment systems, and other, less arcane, relating to the possibility, for the Central Bank, of inject money into the economy more directly (individuals may have bank accounts with the Bank). Of course, if one day of the 2.0 pandemic the Bank of Italy, on instructions from the ECB, were to make us a generous transfer, it would be nice. The path would be less tortuous than the one that goes through the purchases of securities on the secondary market. Of course, purists would say so the boundaries between monetary policy and fiscal policy are blurred, but we, who are not purists, would answer: and what's wrong with obfuscating?
To finish with the rates, those Really, thanks to the higher inflation, are I went down again (except in Italy, where inflation is almost at a standstill). In the history of the American economy, it is not easy to find another year in which the difference between the growth rate of the economy and the real rate on T-bonds has reached ten points or so. Proof that in this post-pandemic world many things are changing… However, real rates are negative or zero comfort the economy and foster the investments the world needs.
Il dollar, which goes leaving 1,20 against euro, do some upward tests. The appreciation to 1,18 is modest, and remains within the range of the last 12 months. There are reasons – growth differential – which militate in favor of further appreciations (at the beginning of 2021 there were even those who advocated a greenback at 1,30 by the end of the year), just as there are reasons that go in the opposite direction – long-term real rate differential, investment opportunities in the Old Continent – which influence in the opposite direction those capital movements which are predominant in the currency market. In this tug of war the most likely outcome is (relative) stability.
In the last two years, the difference between the lows and highs of the dollar/euro exchange rate e yuan/dollar for the two exchange rates, it was very similar, just over 10%. But, if we look at the yuan/euro exchange rate, the fluctuation is smaller, as if the Chinese currency wanted to stay closer to the single currency than to the dollar.
Over the last twelve months the dollar register a substantial depreciation, both against the euro and against the yuan.
I stock markets, who have not forgotten to grind records every other day, are they ripe for a correction? Certainly, the scratches (or worse), which the variants of the coronavirus will inflict on the recovery, the likelihood of a fix increases. But not a lasting turnaround. Some will argue that, going forward, the probabilities of rate hikes make bonds more attractive, just as Delta or Lambda make equities less attractive. But, as mentioned in another section of the “Lancette”, in the end vaccines will win, And , in a world that wants to grow and with more than accommodating economic policies, favor the stock markets.
What about Bitcoin? It's down again, to $31000-odds. Goldman Sachs, which accompanied the listing of the Crypto-Echange Coinbase, says the roller coaster of the Bitcoin volatility and trading increase, with positive effects on Coinbase's earnings. Strange and interested consolations…
