How Much Growth and Green Shoots the Fed and ECB Would Need to See Before Contemplating a Tightening?

TGIF, eh? The week’s almost over, and all Macro Man can say is “good riddance.” He’s actually scratched out a bit of P/L this week, but overall the last five trading days have been deeply unsatisfying. Hey, at least the SPX managed to break away from the 1025 tractor beam yesterday…closing higher after trading weak for most of the session. Deeply unsatisfying indeed.

But even that was a visit to Xanadu compared to what can only be described as a classic FX screw job last night. Just before 3 pm New York, when most spot jockeys are more interested in the latest Mets injury or the Yankees’ Dr. Evil-esque payroll, some bright spark decided to jam a $3 billion order in USD/CHF through the market. Supposedly this was to fund a purchase for the UBS share tender, but Macro Man has his doubts, given the timing and manner of execution.

(By way of discalimer, he had no position in FX, so was unaffected by last night’s carnage. Price action like last night’s isn’t exactly tempting him to rush back, however.)

Bloodshed of a more predictable type came in the Aussie fixed income market overnight, following on the heels of an article from well-known RBA watcher Alan Mitchell suggesting that the bank could begin hiking rates as early as Q4. The entire strip beyond front-Sep was mullahed by at least 20 bps. Ouch!

This, of course, raises the question of how much growth and green shoots the Fed and ECB would need to see before contemplating a tightening. US Q3 GDP is now tracking at something like 4-4.5%, and if the inventory surge continues a similar result in Q4 is certainly not impossible.

Jeff Lacker was on the tapes yesterday expressing a desire to avoid the mistakes of Easy Al during the last cycle, when rates were left too low for too long. If and as CBs like the RBA start putting up rates (rightly or wrongly), surely some sort of risk premium will be introduced into G4 fixed income markets if growth numbers keep up?

After a 60-70 bp rally in the reds and an en fuego bond market, Macro Man can’t see much of a risk premium there. So perhaps that’s where he should be directing his energies for the time being. Ironically enough, of course, the very introduction of a risk premium in rate markets could well be a key catalyst for a lurch back into the second half of a W-shaped growth profile early next year.

Macro Man suspects that it will be some time before he can say “good riddance” to the hit-and-run trading methodology that’s carried him through the last couple of months….

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