Converging Views Only Starts With Fed ‘Pause’

There’s no sign of inflation, markets are unsettled, and now new economic data keeps confirming that dark side. Forget each month, every day there is something else suggesting a slowdown. That much had been evident across much of the global economy, but this is now different. The US has apparently been infected, too, not that that is any surprise.

That’s how these things go. Global synchronized growth, decoupling, globally synchronized downturn. Every time. What’s amazing is just how quickly US decoupling in 2018 has disappeared. It’s like they’re not even trying anymore, so shocked at how quickly and fervently markets have turned (despite their brave public face, inversion[s] almost surely has everything to do with it).

The Wall Street Journal reports today what has been plainly obvious for more than a week if not longer. Even Jay Powell sees it, which means “it” isn’t something small if the US central bank is thinking about shifting. A Fed “pause” has been priced by markets for months now, only now they are trading as if that isn’t even the full extent.

Eurodollar futures, for example, the curve continues to be inverted in the same key space right at the end of the 2-year window where real economy meets the Federal Reserve’s very limited influence. Futures prices have been bid (meaning an overall expectation for lower money rates, LIBOR, in the future) but the inversion continues and has even deepened.

The market is saying forget about a pause, there is as likely rate cuts in the intermediate future. Again, without any sense of wage inflation (also amazing just how fast the LABOR SHORTAGE!!! disappeared, too, from the front pages) there is just nothing on Powell’s side while a great deal of evidence continues to stack up against him.

Today, it was US trade figures. It doesn’t take any calculations to see that “something” is different about 2018, indeed the last six months or so.

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