Below is a chart and brief excerpt from today's Early Look written by Macro analyst Christian Drake.
|
If relative attractiveness/growth is driving capital flows to U.S. assets, it is also (directly or indirectly) supporting the dollar and (directly) driving a disinflationary impulse and an associated rise in real yields. Absent an organic and durable acceleration in domestic growth, the only way out for the Fed is to loosen policy, which is a precarious tightrope walk … which is also probably redundant since a tightrope walk can’t, pretty much by definition, be anything other than precarious. Anyway, If that loosening is just sufficient enough to support activity & assets domestically then it will lead to more relative attractiveness ... the same relative attractiveness that drove dollar strength, disinflation and a tightening of dollar liquidity & global financial conditions that (at least partially) necessitated the loosening in the first place. In other words, the Fed needs to go big enough to drive a reflationary impulse globally such that the policy and growth divergence can compress, ROW can take the handoff and a protracted run of global Quad1/Quad2 capable of driving durable $USD pressure works to extricate the fed from the perversity cycle above. The market began pricing in negative policy rates domestically for the first time ever yesterday. |
