Attentive to shocks
October 11, 2022
–ESZ very nearly at new lows this morning 3590. Early story yesterday said ‘Berlin backs joint EU debt for loans to ease energy crisis’. Bunds and tens sold off in response with TYZ 110-22+ low. Then a ‘German Gov’t Source’ disputed the story, and treasuries bounced. Current TYZ 111-00. In a broad sense, policy makers are reeling from high energy prices and inflation and can’t seem to find a coherent response that doesn’t involve borrowing more in less than hospitable debt markets.
–Brainard speech yesterday touched on the possibility that the Fed could overstep the inflation mandate:
The combined effect of concurrent global tightening is larger than the sum of its parts. The Federal Reserve takes into account the spillovers of higher interest rates, a stronger dollar, and weaker demand from foreign economies into the United States, as well as in the reverse direction. We are attentive to the risk of further adverse shocks…. And we are also very aware that the cross-border effects of unexpected movements in interest rates and exchange rates, as well as worsening external imbalances, in some cases could interact with financial vulnerabilities. In this environment, a sharp decrease in risk sentiment or other risk event that may be difficult to anticipate could be amplified, especially given fragile liquidity in core financial markets. In some countries, the realization of these risks could pose challenging tradeoffs for policy.
–That is…we might have to stop…soon. Three year auction today followed by tens and thirties Wednesday and Thursday. Less liquid conditions in US treasuries? We’ll probably find out with the ten year auction, coming just after PPI and before CPI.
