Friday, 12 July 2019

The Queen Does Not Tolerate Negative Interest Rates

Central Bank Rates and 10-Year yields in Britain and the Commonwealth appear to be immune to the negative interest plague.

All former British Colonies' interest rates are greater than or equal to 0.71%.

Fair to say the Queen isn't sold on the virtues of Negative Interest Rate Policy.

Central Bank Rates in Britain and the Commonwealth States (Australia, Canada, New Zealand) Trailing 20 Years (%)

10-Year Yields, 2005-2019 (%)

The $12 Trillion or so in negative sovereign bond yields is so far restricted to the EU and Japan.

Saturday, 6 July 2019

Interest Rates: Central Bank Rate Spreads Highest in Over 20 Years

Equally as curious as the new negative interest rate phenomenon is the generous spreads between official Central Bank Policy Rates.

Central Bank Rates:

USD <2.50%
CAD 1.75%
GBP 0.75%
JPY -0.10%
EUR -0.36%

USD-EUR spread = 286bps.

Points of note:

1. The Fed leads the pack (first to act) in terms of interest rate policy, followed by Canada then Britain. Fed policy is a good predictor of global central bank policy.

2. Beginning 2017, The Fed hikes interest rates 8 times, the BOC 5 times and the BOE 2 times; while the BOJ leaves rates unchanged and the ECB actually cuts interest rates further into negative territory.

3. The spread between Central Bank Policy Rates is widest in over 20 years. Post-2008 "central bank policy coordination," is the unofficial policy mantra among policymakers, which implies an eventual conversion of interest rates. This means either The Fed cuts interest rates by about 250bps, or the ECB and BOE hike by a similar amount.

One thing is for sure: interest rate divergences this wide won't last forever.

USD, CAD, GBP, BOJ, & ECB Relative Interest Rate Performance

USD (Blue) vs EUR (Beige) Interest Rate Performance - 275bps Spread

Macro Fundamentals: Interpreting Friday's Jobs Numbers

Do you know why the June Unemployment Rate increased a tenth of a percent from 3.6% to 3.7%?

Because the Labor Force Participation Rate also increased: i.e., more and more people are entering the Labor Force. People who've quit looking for jobs in the past are now actively seeking employment again. 

Only those actively seeking employment get counted in the official unemployment rate; the more people there are seeking employment, the more people there are being counted as unemployed. (Job seekers that drop out of the labor market (stop searching) are excluded from the official number.)

So, the actual rate of unemployed people didn't increase; there's just a greater number of job seekers included in the sample.

To the casual observer, an uptick in the Unemployment Rate appears to be a negative development, but that is not the case.

Market effect
Traders view the number of unemployed people as a general signal of overall economic health, as consumer spending is highly correlated with labor-market conditions, and is also a major consideration for monetary policy at The Fed.
Investors tend to interpret the Unemployment Rate in relation to the LF Participation Rate as follows:

Unemployment Rate ↑ + Labor Force Participation Rate ↑ = +

Unemployment Rate ↑ + LFP Rate ↓ = -

Unemployment Rate ↓ + LFP Rate ↓ = +/-

Unemployment Rate ↓ + LFP Rate ↑ = ++

By forming a general but comprehensive view of fundamental economic data and getting a sense of the potential market implications a trader adds a valuable tool to his tool-belt