“I wish there was a painless way. There is not any.”
Federal Reserve Chairman Jay Powell said so to reporters as the central bank hiked US interest rates this week and markets listened.
The resulting strength in the dollar has helped the pound get crushed along with all the other stuff. And after at least six Additional rate hikes by central banks (plus Japanese currency intervention that likely involved selling the dollar to buy the yen) extend the pain even to US large-cap stock indices, which are down more than 2 percent at pixel prices.
Or as Bank of America puts it: “This is going to hurt.”
Ouch.
“Central banks will rise until something breaks. . . Weak liquidity increases the risk of a breach and tighter financial conditions,” the bank’s rates strategy team wrote in a note on Friday.
Of course, if rates rise and markets sell off, there’s a chance that this will be driven by duration rather than a broader risk-aversion panic. . .
Just kidding, not this time! US junk bond ETFs (HYG and JNK) are down more than 1 percent, while the investment-grade corporate ETF (LQD) is down about 0.7 percent.
Goldman Sachs’ Tony Pasquariello interjects:
[Two-year yields] are looking for the biggest annual backlog since the infamous bond market massacre of 1994 (an event very few of today’s risk-takers have witnessed… By design, everything that’s happening now in real time — dramatically higher interest rates, the Fed’s maelstrom – Balance sheet contraction and tightening US bank capital restrictions – clearly points in the wrong direction when it comes to liquidity Also, as you can see in the first chart below, one can argue that this turnaround has only just begun, while liquidity is only one is input to the fundamental equation, it is clearly increasing headwinds for risky assets – and has created a renewed sense of “abandon ship” in the stock market.
In fact, investors have withdrawn cash from all asset classes except money market funds over the past week, according to another BofA team.
But hey, at least 10-year gilts are now worth more than government bonds! (Currency adjustment not included.)