Fed Week: The Great Balance Sheet Unwind?

Fed Week: The Great Balance Sheet Unwind?

All eyes are on Wednesday’s FOMC meeting, watching for clues on the details – and speed – of the Fed’s plans for its balance sheet; French labor unrest finally begins; Austria issues its first century bonds.

“Free trade is a good medicine for resolving problems.”
Chinese Premier Li Keqiang, in Beijing at a joint news conference with IMF Director Christine Lagarde and World Bank President Jim Yong Kim

The Fed rate hike in 2017: Back in the game Quite rightly, attention is focused this week on the nuances of the FOMC’s statements about beginning to reduce its holdings of Treasuries and mortgage-backed securities (MBS), the legacy of its years-long support of the U.S. economy after the 2008 Global Financial Crisis.

But there’s another rebalance taking place – financial markets have changed their implied odds of whether the Fed will raise its target rate in 2017. As recently as September 8, fed funds futures were trading as if the odds of a hike by the December meeting were about 27%.1 A mere week later, on September 15, those odds nearly doubled, to about 47%. Behind the shift: improving clarity on growth, both in the U.S.  and elsewhere, with continuing strength in job creation and corporate earnings in the U.S., a highly visible turnaround in overall economic growth in the European Union (EU) and continued growth in Asia – especially in China.

For more see Brandywine Global’s recent commentary: Synchronized growth and leveraged financial markets

French labor reforms: The rubber meets the road After a surprisingly placid summer, large demonstrations took place last Tuesday in reaction to President Emmanuel Macron’s newly-enacted labor code. The protests highlighted the new leader’s basement-level popularity, a rapid fall since his strong second-round showing of over 66% in the presidential election on May 7. A recent contributor to President Macron’s troubles was a recent speech in Greece, during which he answered resistance to his reforms, by stating he would cede nothing “…to slackers, nor to cynics, nor extremists”.

Austria: Looking 100 years ahead This past Tuesday saw the government of Austria issue a 2.1% bond with an unusual feature: it matures in 100 years, in September 2117. This was the first public “century bond” issued by a government in the eurozone, which is itself only 18 years old as a currency union. The issue was for €3.5 billion ($4.2 billion) of the new bonds, after having received €11 billion in orders. The yield was seen as attractive. Little wonder; at the same time, Austria issued €4 billion in five-year bonds whose yield is  -0.2%.


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