Fixed Income Highlights
- One Pill Makes You Larger. And one pill makes you small. While the Fed took the one making QE smaller, the Bank of Japan took one making it larger. And yes, the ECB continues to take the "ones that mother gives you" that don't do anything at all. For the U.S. interest rate outlook, expanding global QE helps restrain the rise in longer-dated yields.
- A Surprisingly Hawkish Fed and, Finally, Rising Wages. The market read the October FOMC statement as surprisingly hawkish. But the Fed's surprise upgrading of the labor market proved prescient as the 3Q Employment Cost Index finally showed accelerating wages. Wages are the most lagging of lagging indicators highlighting that the well-entrenched though not particularly robust recovery no longer justifies emergency Fed support. We continue to expect the Fed to exit from zero interest rates before the market does and for that to lead to the largest increases in shorter maturity yields.
- Return to Achnacarry Castle. In 1928, the leaders of the global oil industry met at Achnacarry Castle, signing what became known as the "Achnacarry Agreement" to control global petroleum production. It didn't work. Today, a debate rages of a return of sorts. Falling oil prices reflect dramatic changes in the marginal supply of oil, shifting expectations for demand and, critically, a change in the outlook for monetary policy strengthening the dollar and weakening its equivalent measure in the price of oil.