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The Weekly Track pass-through

- The Weekly Track – Pass Through? by Bob Savage
http://track.com/articles/the-weekly-track-pass-through/

We all look through the same past set of data and news and yet we come up with a myriad of forecasts for the months ahead – uncertainty has never been higher but volatility remains near all-time lows. September has always been a month of change, a passing through from Summer to Autumn, a shift from mid-year to end-year investment horizon, and usually a month of risk-off. This was still true but not with any notable volatility. What was different in September matters for how we think about October and beyond. The markets didn’t sell-off equities, they sold bonds instead, they reversed course on the USD, bought oil, and they began to doubt the wisdom of central bankers. There were 4 key actions that shifted the markets – 1) FOMC balance sheet adjustment – no matter how small or how well guided – this action changes the debt-monetization of the Federal Reserve and sparks comparisons to the ECB, BOJ and others. 2) The fiscal stimulus from the hurricanes. While no
t a significant amount it changed the Trump Administration from being Republican to being something else – by working with democrats he opened hope for fiscal spending writ large over the next 6-12 months. His tax plan release may add to the deficit and with the FOMC not covering that bills, the bond investors will charge a premium. The bipartisanship of September surprised many analysts. 3) Other central bankers shifted from accommodation to normalization – with the BOC Poloz being the front-runner but the ECB and BOE being the focus as their language shifts. Risks for 2018 reversing QE rise. 4) Geopolitics are less scary, North Korea lost its fear factor – even with a supposed hydrogen bomb test and multiple launches of ballistic missiles, the markets have learned to ignore the war of words and expect a path to peace as China tightens its trade and UN sanctions kick-in. The weekend vote in Catalan looks to be a test for how much fear politics play in Europe again �
� with the German election leading to a tough coalition, the protests in Spain Sunday will test the mettle of EU calm and perhaps the global calm that it helped inspire post the French elections. As the chart of the VIX to VVIX suggests markets are less sure about the path forward – this reflects the S&P500 3M implied volatility which trades near the lows and the steep expectations for higher volatility ahead.