Usual Thursday jobless claims

Outlook:

We get the usual Thursday jobless claims, existing home sales and the Philly Fed today, leaving plenty of room for chatter about the Fed.

The WSJ headline screams “Fed Debates Early Rate Increase,” a statement wrong in more ways than one. In fact, nearly every member is willing to wait for more data. "Most participants indicat-ed that any change in their expectations for the appropriate timing of the first increase in the federal funds rate would depend on further information on the trajectories of economic activity, the labor mar-ket, and inflation," the minutes said.

We pretty much knew ahead of time that some members would dissent to the waiting game, i.e., hawk-ish noises, and yet this time dissent was not fully built in. The 10-year yield rose from 2.387% to 2.426% at the close and thence to 2.44% this morning. Now we await Yellen’s Jackson Hole speech, expected to be dovish and possibly reversing the yield rise. This is exactly the scenario imagined yester-day and markets are (so far) going along with it. You’d think that they would seek a little more ad-vantage ahead of time. That traders are not positioning pre-emptively may indicate their uncertainty quo-tient is just too high.

To be fair, the main paragraph everyone focused on is this: "With respect to monetary policy over the medium run, participants generally agreed that labor market conditions and inflation had moved closer to the Committee's longer-run objectives in recent months, and most anticipated that progress toward those goals would continue. Moreover, many participants noted that if convergence toward the Commit-tee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated." The language is stilted and contains a double maybe. If data is better, faster, maybe acting sooner will be called for—but maybe not, too.

Unstated is that offsets could appear. In fact, offsets may already be appearing in the three weeks since the policy meeting, as Market News notes. Take everything with a large grain of salt. Besides, it’s all so vague. "Some participants viewed the actual and expected progress toward the [Fed's] goals as sufficient to call for a relatively prompt move toward reducing policy accommodation." What, exactly, is “relatively prompt? You can imagine the Fed’s wordsmiths laboring over that one.

And here’s the kicker: let’s say Yellen moves the goalposts in Jackson Hole. She has already argued that the quality of jobs is low—lots of part-time and temporary jobs—and that the pool of permanently long-term unemployed is too big and growing. If she comes up with a new model with new goals, then “actual and expected progress toward the goals” will have to be re-evaluated. If the dissenters play by the rules, they will be roped back into the herd—meaning further delay. The FT says the Fed is clearer about its intentions. This is true only if things remain the same. Economists have to use ceteris paribus, but traders should be smarter. We bet Yellen is smarter, too.

And yet Jackson Hole is not the right place to announce a change in policy or the basis of policy. We may think the bond market is getting too far ahead of the Fed, but we can’t count on Yellen to pour cold water on them tomorrow. She could, and has signaled she might, but the minutes are the official record and Jackson Hole is a gab-fest. This means uncertainty over the interest rate outlook is far higher than any trader should find comfortable and we are going to have an awful weekend. No one would be sur-prised to see the dollar retreat today.

Too Big to Fail: We have some preliminary information that moral hazard is being dealt with in some concrete way—six years after the crisis. Reuters reports G20 may agree at the November meeting to banks being required to top up capital (instead of tapping taxpayers) by issuing GLAC bonds. GLAC refers to "gone concern loss absorption capacity," which is either a spelling error by Reuters (maybe “going concern”?) or a really bad translation. It will apply to the biggest 29 global banks. “The plans are being drafted by the Financial Stability Board, the regulatory task force of the Group of 20 economies which declined to comment ahead of a G20 summit in November, when G20 leaders will discuss the reform before it is put out to public consultation.”
It looks like banks “will have to hold GLAC bond capital equivalent to about 10 percent of their risk-weighted assets on top of their core capital buffers which currently stand at around 10 percent. But they hope for some leeway if they can show that they can already be wound down smoothly in a crisis be-cause of simplified structures.”

Here’s the good part: “In May, Moody's lowered its outlook to 'negative' on more than 80 banks in the European Union after the bloc approved a law requiring banks to hold a buffer of potential bail-in debt like GLAC.” After fixing too big to fail, G20 will turn to “conduct” like the LIBOR and FX fixings.

We will be surprised if anything substantial comes out of this, mostly because banks are so easily able to hoodwink regulators. Since bankers are not the brightest bulbs in the chandelier, the regulators must be dolts, but never mind. We can no longer complain about governments failing to address moral hazard, at least not so loudly. Let’s hope jail sentences get baked in.

Note to Readers: We will take off next Thursday and Friday, Aug 28 and 29. These dates precede Labor Day on Monday, Sept 1, which is a national holiday in the US. There will be no reports on Thurs-day, Friday or Monday. We return Tuesday, Sept 2.