Morgan Stanley: "We remain optimistic that Congress will deliver another fiscal stimulus package, but it may take a market wobble this month to get the package over the goal line."
Forget the people and the economy - all that matters is the market.
Earlier this week, JPM's quant Nicholas Panigirtzoglou spotted an ominous signal for equities: similar to what happened in mid-2018 (just before the Fed's overtightening sent stocks tumbling into a mini bear market in Q4 2018), and then again in the late summer of 2019, when the "break" in the repo market (which incidentally was caused by JPMorgan) forced the Fed to launch "Not QE", last week the front end of the US Treasury curve (which is a far better signal of financial stress than the long-end which now is mostly a function of global QE) represented by the 1m OIS 2Y-1Y forward spread and which to the JPM quant "is a better signal of policy expectations", once again inverted, sending an ominous alert signal across asset classes.
As the JPM quant continued, "while the spread between the 1- and 2-year forward points of the US OIS curve in Figure 2 had improved rapidly and turned significantly positive after the dramatic policy response to the virus crisis last March, it has been slipping over the past couple of months and turned negative last week. It printed -3bp negative on Monday, June 29th."
To JPM, this suggests that rate markets are signaling the need for further monetary and/or fiscal policy stimulus across DM economies. And, logically, if the Fed turns a deaf ear to this latest extortion attempt by market, and additional stimulus is not delivered, then the inversion at the front end could worsen, "eventually becoming a more problematic signal for equity and risky markets going forward."
