Macro and Credit - Iconic Memory

"There are things known and there are things unknown, and in between are the doors of perception." - Aldous Huxley

Looking at the significant acceleration in the melt-up in the equities space in early 2018 on the back of decent macro data and earnings, with credit spreads going towards the 11 level on the credit amplifier in true Spinal Tap fashion, when it comes to selecting our first title analogy for the new year we decided to go for "Iconic memory". The development of iconic memory begins at birth and continues as development of the primary and secondary visual system occurs.  A small decrease in visual persistence occurs with age. Iconic memory is the visual sensory memory (SM) register pertaining to the visual domain and a fast-decaying store of visual information. It is a component of visual memory and is described as a very brief:

1. The duration of visible persistence is inversely related to stimulus duration. This means that the longer the physical stimulus is presented for, (QE 1, 2 and 3) the faster the visual image decays in memory.
2. The duration of visible persistence is inversely related to stimulus luminance. When the luminance, or brightness of a stimulus is increased, the duration of visible persistence decreases. Due to the involvement of the neural system, visible persistence is highly dependent on the physiology of the photoreceptors and activation of different cell types in the visual cortex. This visible representation is subject to masking effects whereby the presentation of interfering stimulus during, or immediately after stimulus offset interferes with one's ability to remember the stimulus

Information persistence represents the information about a stimulus that persists after its physical offset (Tapering). It is visual in nature, but not visible. The brief representation in iconic memory is thought to play a key role in the ability to detect change in a visual scene such as the continuation of the Fed's reduction of its balance sheet and its impact which has yet to be fully assimilated by many investors due to their "Iconic memory" we think. In similar fashion the "Iconic memory" of the Great Financial Crisis (GFC) has led many retail investors including the US middle-class to continue to be scared out of the stock market and leading the top 10% of American households to now own 84% of all stocks. 

In this week's conversation, we would like to look at what allocations could benefit 2018 in the on-going "goldilocks" environment thanks to a very muted volatility overall but, the most important question, we think will be once again the direction of the US dollar. In terms of "allocation" we gave a small Christmas present in our last musing on the 17th of December when we hinted that we liked gold miners again because they had "cheapened" a lot. We continue to like the sector for 2018. 

Synopsis:

• Macro and Credit - The US Dollar New Year's hangover
• Final charts - Credit Conditions in early 2018? Take it "easy"

• Macro and Credit - The US Dollar New Year's hangover

While in early January last year we indicated our contrarian view to the long USD investing crowd and we also indicated that in the context of a weaker US Dollar one should rather be overweight Emerging Markets (EM) equities versus US equities. The US dollar index fell by around 10% in 2017 which does indeed validates our early contrarian stance of 2017 as per our conversation "The Woozle effect":

"It appears that from a "Mack the Knife" perspective, it will be rather binary, either we are right and the consensus is wrong thanks to the Woozle effect, or we are wrong and then there is much more acute pain coming for Emerging Markets, should the US dollar continue its stratospheric run. From a contrarian perspective we are willing to play on the outlier." - source Macronomics, January 2017

And as indicated from the table below from the blog "The Capitalist Spectator", playing the outlier namely being overweight EM versus Equities has rewarded the "contrarian crowd" handsomely in 2017:

- source The Capitalist Spectator

Could 2018 play out differently than 2017 when it comes to the US Dollar? We do not think so, yet no doubt we could see in the early stage of 2018 a technical bounce of the US dollar. But, for us, from our "Iconic memory" perspective, we still see a weakening of the US dollar from a medium term perspective. On that note we agree with Barclays take from their note from their Thought for the Week Ahead note from the 7th of January entitled "The perils of following the consensus":

"USD: Holiday hangover

The USD has lost ground versus practically all major G10 and EM currencies (except for the JPY and MXN) since mid-December. Price action suggests that FX markets had largely anticipated the announced tax bill. Our economists have taken a closer look at the final details and recently updated their forecasts (see US Economics Research: 2018-19 US Outlook: Tax cut-induced bounce in activity, 4 January 2018). The tax plan is likely to boost near-term growth prospects by about 0.5pp and push out any slowing in the economy into 2019. Above-trend growth and a tightening labor market imply an increase in inflation toward the Fed’s target, and we now look for four Fed hikes in 2018 and three in 2019, taking the target fed funds rate to 3.00-3.25%.

That said, we do not see a lasting effect of the tax plan in pushing potential growth and, hence, long-term rates higher. The expected temporary boost to growth would be driven, largely, by a one-time improvement in disposable income. With many of the changes to personal taxation expected to be phased out of the bill, we do not expect it to have a permanent effect. In addition, it is likely to have heterogeneous effects for consumers based on household situations and the type of income earned. On the investment side, business spending has tended to have low elasticity with respect to changes in the required rate of return on capital, and as such, we are skeptical that it can deliver a substantial increase, particularly given the maturity of the business cycle. Finally, the discussion of restrictive immigration and trade policies that are also on the administration’s agenda may work against delivering lasting productivity improvements.

We remain USD bears over the medium term on account of an overvalued exchange rate (13% versus BEER), compression in risk premium in the US as symbolized by a bear-flattening yield curve, and a global backdrop that remains positive both in terms of cyclical prospects (the US cycle looking more mature) and from a valuation perspective. We believe the market’s focus will shift from tax policy to other policy priorities in Washington. These include approving the budget, immigration (DACA, the border wall, etc.), healthcare (renewal of CHIP, paying for Obamacare subsidies, etc.), and trade policy (NAFTA, alongside Korea and China). The 19 January government shutdown deadline and the seventh round of NAFTA negotiations on 23-28 January should be on investors’ radar." - source Barclays

As per our final conversation for 2017, either you think we are in a bull flattening case or in a bear flattening case:

"In a Bear Flattener case thanks to the Fed's Rician fading, it is still TINA playing out for the Japanese investor crowd" - source Macronomics December 2017.

We argued in our previous conversation that Japanese investors (and global credit and overall allocation wise these guys matter a lot) tends to be dip buyers ensuring in effect a bear flattening of the US yield curve. In 2018 we will watch again very closely what "Bondzilla" the NIRP monster "Made in Japan" will do in terms of "allocation". It is a major support to US credit markets as well. We think monitoring what the Bank of Japan (BOJ) does in 2018 will be paramount. On that note we agree with Deutsche Bank's take from their Japan Fixed Income Weekly note from the 5th of January entitled "BOJ normalization could pose a tail risk to domestic and overseas rates":

"Global investors focusing on the BOJ?

We expect the BOJ to be a major focus of attention among global investors in 2018. We say this because any change in the BOJ's monetary policy stance could have significant ramifications for how Japanese investors approach foreign bonds.

For example, the January 2016 launch of BOJ NIRP and September 2016 institution of YCC each had an important impact on international bond investment flows. Japanese banks were net sellers of foreign bonds to the tune of around JPY1 trillion and life insurers were big net buyers (+JPY4.8 trillion) over the 34- month period between the April 2013 launch of QQE and the January 2016 launch of NIRP, but the subsequent eight-month period up until the September 2016 launch of YCC saw net purchases of JPY5.2 trillion by banks and JPY9.3 trillion by lifers. The obvious conclusion is that the introduction of BOJ NIRP played a major role in the decline in the 10y UST yield from above 1.9% to below 1.4% that was observed between January and July 2016.

Conversely, the eight-month period following the launch of BOJ YCC (October 2016~) saw banks sell off foreign bonds to the tune of JPY9 trillion while lifers cut back their net purchases to just JPY1.3 trillion. We attribute this to bear-steepening of the JGB curve under YCC leaving domestic players with less of  an incentive to invest in foreign bonds, with life insurers in particular probably becoming more willing to wait for overseas interest rates to move higher once they perceived that the risk of the JGB curve bull-flattening had diminished.

Banks began FY2017 by selling off foreign bonds to the tune of JPY5.6 trillion in April (the biggest monthly selloff on record), rebuilt their holdings somewhat through July, and then shifted back into selling mode, meaning that they have now sold more than they have bought since April 2013. Lifers have also remained slow to add to their positions. We attribute this to a flattening of the UST curve —with the 10y yield having ranged between 2.00% and 2.60% even as the Fed has proceeded with multiple rate hikes—reducing the relative appeal of USTs. The flipside is that we see ample potential for Japanese investors to shift into dip-buying mode in the event of overseas yield curves starting to face bear-steepening pressure.

The key question among overseas investors is whether BOJ easing will continue to serve as an anchor for global interest rates. Under the current easing framework, demand from yield-starved Japanese investors should help to prevent overseas long-term interest rates from rising more than modestly. Conversely, if domestic long-term interest rates rise as a consequence of the BOJ commencing "normalization" efforts, then overseas interest rates could rise sharply due to Japanese players seeing less of an incentive to invest abroad. The trajectory of overseas interest rates in 2018 and beyond could therefore depend in significant part on what the BOJ decides and does.

It would not be at all surprising for short- to medium-term JGB yields to move significantly higher if BOJ normalization starts to be seen as a realistic possibility given that (1) foreigners have been by far the most active traders in negative yield short- to medium-term JGBs and (2) BOJ normalization is liable to reduce the FX "hedge premium" available to foreigners (and hence the attractiveness of short- to medium-term JGBs) by causing (negative) USD/JPY basis swap spreads to tighten.

Foreigners' cumulative net purchases have totaled JPY23 trillion for Japanese long-term debt securities and JPY14 trillion for short-term debt securities since the April 2013 launch of QQE, with medium-term JGBs likely to have accounted for much of the former if purchases were indeed funded mostly via the basis swap  market. Up until 2016 net purchases tended to increase when basis swap spreads widened, with this positive correlation reflecting the ability of foreign investors to earn positive spreads over USD LIBOR. However, we would expect foreigners to start reducing their Japanese bond holdings if and when the BOJ commences normalization, in which case short- to medium-term JGB yields might face some quite strong upward pressure until the YCC framework (which will presumably remain in place at least initially) begins to exert its influence once again.

Much will ultimately depend on inflation, but we are wary of bear-steepening risk under the YCC framework

Our US economics team expects US inflation to quicken in 2018, supporting a total of four further Fed rate hikes and a rise in the 10y UST yield to around 3%. The JGB yield curve is liable to face at least some bear-steepening pressure under such a scenario. However, we do not expect Japanese inflation to establish a firm foothold at or above +1% and thus see little prospect of the BOJ actually commencing normalization this year. As such, we will be looking for Japanese investors to step up their purchases of foreign bonds if interest rates move higher, thereby acting as a counterbalance. Irrespective of how many times the Fed hikes, upside for JPY rates is likely to be limited so long as Japanese inflation remains sluggish, leaving foreign bonds as the best means of generating carry. We expect the JGB curve to face a certain amount of bear-steepening pressure in 1H 2018 if overseas interest rates do indeed rise, but bull-flattening pressure may then start to dominate if the Japanese economy loses momentum, domestic CPI inflation peaks out, and the BOJ persists with its YCC framework.

The most obvious risk scenario is that of the BOJ shifting into normalization mode, in which case interest rates could rise quite sharply both at home and abroad. Attention in the first quarter of 2018 is thus likely to be focusing largely on (1) whether domestic and overseas inflation accelerates and (2) whether the Fed hikes once again in March." - source Deutsche Bank

As we pointed out it is still TINA (There Is No Alternative) for the Japanese investing crowd therefore we believe the bear-flattening of the US yield curve will continue its "Iconic memory" movement in 2018.

But moving back to the US dollar and the New Year's hangover, we read with interest Nomura's take in their FX Insights note from the 4th of January entitled "Two factors hurting the dollar":

"As is often the case, markets move when it is least convenient. The dollar has tumbled since mid-December until now – a period when investors were more likely to be embroiled in family dramas and over-eating than to be trading FX markets. Dollar weakness has come despite the passing of US tax cuts, an associated upgrade to US growth expectations and a hawkish Fed. There are many medium-term factors that we think are weighing on the dollar, but in terms of short-term factors, two stand out:

1. The dollar typically falls after a hike. Markets are all about expectations and it was likely the expectation of the December Fed hike that was helping the dollar. The actual hike, then, would naturally reset those expectations and would lead to a “buy the rumour, sell the fact” dynamic in the dollar. Indeed, the dollar has followed a pattern of trading relatively well into Fed hikes, but selling off after (Figure 1).

This time appears to be no different.

2. Rising US inflation expectations could be hurting the dollar. Wednesday’s ISM report showed the prices paid component bouncing back from an earlier dip. Oil prices are marching higher. Importantly, US inflation expectations as priced by US rates markets have consistently risen since early December. The 10yr breakeven from the TIPS market breached 2% in recent days – the first time since early 2017, and the 5y5y inflation swap inflation breakeven has gone above 2.35%. The dollar does not always move with inflation expectations (notably during the” Trumpflation” phase), but typically it does (Figure 2).

Some of this co-movement could be the dollar influencing inflation expectations, but some could be inflation affecting the dollar (through PPP, real yields or “credibility”). Either way, inflation could be returning as a market factor.

Of course, the start of the year is a period when market liquidity is poor. Therefore, we need to be cautious in extrapolating too much from price action, but these two factors do warrant some attention." - source Nomura

It isn't a surprised to see inflation returning as a market factor. A surge in inflation expectations would indeed mark a return of volatility and would be negative for bond yields. If inflation expectations are rising, then again it would continue to be headwind we think on the US dollar. Morgan Stanley in an interesting FX Pulse note from the 4th of January 2018 entitled "New USD Lows in Store" make as well the case for a lower US dollar:

"The case for USD weakness. The USD has come back under selling pressure and the DXY is set to break its early September low. This renewed weakness has occurred despite continued positive US economic surprises (Exhibit 2).

However, we note that the strength of US performance should be taken in the context of the global economy. Global synchronized growth, which should eat into global capacity reserves, will in turn clear the way for a pick-up in investment. Investment requires funding, which augurs poorly for funding currencies.

USD is the world's dominant reserve and funding currency. In order for a currency to be considered a funding currency, it should meet two important criteria: expected funding costs should stay below anticipated returns on investment; and the availability of capital must be ample.

In other words, there needs to be a substantial supply of the currency to be lent out and institutions or individuals willing to lend it. By definition, a dominant reserve currency meets this criterion.

As the world's primary reserve currency, then, it is no surprise that the USD makes up the majority of cross-border foreign-currency lending (Exhibit 5).

Other currencies may temporarily fall into the funding currency category, such as JPY, EUR, and CHF, which have seen periods of significant outflows.

Funding qualifications. The use of QE by global central banks has altered the funding environment, with central banks absorbing outstanding sovereign bonds in exchange for base money. In the case of QE programs from the ECB and Riksbank, EUR- and SEK denominated sovereign bonds held by foreigners declined as a proportion of total bonds outstanding (Exhibit 6).

In comparison, the proportion of foreign holdings of US Treasuries held relatively stable despite the Fed conducting its QE operations.

However, the relative stability of foreign Treasury holdings masks an important underlying shift. While foreign private accounts reduced their Treasury holdings, the ownership by foreign central banks increased. Two factors explain this. First, the Fed's QE operations took place in a period when global currency reserves were rising (2009- 2013), so demand for Treasuries from reserve managers rose in tandem. Second, debt issuance by the US government during this period also increased, so as demand for Treasuries grew with the Fed entering the market, supply also expanded simultaneously.

US assets for sale. Importantly, US agency debt and higher-yielding corporate bonds did experience a significant uptick in foreign holdings. Unlike in Europe and Japan, where private fixed income assets are in relatively limited supply, the US bond market offers a high yielding alternative to sovereigns. This in part explains the increase in the US' net foreign liability position (Exhibit 7).

Private foreign investors selling their Treasury holdings to the Fed reinvested those funds into higher-yielding USD-denominated bonds.

Our key point here is that foreign holdings of USD-denominated debt have increased, while foreign holdings of European debt instruments have declined. A similar dynamic has taken place for equities, where foreign ownership of US equities has more than doubled, which contrasts with trends in the foreign ownership of European equities. An important implication is that, should US assets lose their relative attractiveness (e.g., widening credit spreads, declining equities), then there could be a substantial amount of foreign-held USD-denominated assets for sale. In comparison, the relatively smaller share of foreign-owned assets in Europe renders it more immune to a pullback in foreign sentiment. This is why an environment of rising global bond yields may see the USD lose further ground.

The increase in the US's net foreign liability position comes at a time of relative stability in the US current account, with the deficit fluctuating around 2.5% of GDP since 2009 (Exhibit 8).

However, inward US net foreign direct investment (as provided by the World Bank) has turned negative for the first time since 2006. The composition of US inflows has become narrower, which renders the USD more vulnerable to selling once US equity and credit markets turn lower.

The case for JPY strength. One could argue that foreign ownership within the JGB market has increased, too. The BoJ's QE operations resulted in a significant absorption of JGBs held by the Japanese banking system, which reached the lowest level since 2007 and is now lower than that held by foreign investors (Exhibit 9). 

Importantly, many of these foreign JGBs have been currency hedged - with the FX hedge offering additional income, as opposed to a cost. Indeed, with the widening of the USDJPY basis, the returns offered for asset swaps into Japanese fixed income have increased. These foreign purchases have helped keep JGB yields low, particularly as the majority of the currency-hedged return comes not from the yield on the JGB itself, but from the currency hedge, which renders these foreign investors fairly price-insensitive.
The cross-currency basis represents the cost difference between domestic and offshore FX. A wider basis, all else equal, suggests tight offshore liquidity conditions, while a narrower basis indicates that offshore liquidity is relatively more ample. At this point, the 1 year USDJPY cross-currency basis is trading at its tightest since the summer of 2017, reducing the relative attractiveness of foreign accounts holding FX-hedged JGB exposures (Exhibit 10).

The reduction in this exposure may have no initial FX impact given the FX-hedged nature of the investments. The second order effects, though, are important, as reduced exposures could lead to a potential steepening of the JGB curve. A steeper JGB curve raises the incentive for Japan-based investors to keep funds at home, instead of investing in higher yielding foreign securities. For more detail on our JPY framework and why we no longer view the JPY as a funding currency, see: JPY: Impact of Bank Lending.

The neutral rate matters. Despite the Fed hiking rates 5 times since 2015, the USD will remain the globe's best funding currency. Buoyant financial conditions suggest that the Fed's gradual pace of rate hikes has not yet overtaken the market's perceived neutral rate of interest. The continued easing of financial conditions and the strong growth environment, it can be argued, suggest that the Fed may be behind the curve. Moreover, with soon-to-be Chair Powell taking the reins of the Fed in February, President Dudley planning to retire in mid-2018, and the three vacancies on the Board, markets may begin to question whether the FOMC's reaction function is set to change.

Forget the textbook. Textbook analysis would suggest that the estimated $1.5 trillion deficit expansion as part of the recently-passed tax reform bill, coupled with the limited degree of economic slack, should lead to higher US rates and a stronger USD. However, real yields remain at low levels by historical standards.

One way to explain this dynamic is that markets believe that there has been a structural shift in the mix between growth and inflation. However, another explanation could be a perceived shift in the Fed's reaction function, justifying real yields staying low.

Accommodative Fedspeak. FOMC participants have generally eschewed aggressive policy tightening, remaining instead in favor of a gradual normalization which keeps financial conditions from tightening prematurely. Indeed, despite the 5 rate hikes so far this cycle, financial conditions are at their loosest level since 2014 (Exhibit 13).

The most recent FOMC minutes support this thesis. However, some have also supported a looser regulation approach, most notably soon-to-be Chair Powell, whose comments during his testimony suggested an openness to regulatory reform.

Combining easy monetary policy with financial deregulation suggests that the velocity of money is poised to rise, which bodes well for USD liquidity conditions remaining ample. Other major central banks such as the ECB and the BoJ are also likely to gradually normalize their policy stances. This speaks in favor of the EUR and JPY against the USD as these areas remain investment destinations.

Explaining real yields. What drives real yields? Traditional academic research has suggested that factors such as demand deficiency, demography and aging societies, inequality, and poor total factor productivity are important, and these may explain the current low real yield environment within the DM world.

A recent BIS study has enriched this debate by claiming that the above factors may explain the evolution of DM real yields over the past 30 years, but they fail to explain real yield behaviors in eras preceding the 1980s. Instead, they argue, changes in central bank regimes may have had a bigger impact on the broader evolution of real yields. The current low real yield environment began in the early 1980s when DM central banks began adopting inflation-targeting regimes.

The effects of inflation targeting. Inflation targeting has been successful by maintaining price stability and providing stable funding conditions in the DM and EM alike, which has been an important foundation for EMs to develop income and wealth. Another implication, though, may have been an increase in liquidity preference (increased demand for cash and cash-like instruments) within DM economies which may also explain demand deficiency and, implicity, weak DM investment. This is because low and stable inflation reduces the costs of saving - compared to higher and less stable inflation, which may incentivize consumers to invest in other financial assets or consume.

Creating higher inflation expectations may reduce this liquidity preference, pushing these funds into circulation within the economy. The combination of Fed policy accommodation and financial deregulation may be sufficient to do so. A weaker USD in the FX market would be the side effect.

Bringing China into the equation. Prices tend to fall when supply exceeds demand. DM investment-to-GDP ratios have come down within the post-Lehman environment. However, what investors often miss is that the global investment-to-GDP ratio has been rising since the early 1990s, driven in large part by China (which currently has a 40% investment-to-GDP ratio). Exhibit 17 shows the relationship between the US 10-year yield with the global investment-to-GDP ratio. Yields declined as investment rose relative to GDP.

The fact that much of the investment took place in China, which has closed and regulated capital and financial accounts, may have helped global bond yields to stay low via two key channels. First, China's investment boom had largely been funded by local savings, meaning that little foreign capital was needed (which would have drawn capital away from DM bond markets). High household savings and an accommodative PBoC provided the sufficient liquidity. Second, the emphasis on investment provided a source of latent deflationary pressure, pushing inflation risk premia lower. This, in turn, bolstered the demand for liquidity, as inflation risks were low and stable, and in turn supported subsequent demand weakness.

In general, it is fairly unusual within a historical context to see a domestic investment boom without foreign funding contributing to it. Typically, investment booms and current account deficits (where investment exceeds domestic savings) should go hand in hand. When this is not the case, then funding costs tend to decline. Another example has been Japan's investment boom in the 1980s, which turned Japan into a country of low inflation even before the 1990s and beyond.

The concentration of investment in China, where local liquidity was sufficient to finance it, meant that global demand for capital did not rise, which allowed yields to stay low. Should China's investment boom be replaced by investment in other jurisdictions with open capital accounts, prices may still face disinflationary headwinds, but funding pressures would rise. The Fed, then, has an incentive to counter these disinflationary headwinds by keeping policy accommodative.

Still bullish on EM: The bearish USD story has been seen across the emerging market spectrum too. As risk appetite remains strong, investors will likely focus on vol-adjusted carry again to capture excess return. As seen in Exhibit 18, most of the high-yielding EMFX offers such value and we are bullish on most of these currencies.

We believe that rising global growth momentum, improving EM fundamentals and reasonable valuation in EMFX will prompt new inflows into EM in 2018." - source Morgan Stanley

Whereas Morgan Stanley believes a steeper JGB curve raises the incentive for Japan-based investors to keep funds at home, instead of investing in higher yielding foreign securities, we do not think Japanese investors have much alternative at the moment so the TINA trade will still make them buyers of the dip as mentioned above in our conversation. While we do expect some short term pull-back and US dollar strength in the near term, we do think that from our Iconic memory perspective more weakness lies ahead for the US dollar and given the positive macro momentum, equities wise, we would continue chasing EM over US equities from an allocation perspective. When it comes to credit, it is still "carry on" as we move again towards that famous 11 on the credit amplifier in true Spinal Tap fashion, basically more of the same, though as we pointed out we expect debt-fueled M&A to be a big theme in 2018 which will no doubt deliver some "sucker punches" along the way to the Investment Grade investing crowd, so, as we repeated in various conversations, dust up your LBO screener in 2018.

Yes 2018 has started with a bang with relentless tightening and equities indices racing even higher, the goldilocks environment is still alive and kicking, even if there are some genuine geopolitical concerns on the background. It is still pretty much "carry on". In our final chart below, for those still rooting for US High Yield, financial conditions in early 2018 still remain plentiful. Apart from a surge in inflation expectations that would warrant a faster tightening by the Fed in 2018, we do not see at the moment the catalyst for a sell-off unless of course our Iconic memory is playing with our thought process but we ramble again...

• Final charts - Credit Conditions in early 2018? Take it "easy"

As we pointed out, the goldilocks environment continues to be supportive thanks to low volatility in various asset classes. Credit conditions remain a key support for sensitive credit such as US High Yield, yet we do think after the significant rally of low beta in 2017 including the CCC bucket, one should start switching from quantity (yield) towards quality (up the rating spectrum). After all the US yield curve continues to bear flatten thanks as well to its Japanese support. Our final charts come from CITI Monday Morning Musings from the 5th of January entitled "Five Charts to Start 2018" and display comforting credit conditions:

"Comforting Credit Conditions

Commercial & Industrial (C&I) lending standards are the key reasons for being comfortable with the upcoming trend in business activity. Figure 9, which is key, illustrates the long-term relationship between the two and Figure 10 provides additional underlying detail. Essentially, easy money lowers the cost of capital and allows corporations to fund hiring plans, capex and working capital needs with C&I credit conditions providing a nine-month lead getting us well into 4Q18. As we have shown in the past, industrial production is very closely correlated with changes in net income.

- source CITI

While the US dollar has started 2018 with a hangover, we do expect a short term rebound in the near future though we remain bearish in the medium term. Meanwhile, no doubt to us, the central banking narrative is changing and it isn't only the Fed which has been retreating from QE, the ECB and even the BOJ are paring as well. Though your Iconic memory might be still playing tricks, you have been warned, the level of the strike on the central banking put is fading we think.

"There is no truth. There is only perception." -  Gustave Flaubert

Stay tuned !