Greetings,

We begin with the United States where Janet Yellen indicated that a return to the more traditional techniques to manage monetary policy is unlikely going forward. That's because with rates remaining depressed for the foreseeable future, there is only so much "traditional" easing that can be done before hitting zero. At the same time, few on the FOMC are willing to entertain the possibility of negative rates.

Source: @WSJ

Chair Yellen also echoed the Fed's Fischer's earlier comments that a rate hike is coming.

Chair Yellen's speech, Jackson Hole, Wyoming, August 26, 2016; Source: FRB

Markets initially had some difficulty finding direction, with a relatively muted overall reaction to the speech. Much has already been priced in.

1. The 2yr Treasury yield continued to rise.

Source: Investing.com

2. The Treasury curve flattened further, with the 10y-2y spread hitting 76bp.

Source: St. Louis Fed (FRED)

3. It was strange to see gold and equities so correlated.

4. The September implied rate hike probability jumped to 42%, although many analysts remain skeptical.

Bloomberg Function: "WIRP" 

5. Dollar bulls are waking up again. The dollar's rise against the yen was especially sharp (second chart below).

Source: YCharts.com

Source: myfxbook.com

6. Banks are looking forward to this rate hike because they can charge more for loans but still pay zero on deposits (higher interest margin). US banking shares jumped.

Source: YCharts.com

7. Shares of US utilities were hammered on higher rate expectations.

Source: YCharts.com

8. The Russell 1000 index 30-day historical volatility remains remarkably low. The implied volatility (VIX shown in the second chart below), while off the recent lows, ended up roughly where it started on the day.

Source: Bloomberg Terminal, Function "HVG"

Source: YCharts.com

---

1. In other US developments, the U.Michigan long-term consumer inflation expectations remain at record lows. This metric would argue for caution with respect to rate hikes.

2. The decline in the US velocity of money seems to be accelerating. This tells us that a unit of credit expansion (which is what grows the money supply) "buys" progressively smaller amounts of GDP growth.

Money = M2; updated based on Friday's US GDP

3. US banks seem to be increasingly comfortable holding consumer loans (non-real-estate).

4. Puerto Rico's problems continue, as the massively underfunded pensions come into focus.

Source: @WSJ

1. Switching to emerging markets, Fed's Fischer's comments and Yellen's Jackson Hole speech put some pressure on emerging markets currencies.

2. The renminbi is weakening again. Here is USD/CNH (offshore).

3. Brazilian 10y government bond yield rose back above 12%, although it remains significantly below the highs from earlier this year.

Source: Investing.com

4. On the other hand, here is Chile's 10y government bond yield.

Source: Investing.com

1. Turning to the United Kingdom, the net speculative British pound positions hit another record.

2. UK's private sector investment prior to the EU Referendum was surprisingly strong. The second chart below shows fixed capital formation which exceeded expectations.

 

3. UK's 5y breakeven inflation expectations (based on inflation-linked gilts) continue to rise, with markets expecting the pound's weakness to translate into larger price increases. 

Speaking of inflation expectations, Eurozone's 5x5 forward inflation swap rate remains on a downward trend.

Now on to commodities where, according to the International Grains Council, global wheat and corn markets are heavily oversupplied. US wheat and corn futures resumed their declines. A stronger US dollar on Friday didn't help.

Source: International Grains Council

 

Finally, US cheese inventories have risen to multi-decade highs on cheap and plentiful European imports.

Source: USDA

Turning to Food for Thought, we have 5 items today:

1. The Economist recently published this chart on how “Amexit” impacted the British stock and bond markets  - roughly a 22% stock market correction over the year and a half that followed the Declaration of Independence. 

Source: The Economist, ‏@PlanMaestro

2. "Old" vs. "new" money around the world.

Source: ‏@business

3. Public approval of various federal agencies in the US.

Source:  ‏@BenLeubsdorf

4. The most "globalized" nations.

Source: @wef

5. The growing "upper middle class" in the US.

 

Source:  ‏@WSJThinkTank