US Federal Reserve chairman Jerome Powell has said that if he had had more clarity on the nature of inflation, the Fed would have used its tools earlier.An outcome of this shift – all while inflation pressures have continued to build – is that the Fed has articulated an ambition to lift the cash rate to neutral as soon as practical, as well as reducing the balance sheet by unwinding quantitative easing.
The daily volume of bond futures and many listed commodities and stocks is at levels similar to before the pandemic. However, for traders and investors to “find” sufficient volume to trade, prices have to move further, and this greatly exaggerates price moves.Bid and offer size has shrunk. This can be a sign of market stress, or trigger stress elsewhere. But most markets that are stressed typically don’t melt up; they melt down.
Australia is different, right? Inflation is indeed lower than in the US so the Reserve Bank narrative is closer to the European Central Bank’s than the Fed’s. Wage pressures are building as full employment is nearby, but it is a lower and later starting point.To return to the issue of liquidity, in Australian three-year bonds over the past decade, the average daily range is about 5.5 basis points. During the period of RBA yield curve control where the three-year bond was pinned at 0.
An outcome of the lift in volatility in specific markets is that the number and size of counterparties shrinks.