• BCMstrategy, Inc.

V3 Nowcasting Tutorial: Monetary Policy Edition

Are you ready for tomorrow's snap FOMC meeting? Are you wondering what happens if St. Louis Federal Reserve President Bullard gets his way and triggers an unprecedented +100bp increase in interest rates by July of 2022?


Don't worry. Our newly launched Bloomberg Terminal App {APPS PLCY <GO>} can help you anticipate market volatility using our backtested data paired with the considerable capabilities of the Bloomberg Terminal. This post teaches you how to "catch the wave" of public policy. Step 1 is to incorporate the V3 app into your daily morning horizon scan. This is what happened to users that did this last week regarding monetary policy.....


Time spent on the app ranged from 15 seconds (on Monday) to 20 minutes (on Thursday). The aggregate impact: the ability to lay in trades on Thursday morning in European markets, before New York opened and before the inflation data (not to mention Pres. Bullard's remarks) was released....all using publicly available information powered by our patented tech. Here is the play-by-play

Monday (Feb 7)

Total time spent on the monetary policy element: less than 15 seconds.

Main conclusion: things are quiet.

User A's daily horizon scan for monetary policy shows this chart:


Mondays are quiet, since not much economic policy occurs on Sundays. He knew what happened last week and moves on.


Tuesday (Feb 8)

Total time spent on the monetary policy element: about 5 minutes.

Main conclusion: The ECB remains dovish in its stance regarding interest rates

The daily monetary policy horizon scan shows an uptick in monetary policy activity in the last 24 hours. User A decides to investigate farther.



He glances down at the documents and keywords corresponding to the increased activity on February 8 to find out which issues were in play and sees the following verbal distribution of keywords for the day:

As a fixed income trader, he prioritizes keywords like “inflation” and “interest rates.” He clicks on the document with the longest list of relevant keywords and immediately accesses the testimony of ECB President Lagarde to the European Parliament the prior day, which did not receive much media attention:


Time elapsed to find the document: 7 seconds.


Now he is curious and starts clicking on all documents from the day which reference interest rates and inflation. He finds:

  • European Commission documents also presented to the same hearing at the European Parliament

  • A written letter from ECB President Lagarde responding to questions from MEP Beck

  • A speech by the EU Council President

  • A proposed amendment to EU consumer protection legislation to adjust inflation indexation rules

He moves on, knowing that EU officials are refining their positions regarding inflation.


Wednesday (Feb 9)

Total time spent on the monetary policy element: about 7 minutes.

Main conclusion: The interest rate environment is unsettled beyond monetary policy due to carbon border adjustment policy in the EU and the ongoing LIBOR transition.


The daily morning scan shows a downtick in monetary policy activity globally relative to the previous day. This is consistent with overall market sentiment, which is showing market pressures related to inflation and monetary policy but User A knows that a data release is scheduled for the following day regarding US inflation. He knows the drama is not over. Because US policymakers typically are silent in advance of major data releases, User A wonders what kind of activity is underway just before a big data release.


He scans the keywords for Feb. 9 and spots:

Again, he starts with the document that has the longest string of relevant words and works his way methodically through the rest of the documents, skimming along the way. He finds:

  • A proposed amendment to the European Parliament’s draft legislation regarding the carbon border adjustment mechanism. This is interesting, but it is 89 pages long and he knows that this document will not have an immediate impact on the fixed income markets. He spots a few other European Parliament documents as well as some U.S Trade Representative documents, none of which will trigger an immediate impact on fixed income markets. He notes the macro trend relationship between climate policy and monetary policy then moves on.

  • A UK government draft proposal to adjust accounting requirements for the Department of Health and Social Care. This is 233 pages. He can see from the highlighted keywords inflation assumptions are discussed in the document, but again this will not generate an immediate impact on fixed income markets. He moves on.

  • U.S. Treasury Department testimony to Congress concerning the impact that stablecoins and cryptocurrency can have on funding markets and financial stability, He sees that the Treasury Department is fretting about the feedback loop between stablecoins and dollar-denominated funding markets. The scenario under consideration is that a loss of confidence in a stablecoin could trigger pressure on hard currency markets, but it occurs to him that the opposite could also be the case: volatility in hard currency markets could trigger a reaction function that loops through stablecoins.

  • A Bank of England press release (jointly with regulatory authorities) regarding the next steps in the LIBOR transition towards SONIA, which reminds User A that market reaction functions to shifts in interest rates will operate differently now that there is no standard risk-free rate for global markets; the risk-free rates are now all tied to national monetary policy.

He steps back for a second and realizes that traditional historical data for the fixed income market may not be reliable indicators of future market behavior because the new risk free rates are tied to national monetary policy whereas the historical data reflected market behavior pinned to one single risk-free rate (LIBOR). Things could get interesting.


Thursday (Feb 10)

Total time spent on the monetary policy element: about 20 minutes.

Main conclusion: All G7 central banks (except Japan) have spoken BEFORE the US inflation data is released and they are aiming at different stances on interest rate policies. Someone from the Fed will have to contribute to the conversation even without new inflation data.


Volatility today is inevitable. Time to hedge the portfolio and seek volatility-based yields before New York markets open for trading.


User A gets up early. He knows it will be a busy day, likely volatile, because the US inflating data release will occur later in the morning. He sees a sharp increase in action levels related to monetary policy:

User A knows two things before looking at a single word:

(i) PolicyScope data signals an inflection point when action exceeds rhetoric. The data is showing we are on the threshold of an inflection point.


(ii) The inflection point has been occurring abroad…it cannot have yet emanated from the United States because the inflation data won’t be released for hours.


Who else was talking about inflation and monetary policy? What were they saying?

Racing through the highlighted keywords and speedreading his way through the PDFs, he discovers the following SEVEN significant developments from France, Canada, the UK, and Sweden within 5 minutes:

Governor of the Banque de France

…we retain our full optionality on the decisions we will make from March and in the following quarters, informed then by the latest data, forecasts and geopolitical developments. And as we clearly stick to our sequencing starting with first tapering and second lift off we will also retain our full optionality about the pace of this sequence, and timing of moving from one stage to the other.”

Bank of England Deputy Governor Jon Cunliffe

BIS/ECB

Bank of England Chief Economist Huw Pill

Governor of the Bank of Canada

ECB Executive Board Member Isabel Schnabel

Monetary Policy Decision: Sweden's Riksbank

User A realizes that all members of the G7 except Japan have in the last 24 hours signaled their stance regarding monetary policy….and that stance is dovish in Europe but hawkish towards interest rate increases in Canada.

He knows that someone from the Federal Reserve will have to contribute to the conversation and send a signal. This would be true even if inflation data were not due to be released this morning. The expected release of a strong inflation number in the United States paired within hours by any statement from any Federal Reserve official will certainly roil markets.


It is not yet 8 am. He evaluates his fixed income portfolio (PORT) and scans to see whether reactions are visible in equity futures (WEIF), market headlines (TREN). He checks the latest analysis from the Bloomberg Intelligence FICC dashboard (BI). Still on his Bloomberg Terminal, he purchases some cover in the European markets which are open and not yet reacting to the shifts on display.

 

Epilogue: The blockbuster inflation data (+7.5% over the last twelve months) released on Thursday morning was followed shortly thereafter by statements from St. Louis Federal Reserve President Bullard calling for an unprecedented rate of interest rate increases of 100 basis points "by July 1." The Federal Reserve has called a snap meeting of the Federal Open Market Committee (FOMC) for Monday, February 14 to discuss " advance and discount rates to be charged by the Federal Reserve Banks." Any capital market transactions made on Thursday morning in Europe (whether for hedging or for yield/alpha generation) have just become more valuable to the holders.

 

About the V3 PolicyScope Data App for the Bloomberg Terminal: The app delivers to Bloomberg Terminal users quantitative multivariate time series data (in chart form) measuring public policy momentum and volatility. The app also delivers to users underlying verbal data (metadata tags, tagged PDFs from the official sector) as well as interoperability with selected Bloomberg Terminal function buttons addressing market movements (PORT, WEIF) and Bloomberg analysis (TREN, BI). Users can generate time series charts and find official sector PDFs in relation to three silos of public policy activity (Climate Disclosures, Digital Currency, Monetary Policy) or they can choose to see which policies are impacting individual economic sectors across a range of time horizons.


About BCMstrategy, Inc.: The company helps portfolio managers and strategists anticipate market volatility related to public policy/headline risk by delivering quantitative volume-based objective data drawn directly from the public policy process paired with data generated from media coverage from fact-checked journalism publishers like Dow Jones and ThomsonReuters. The quantitative and verbal data delivered to users is generated objectively using a patented process. The full data set is available exclusively through the Bloomberg Enterprise Access Point. Volatility signals related to cryptocurrency policy, CBDC policy, climate finance policy, and monetary policy are available via API. Charts, graphs, and verbal data are avaiable through the V3 PolicyScope Data app on the Bloomberg Terminal.