Late in 1966, Studio Uno was the location and Prince De Curtis, alias Toto’ performed in a magnificent sketch.
I will report the transcript of the conversation with Mario Castellani: “a big young man, big like that, came in front of me, looked at me straight in my eyes, and said: Pasquale!” followed by a guffaw that obstruct him from talking, “it is such a long time that I have been looking for you, son of a gun! In the end, I have found you! He raises his hand, and BAM! I got slamped, very strongly…” he continues to laugh even louder than before by arousing the audience. “I was asking myself how this silly guy would like to go on.” He continued to laugh, “he yanked me, slammed me up against the wall and I let him continue. Pasquale! I am going to kill you, BAM. He smacked me twice…oh my god, I thought this was funny, where does this idiot want to go with this?” at this point he bent over laughing …”Pasquale! Take your hat off. I did not let him repeat it twice. Pasquale, damn it! I have got to crack in your skull! BAM! And he kept on laughing. “A punch on my head, and I am still black and blue. Again I was thinking, where is he going with this?” By now, the performance sounds like an involving roaring laugh. “But why did not you react?” At this point Mario Castellani asked. Toto’, who seriously replied: “what do I care, I am not Pasquale”.
Moving right along in analyzing the statement of Janet Yellen, late on Tuesday 29th of March, at the Economic Club in New York – one of the crucial periods is the following: “Major thing that’s changed” between December and March affecting the Fed’s baseline outlook is “a slightly weaker projected pace of global growth.” So that, now we are informed that the Federal Reserve is adding a third variable at its dual policy’s mandate. The FED is caring about worldwide economic health. Now the main issue is its credibility, because it will be very difficult to manage a variable that is not, by definition, directly controllable. Moreover market expectations cannot be adequate if FED’s operate is not easily estimable. By the way, apparently these were the magic words that market participants have longed to hear. Low rates for the long run. In fact, equity indexes rallied and government’s bond yields dropped.
And now what comes to my mind is Toto’ famous quote: “what do I care, I am not Pasquale”. Right, because, even if the equity guys’ are celebrating and bond investors as well, the latter could suffer some losses forward looking, due to prices pressure. Nowadays, the trend on yields is clear, thanks to the easing by ECB and BOJ, combined with the dovish attitude of FED. Ultimately, the USD is beneficiating against the other currencies (only the Pounds weakened vs. the US dollar, since concerns about BREXIT are continuing to mount up). One of the consequences of the weaker dollar is related to commodities. It seems that their price action remain sustained and of course, emerging countries whose trade balances are depending from commodities’ behaviour are experiencing a relief since the beginning of the year. Nonetheless, US economy remains the big winner of FED policy, since the exportations could be revitalized and at the same time it is materializing the hope of some inflation linked to higher commodities’ price.
The phenomenon of prices’ dynamics is already showing a support coming from the unemployment conditions. Latest data from the Bureau of Labour Statistic have provided a positive sign for the US Economy. Actually Nonfarm payrolls increased by 215,000 in March and the headline unemployment rate rose to 5.0 percent (from 4.9 percent), the first month-over-month increase since May 2015.
For this reason I believe that if the OIL recovery will support a broad price pressure, then we all will fully understand the real meaning of Toto’s quote. “FED is not Pasquale”. The US Treasury yields will increase to incorporate a level of inflation that is not priced in yet. In the end, bond investors will understand that low interest rates for the long term will not coincide with low yields. And if I think about Draghi and Kuroda, about their ability to avoid a currency war during latest meeting, I can find another reading of the famous quote: “Federal Reserve Chairwoman Janet Yellen is not Pasquale”.