By Anthony B. Sanders
SMART Money Flow Index Keeps Tanking
The S&P 500 Index extended its drop since September to almost 15 percent on Wednesday, barreling through its February intraday low and leaving the equity benchmark about 162 points from its first bear market in a decade. The chief culprit: Federal Reserve Chairman Jerome Powell’s indication that market volatility has done little to change the central bank’s rate path or to alter efforts to reduce its balance sheet.
The SMART Money Flow Index continues to fall as The Fed Grinch keeps talking.
Continue reading Breaking Bottom: S&P 500 Down 15% Since September As The Fed Grinch Speaks
By Jeffrey Snider
The official statement that accompanies each every FOMC policy action is by nature bland and sterile. Still, despite the sparseness of printed words those that are included can say a lot. Here’s its essence for what just wrapped up in December 2018:
The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.
The statement used the word “strong” three times in the paragraph before, too. You can see just how much the unemployment rate grabs these empty suits in spite of so much else.
Markets reacted uniformly with AYFKM. What else can they say, and trade, at this point? Powell has trapped himself in Yellen’s prior position. If he’s not careful, he’ll smile his way past that all the way to Bernanke’s “contained.” Things are accelerating to the downside, not stabilizing.
Continue reading Powell: Still Strong; Markets: AYFKM
Below are the Opening Notes and Bond Market segments from last Sunday’s edition of Notes From the Rabbit Hole, NFTRH 530. Jerome Powell was actually more firm than I expected. Atta boy Jay! Aside from my prognostication the more important stuff (IMO) begins at the 4th paragraph. That is where I put on my tin foil hat and tell what I think. It does seem to dovetail with what we saw today out of the Fed chief.
Opening Notes: FOMC at Center Stage
It is likely that the Fed is going to raise the Funds rate on Wednesday because this is a confidence game and a Fed suddenly showing weakness and doubt could exacerbate the market’s already frayed nerves. As a side note the 76% reading of CME futures traders expecting the hike to happen has not changed in the last few weeks.
But US and global authorities can read charts and as a person with some short positions I am well aware that they have people who can read charts as well. It’s not complicated; the market (SPX) needs to hold here or it could be an express (or possibly a slow moving) elevator to SPX 2100.
Continue reading FOMC at Center Stage (NFTRH 530 excerpt)
By Jeffrey Snider
The FOMC had voted to taper the final purchasing levels of its third and fourth QE programs at the end of October 2014. Just two days later, the Bank of Japan’s policy committee would vote to expand theirs (already with the extra “Q”). The diverging outlooks punctuated a period of high uncertainty.
No more so than global asset markets. When Federal Reserve Chairman Janet Yellen appeared in front of the cameras the following policy meeting in December 2014, she did so with WTI in total freefall. Whatever anyone tried to make of it, the oil crash was rightly unnerving. These things just don’t happen like that, not during normal times.
On December 18, the front month oil contract fell below $55 for the first time since 2009, the big one five years before. The 3-month calendar spread, that is the difference between the first contract on the board (effectively the spot price) and the one three months later had just surpassed $1 in contango (a higher front month price). Functioning oil markets in balance fundamentally, as would be the case with economic growth picking up, should have meant a backwardated oil futures curve not contango.
Continue reading FOMC Preview: Desperate RHINO’s (Again)
By Anthony B. Sanders
Optimism Lowest Since May ’15
The Fed’s next Open Market Committe (FOMC) meeting is on December 19th and it appears that another rate hike is due.
But today the National Association of Home Builders (NAHB) released their homebuilder optimism index, and it is shrinking like a burrito left in the Arizona sun in July.
Continue reading The Federal Reserve And The Decline Of Home Builder Optimism
By Steve Saville
The Fed probably will implement another 0.25% rate hike this week, but at the same time it probably will signal either an indefinite pause in its rate hiking or a slowing of its rate-hiking pace. The financial markets have already factored in such an outcome, in that the prices of Fed Funds Futures contracts reflect an expectation that there will be no more than one rate hike in 2019. However, this doesn’t imply that the Fed is about to stop or reduce the pace of its monetary tightening. In fact, there’s a good chance that the Fed unwittingly will maintain its current pace of tightening for many months to come.
The reason is that the extent of the official monetary tightening is not determined by the Fed’s rate hikes; it’s determined by what the Fed is doing to its balance sheet. If the Fed continues to reduce its balance sheet at the current pace of $50B/month then the rate at which monetary conditions are being tightened by the central bank will be unchanged, regardless of what happens to the official interest rate targets.
Continue reading The Fed Unwittingly Will Continue to Tighten
By Kevin Muir
Way back in August of 2013, two FRBNY staffers wrote a paper titled, “The Pre-FOMC Announcement Drift”. It was a great paper by David Lucca and Emanuel Moench which highlighted the tendency for the S&P 500 to rise in the period right before FOMC meetings.
Continue reading The FOMC Skid?
By Kevin Muir
Today’s post will be short and sweet as I want to get it out close to the stock market open.
There is over $28 billion rolling off the Fed’s balance sheet today.
As readers will recall, I believe the QT maturity days result in an outsized negative effect on risk assets (Pink Tickets on QT Days).
Continue reading QT vs. FOMC Drift
By Rob Hanna
Reaction to the Fed ended up being negative on Wednesday. The study below is an old one I had not examined in a few years. It looked at other times SPX closed down on a Fed after closing at a 10-day high the day before.
This is a setup that has changed over the years. Prior to 2009, this setup often saw the market move higher the next day. But the recent tendency has been decidedly downward. Below is a look at the profit curve.
With a low sample size, and this only being a recent tendency, I do not consider it a strong edge. But this may be something traders want to consider, especially if the tendency persists over the next several instances.
A large number of more substantial edges related to Fed Day activity can be found in the Quantifiable Edges Guide to Fed Days, which is available now if you make any size donation to the Multiple Sclerosis Society. More details on that promotion are available here.
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By Jeffrey Snider
As anticipated, the FOMC voted on both proposals in front of it. There should only be the one, but even routine monetary policy no longer is. Alan Greenspan’s Fed charged ahead with seventeen consecutive moves (the last few completed under Ben Bernanke) with little discussion about uncertainty in the economy (though there was, conundrums and all) let alone in the very place the central bank is supposed to operate with impunity.
The result of today’s action is the first of what is almost certainly going to be asymmetry moving forward. Dating back all the way to December 2008 when policymakers mercifully scrapped the singular federal funds target, the FOMC object had been to maintain a 25bps band or corridor in which they would accept actual trading. As of now, that band has been reduced to 20bps; RRP was increased +25bps; IOER only +20bps.
It immediately brings to mind not just IOER’s failure, as noted before, but also the ECB’s. The European central bank had tried narrowing its corridor starting in May 2013, though with everything reversed. It is a topic that deserves greater devotion at a future date (was it Bernanke’s uttering the word “taper” that ignited the big storm that spring and summer or was it the ECB’s narrowed corridor announced the same day?), so for now I’ll just summarize their experience as the same as it was for the Fed in 2007 forward – losing control.
Continue reading Uncertainty, Or You Had One Job To Do (And It Wasn’t Dots)
Well, it’s Fed day and obviously everyone will be kind of frozen in time in the lead up to the decision and the post-meeting presser where Jerome Powell will probably prove (again) that he prefers to answer questions in a more direct, less academic fashion than Janet Yellen.
I continue to maintain that’s not a positive development, because it leaves less room for obfuscation and paradoxically, academic obfuscation (i.e., model-based bullshitting) is a highly effective way of letting markets know that the committee is willing and able to conjure up excuses to remain dovish even when the data suggests a different path in the event risk assets are showing signs of cracking. And I know what you’re thinking: “The Fed shouldn’t be concerned about propping up risk assets at every press conference meeting!” Yeah, ok man. Just remember you said that when, sometime down the road, Powell accidentally triggers an afternoon rout by eschewing long-winded rambling for a straightforward answer.
Powell of course hasn’t adopted anything that approximates the approach Kevin Warsh might have preferred, but obviously there’s a perception that he (Powell) is more data-dependent than Yellen and that it will take more in the way of turmoil in emerging markets and much more in the way of exogenous shocks and event risk from things that aren’t directly related to Fed policy (e.g., Italy) to deter him.
On Tuesday, WSJ moved markets with a report that once again suggested Jerome Powell may be moving towards holding a press conference after every meeting, which would effectively mean that every meeting is live. That got a reaction across fed funds futures and pushed the dollar higher. A move to take questions after each meeting could potentially set the stage for more volatility – or at least that’s the way I would see that panning out, even though I’m sure that wouldn’t be the intent and I’m sure a lot of folks wouldn’t agree with me.
Continue reading What Wall Street Expects From the Fed