Tag Archives: FOMC

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Land of the Rising None; Fed is Fed Up re Rates Talk

The Fed is Fed Up re Rates Talk…or at least they must be, according to MarketsMuse pundits who have frequently guessed wrong within the context of how much and when the FOMC will decide to upend the current interest rate regime and return to normal. Below excerpt is courtesy of expert debt capital market commentary published 21 Sept 2016 under the banner “Quigley’s Corner”–a daily note delivered to institutional fixed income portfolio managers and Fortune corporate treasurer clients of Mischler Financial Group, a minority broker-dealer and the sell-side’s oldest boutique investment bank/institutional brokerage owned/operated by service-disabled veterans…

It was a no print day today as corporate debt issuers respected both the impact of the BoJ and FOMC.

dewey moment mischler debt market Not so fast my friends…..not so fast!  It’s not exactly a “Dewey Defeats Truman” moment. Still, let’s call it like it is folks – I did say “the next best thing to having tomorrow’s newspaper today is the ‘QC’”.  Then on Monday, September 19th and alluding to today’s BoJ and FOMC rate decisions, I wrote, “Fed Holds; BoJ Cuts Rate and Then Some.” Well, I guess it’s not “tomorrow’s newspaper today” but I still think it’s the “next best thing to it.” The Fed Held, the BoJ introduced new fringy though convoluted easing details (“and then some”) but the BoJ kept rates unchanged.  Two out of three isn’t bad, but that’s why it’s “the next best thing.” If I played baseball, I’d be in the Hall of Fame with a .666 average.  Joking aside, a Fed that infers raising rates by December should have hiked rates today, but they didn’t. This is more of the same readers.  Look for Fed members – both voting and non-voting – to continue giving speeches and appearing on television to opine about the rate flux that has restricted so many from doing so much.  The street is the leader; the Fed is the ultimate laggard.  It’s how it is.  Today was more of the same. No surprise at all.  The government should consider issuing a gag order on any and all Fed-speak in between meetings for all members, both voting and non-voting.  They only confuse the situation and shock markets.

First up, let’s look at what the BoJ did while we were in REM sleep this morning:

A Big Red Zero – Land of the Rising “None” as BoJ Keeps Rates at <0.1%> & Introduces More Shifts to PolicyBoJ Mischler Debt Market Comment

Central Banks from the FOMC to the BOE and from the ECB to the BoJ all seem to be pointing to the downside risks to continued rate cuts while at the same time highlighting that monetary policy needs to be substantially accommodative while calling on governments to share more of the economic burdens. Here’s what’s clear: growth is anemic to non-existent, inflation unchanged to nowhere, accommodative policies are manifesting themselves in new policy twists and turns and big government needs to get more involved.  Hmmm…..sounds like things aren’t quite working out, eh?

 

Here are the talking points from this morning’s BoJ announcement:

 

o   The BoJ left interest rates at its still record low <0.1%>.

o   Committed to intervene until inflation reaches 2% and remains stable above that level.

o   Will cap 10-year yields at 0.00% by continuing to buy 10yr JGBs implying that the BoJ must continue intervening to prevent borrowing costs from rising and to ensure that it can borrow for a decade for free.

o   Changed its policy from a focus on a base money target to controlling the yield curve.

o   Pledged to maintain its government bond-buying in line with ¥80 trillion annually while buying fewer long-dated maturities hoping to pump up long-term interest rates thereby helping banks boost profits. There was no expansion of its current quantitative easing program.

 

Will this new approach be effective?  Only time will tell.  It certainly is a shift in monetary policy to control the yield curve. It is NOT a bazooka by any stretch and more like “fiddling around the edges.”  As for the 2.00% target? Folks, we all know that’s a loooong way off. Market participants have a lot of questions with many sharing that the “BoJ should’ve just cut rates again.” Equity markets loved the news. The DOW closed up 163, the S&P was in the black 23, the VIX compressed over 2.5 and CDX27 tightened 3.2 bps.

“Fed” Up with Rates, FOMC Holds; November Increase Has No Chance Pre- Election and Santa Claus is Coming to Town…with Coal?

The Fed held rates albeit the subsequent press conference was more optimistic, if one can call it that, saying the economy appeared “slightly balanced” and “the case for an increase in the fed funds rate strengthened but decided, for the time being to wait for further evidence of continued progress toward its objectives.”  You all know about the myriad global event risk factors out there.  There are so many that on any given day in our inextricably global-linked world economy, should one or several of them get worse, which is entirely plausible-to-likely, the Fed can skirt around a hike by once again pointing to global events, as they have in the past, to justify standing down.  In fact, in its statement Chair Yellen said, “we will closely monitor inflation and global developments.” What’s more, the next FOMC meeting will be held on November 1srt and 2nd and is not associated with a Summary of Economic Projections or a press conference by Yellen. It is highly unlikely that the Fed raises rates in November given that the meeting will take places 6 days before one our nation’s most tumultuous and raucous elections.  Last year saw one rate hike to close out 2015 at its December meeting.  Santa Claus will be coming to town early at the year’s last meeting of 2016 held December 13th-14th …………..but don’t be surprised to find coal in the stocking.

Folks, Q3 is about over.  You hear that sound?   That’s the sound of trucks?  They’re backing up to print between now and Election Day – BIG TIME. 12 IG issuers are in the pipeline with a whole lot of M&A deals getting closer.

Here’s All You Want and Need to Know About Today’s Fed Decision

(to continue reading, please visit the Mischler Financial Group Debt Market Commentary page

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To Whom It May Concern: Inflation Risk Is On

Memo: To Whom It May Concern: Inflation Risk is Back In Play

Below is a special edition of global macro commentary courtesy of Stamford-based think tank Rareview Macro LLC, the publisher of “Sight Beyond Sight.” The following has been excerpted by the curators at MarketsMuse and republished with permission from the author, Neil Azous.

neil azous-global-macro
Neil Azous, Rareview Macro

For the last two years the expectations around the path of Federal Reserve policy swing from one side of the spectrum to the other every six to eight weeks.

This time is no different, and as that pendulum reaches an extreme, it just comes down to trading probabilities.

Right now, our models spit out the following – inflation risk is back in play.

Now, we do not care whether the Fed raises interest rates or not at the upcoming meetings. We only care that the market begins to believe the Fed will be at some point shortly on account of being behind the curve on inflation.

What we mean by that is that from the first speeches after next Wednesday’s FOMC meeting – which usually start on the Friday following – the tone from the various policymakers on the FOMC will begin to sound more hawkish.

A new drumbeat from the Committee will unlock the Treasury market to move away from the range it has been trading in for the past two months.

At the end of the day: the fixed income market needs to price in the inflation impulse that all other assets are reflecting.

 

The Rareview Macro Toolkit

Below is a list of five illustrations that describes our process that we use to determine the probabilities of Fed action over the next 12 months. Included is an explanation for each chart.

The first chart looks at the implied probability of a hike “BY” a certain meeting, which is the cumulative probability of every meeting before that point (i.e. adding them all up to a certain point).

The second chart looks at the unconditional probability of raising interest rates “AT” a certain meeting, which is specifically the probability of an individual meeting.

The third chart is our ‘decision tree’ illustrating the process we use to calculate answers to the following:

rareview-macro-decision-tree-inflation-risk

 

  • What is the probability of the Fed raising rates at BOTH the June and September meetings?

 

  • What is the probability of the Fed raising rates at the June meeting and NOT at the September meeting?

 

  • What is the probability of the Fed raising rates at the September meeting and NOT the June meeting?

 

  • What is the probability of the Fed NOT raising rates at EITHER the June or September meetings?

 

From there, we use options on Eurodollar futures to recreate these four scenarios digitally.

 

The decision tree starts with two generic questions:

What is the probability of the Fed raising rates at the June meeting?

What is the probability of the Fed raising rates at the September meeting?

Once we know the probability assigned to each of those two outcomes, by following the flow of the decision tree, we can determine the mathematical probability of the outcome of our original four questions.

To read the entire piece from Rareview Macro’s Sight Beyond Sight, please click here

 

Neil Azous is the Founder and Managing Member of Rareview Macro, an advisory firm to some of the world’s most influential investors and the publisher of the daily newsletter Sight Beyond Sight®. Neil has close on two decades of experience across the financial markets, and is recognized as a thought leader in global macro investing. Prior to founding Rareview Macro, Neil was a Managing Director at Navigate Advisors where he specialized in constructing portfolios and advising on risk. His daily commentary was highly regarded by the institutional investing community and his success in delivering a forward-looking viewpoint on global markets helped lay the foundation for Sight Beyond Sight® to be built. On Wall Street, his career included roles at UBS Investment Bank and Donaldson Lufkin & Jenrette, where his responsibilities comprised of trading derivatives, hedging solutions, asset allocation and fundamental securities analysis. He began his career at Goldman Sachs in Fixed Income, after completing both the firm’s Analyst and Associate training programs, widely acknowledged as the pre-eminent and most coveted learning ground for undergraduate and graduate students. Neil completed graduate level coursework for a MS in Real Estate at New York University and received his BA in Business Administration from the University of Washington, where he is a member of the University of Washington Bothell Board of Advisors and was the recipient of the Bothell Business School 2013 Distinguished Undergraduate Alumnus Award. He is active in various charity and community organizations.

 

Global Macro View-Friday’s Stock Rally In Perspective

MarketsMuse curators have canvassed assortment of guru-types who have attempted to decipher Friday’s stock rally, along with tuning in to the abundance of Monday morning quarterback views. For those who turn to the cartoon channel (i.e. CNBC), some pundits call it a dead cat bounce, more optimistic professional traders and pontificators would like to believe the spike on Friday is a sign of a “bottoming formation”–irrespective of many signals that suggest the “R-word” will become more frequently used when describing the state of the US economy. Smarter money, particularly those who have Sight Beyond Sight are focusing on following a private weekend comment summarizing last Thursday’s email newsletter from global macro think Rareview Macro…

neil azous-global-macro
Neil Azous, Rareview Macro

Factually the 14-day (Relative Strength Index) or “RSI” on the SPX Index is now 39; no one with a straight face can say the market is oversold technically. Last week, when the S&P futures bounced off the lows the professional community was open to the notion that the index could trade back up into the 1920-1960 range. That has not happened despite three key things:

  1. President Draghi has backing of the Committee now to ease policy further;
  2. The FOMC was dovish and the implied probability of a hike in March now is at 18% (it was ~28% yesterday); anything below 20% most likely means it’s going to zero; unconditional probability of June is exactly 20%; post-March FOMC that is most likely around 33% or 3 to 1 AGAINST;
  3. Crude oil has taken out last week’s highs multiple times and broken the downtrend channel today on an intra-day basis. Additionally, the market has removed the majority of event risk related to Yen and Nikkei heading into the BoJ meeting tonight on the view that if the BoJ eases they go big (20 bonds, 1-3 ETF, and even cut IOER) because they can’t risk an incremental easing that the market rejects.

The key question is with largely every asset now discounting these central bank events and the high degree of correlation of risk assets to crude oil, especially the S&P 500, why has the S&P not responded and traded up to the expected range of 1920-1960?

The answer is that tomorrow the BEA releases their quarterly update for corporate profits (Bloomberg Ticker: CPFTYOY Index). Last quarter it was down -5.74%. The key point being is that tomorrow brings a likely confirmation of two-quarters in a row of declining profits – or a “profit recession”. Remember, this is a clean look at profitability and there are no footnotes like a company specific earnings release that can attempt to paint any Picasso they want.

Additionally, ISM Manufacturing data is released on Monday and in order for the cyclical call bounce to begin to materialize it can’t show another print to the downside. Right now the market has shifted to a 40-50% probability of a forthcoming recession up from 10-20% to start the year. Confirmation of further ISM Manufacturing weakness will only accentuate the view that 11 of the last 13 recessions included ISM Manufacturing printing below the 50 level.

So while you may have to wait for two-quarters in a row of negative GDP at some point in the future to get formal confirmation of a recession, the risk is that corporate profits and manufacturing will govern risk assets for the time being and outweigh the heavy emphasis the Ph.D. community places on the consumer and a services-driven economy for now.

When you marry all of this with corporate earnings season that is now half-way complete, with the exception of Facebook (NYSE:FB), not one icon company has had a good print or said something truly positive in the outlook. In fact, AAPL is very close to touching its 200-week moving average like Russell 2000 and Transports. The last time that happened was during the GFC.

Finally, Friday was month-end and the bulls will lose the call for further pension re-balancing that showed equities were very large to buy. The risk now, with all of the oversold conditions worked off, is that the S&P 500 resumes its downtrend and like every other risk asset the 200-week moving average of 1704 is a magnet.

Interest Rate Probability Dispersion Post-FOMC:

  • Hike Twice March AND June: 6%
  • Hike Once March OR June: 36%
  • NO Hike At All by June: 58%

Rareview Macro is the publisher of “Sight Beyond Sight“, a subscription-based advisory service for professional investors, hedge funds and self-directed investors and offers actionable trade ideas using futures, options, and ETFs within the framework of a disciplined analysis process. Author Neil Azous publishes intra-day updates re model portfolio and trade posts via Twitter @rareviewmacro

 

Wanted: Fed-Watching Pundits: Requirement: Coin-Tossing Skills

MarketsMuse editors were relieved yesterday after the Fed announcement for two reasons; the first being we were reminded that at least half of Wall Street’s Fed-watching pundits who get paid big bucks to predict events can be replaced by anyone who can flip a coin, as half of the pundits were wrong and arguably, at least half of those who were right, were probably right for the wrong reasons. One would need to have a transcript of the entire meeting to know what those Fed governors were thinking and saying.

The second relief comes from having watched a post-announcement color commentary on CNBC “Fed Winners and Losers”..which had sober and well-thought out thoughts from Rareview Macro’s Neil Azous and SocGen’s Larry McDonald

 

Global Macro View From the Perch of Saxo Group: Keep Calm and Carry On

MarketsMuse Global Macro update profiles perceived opportunities from the perch of Denmark’s Saxo Group Mads KoefoedIt and his view that interest rate increases probably won’t happen during the second quarter, but the market will very likely be dominated by speculation on the likely timing of a US Fed interest rate hike. Focus on the Fed, FOMC, ECB and Euro recovery—and European high-yield corporate bonds.

Global Macro Strategy: Get Short-y

MarketsMuse global macro strategy insight courtesy of extract from today’s a.m. edition of Rareview Macro LLC’s “Sight Beyond Sight”, which includes references to the following ETFs: EMB, HYG and LQD.. For those already subscribing to “SBS”, you already know that this market strategist incorporates a cross-asset model portfolio that has outperformed a significant number of those who oversee billions of dollars on behalf of the world’s most demanding investors.

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

New Tactical Trade – Short German DAX…Model Portfolio -33% Net Short Equities

US Dollar Input – Not Just “Patient” and “QECB” but also Balance Sheet Management

Credit – Watch EMB, HYG, LQD Today

Model Portfolio Update – March 6, 2015 COB:  +1.04% WTD, +0.89% MTD, 0.00% YTD

This morning, in the model portfolio we sold short the German DAX. Specifically, we sold 200 GXH5 (DAX Mar15) at 11485. This is a short term directional trade. The notional equates to 20% of the NAV. The update was sent in real-time via Twitter.

All in, between the S&P 500 and DAX, the model portfolio is approximately-33% net short equities. To put it in simple terms, there is an opportunity right now to short the market. Why? Because, either the FOMC Committee blinks, and you get paid until they do, or they do not blink and you get paid as risk assets discount further interest rate normalization. Either way, your short position will make you money.

Here is the best way to describe our sentiment at the moment: Continue reading

Professional Traders Lining Up to Sell SPX For the Wrong Reasons: Be Wary of the Good Idea Fairy: A Rareview View

Below commentary is courtesy of extract from a.m. edition of today’s Rareview Macro’s “Sight Beyond Sight”

A Simple View:  US Dollar, Gold, SPX, UST’s

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

The objectives we have laid out continue to materialize across the themes we are focused on.

The Q&A session with President Mario Draghi following today’s European Central Bank (ECB) meeting has concluded. We will leave it to the people with PHDs to debate the intricacies of what he had to say. But if price is the voting machine that always tells you the truth, then the weakness in the Euro exchange rate highlights that the press conference was simply dovish. Expect these same PHD’s to keep chasing as they lower their price targets again.

As evidenced in our most recent editions of Sight Beyond Sight, there was little doubt that Draghi would not strike a dovish tone. With his emphasis on a unanimous vote for further action if necessary and formally adding in the notion that the ECB’s balance sheet will return to 2012 levels (i.e. ~1 trillion higher), Draghi did a good job of walking back the negative tone that the media have tried to portray over the last 48-hours, especially the speculation about an internal battle/dissent/revolt building up against Draghi.

For us, it was never about whether the professionals sold the Euro after the event. They were going to do that anyway as the trading dynamics continue to point towards the Euro buckling under its own weight regardless of what Draghi says. Instead, we were more focused on a short covering event not materializing ahead of tomorrow’s US employment data and that has been largely removed for today.

So those bearish have to contend with the following factors: Continue reading