Skip to main content

Fed Sleight of Hand

“What the eyes see and the ears hear, the mind believes.”  Harry Houdini


Today is the day volatility traders have been eagerly waiting for, that is of course Fed Day!  And it is not just any Fed Day, it is the most important Fed meeting since the last Fed meeting.  That is of course hyperbole, and if there is one thing financial news loves, it’s exactly that.   The Fed is overwhelmingly expected to raise rates, but every time we have the most important Fed meeting since the last Fed meeting, we need to remember the Fed mission.  The Federal Reserve Mission is to promote maximum employment while at the same time keeping prices stable.   In laymen’s terms, high jobs and low inflation.   Those two goals are of course at odds with each other-- as the economy heats up, so will inflation.  So how does the Fed achieve its mission on a day where rates are expected to rise?  They act like a parent who went to Phish concerts in college and tells their children not to do drugs.  Yes, the Fed will say one thing and do another.   Today the Fed will raise rates, but lower expectations for future rate hikes in 2017.  Ahead of the meeting, 2-year Government Bonds are trading sharply lower at 1.31%.

Janet Yellen, for her part, has been committed to inflation, seen as a bigger dove than Greenspan or Bernanke.  However, of the three most recent Fed chairs, inflation has been the lowest under her.  Today’s CPI was very weak, and already is pushing expectations for another rate hike in 2017 lower. 

I think the Fed will raise rates today, but act like doves.  And in two months if the economy picks up, they will hold pat on rates but act like hawks.   It’s a balancing act, and the stock market for its part, approves.

-Joseph Tigay

Comments

Post a Comment

Popular posts from this blog

Morning Update

ECB officials said last night that ECB President Mario Draghi will likely wait to hear Germany’s Constitutional Court’s ruling on the EFSM before publicly unveiling his plans. Many were hoping Draghi would unveil his plan after the ECB’s September 6th meeting, but this is becoming increasingly unlikely. Today Reuters is reporting that Germany is the latest European nation to begin studying the possible impact of a Greek exit from the Euro. This comes ahead of Chancellor Merkel’s meeting with Greece’s Prime Minister today. Merkel has repeatedly said that she would like Greece to remain in the common currency, though clearly someone in Germany believes a Greek exit is possible outcome worth preparing for. This morning US new durable goods orders numbers we released for July, coming in at a gain of 4.2% M/M. Though this was strong than expected, it was primarily driven by strong aircraft sales. Non-defense orders excluding aircraft were down a sharp 3.4% M/M versus a 0.2% decline expecte...
Post a Comment
Read more

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower.  (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007).  So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...
Post a Comment
Read more

Morning Update

This week a troika of international inspectors will come to Athens. The inspectors, from the European Commissions, the IMF, and the ECB will formally appraise Greece’s delayed overhauls implemented since the June 17 elections. Without gaining approval from the troika Greece risks being cut off from aid, the next round of which is due in September. Domestically the focus of this week’s data will be Friday’s final revision of first quarter GDP. However, next week’s data is likely to rile markets more with both an FOMC meeting and Non-farms payroll report. This morning McDonalds reported second quarter EPS of $1.32, down from $1.35 a year earlier. Revenue grew $0.01 billion to $6.92 billion year over year. This came against consensus EPS estimates of $1.37 on revenue of $6.94, which had already been revised down $0.08 in the preceding weeks. McDonald's U.S. generated comparable sales growth of 3.6% for the quarter, while the European division delivered comparable sales gr...
Post a Comment
Read more