The results of the FOMC meeting: Ray Dalio–1, Janet Yellen–0 (h/t KM). It seems that the FED is fearful of upsetting the Dalio apple cart by raising rates and possibly tipping off a sell off in global assets. As I wrote on Tuesday, the walk back of taking the “patient” off the respirator would result in a DOLLAR selloff as long dollar positions were hopeful of an unequivocal position statement from the Fed on a near-term interest rate increase. Notes From Underground believed the FOMC statement would remove patient from the release and then Yellen would defang the hawks by being cautious about the strong dollar and continuing concern over the lack of wage growth in an economy with improving employment metrics.
While Yellen was certainly dovish in her press conference, the FOMC statement provided enough support to maintain zero rates even without the “forward guidance” of extended period and patience. Two most dovish details of the FOMC release was the lowering of the unemployment threshold to 5.0%. Remember when it was 6.5-7.0% for the Fed to act and the change in the Summary Economic Projections (SEP)? (The FOMC members lower their interest rate projections for the next 30 months.) The financial markets were always much lower on the forward interest forecasts so at the end of the day markets are wiser than the members of the Fed board … shocking. It seems like yesterday when Alan Greenspan was advising home buyers to take out adjustable rate mortgages, using their home equity as a piggy bank by refinancing the higher valued real estate and spending the proceeds.
Don’t forget that in 2007 Ben Bernanke was sure that the subprime crisis was contained and there would be no financial crisis. It seems that the use of Summary Economic Projections, or dot plots, are the tool of the lazy and ill-informed. Upon further review, today the markets walked back yesterday’s market movement in the dollar, bonds and various equities, but be assured that volatility is the theme for the next few years. Again, the Fed may have dropped their use of patience but investors and traders will have to utilize what the Fed has discarded. If you were patient yesterday the market provided many profitable opportunities.
***An interesting turn of events: Yesterday, the Swedish Central Bank, or Riksbank, surprised the market with a 15 basis point cut in the overnight rate to -0.25% and also announced a government bond buying program. While the Riksbank said GDP growth was “relatively good,” they were concerned over the recent strength of the kroner versus the euro (yet another shot fired in the currency war that U.S. Treasury Secretary fails to acknowledge). Every recent central bank statement announcement had made mention over the strength of its currency in making its interest rate decision: Aussie, Kiwi, Canada, Mark Carney of the Bank of England and the FED even acknowledged the strong dollar with the code word “international developments,” although Yellen did actually say the word DOLLAR in the press conference.
There was a surprise today, though, when the Bank of Norway (Norge Bank)surprised the markets by not lowering its key lending rate from its present 1.25%. The Norge did note the currency but was more concerned about the strength of the Norwegian housing market, and in a shocking display of hubris, were worried about the Norge currency’s recent weakness. In a Bloomberg poll, 18 economists voted 34-2 that the Norge bank would lower the rate (they were all two-armed economists). The point is that the world is locked in a battle for global market share of exports and with the Japanese and Europeans actively depreciating their currencies every nation with export potential is vigilant in its reaction function.
The emerging nations have seen their currencies rapidly depreciate against the dollar but at this juncture any negative fallout has not been revealed. Many believe the Chinese will also move to depreciate their currency in order to forestall a fall in exports but the Chinese may not be quick to weaken their currency if there is truly an effort to move the Chinese economy to greater domestic consumption. A strong Reminbi (yuan) provides a wealth boost to Chinese households as imports fall in price. Crude oil prices in China are at an 11-year low of 271 yuan to a barrel of crude. Be careful in picking winners and losers in the global currency wars.
***A quick aside: The ECB‘s QE program is providing a great money-making opportunity for large banks and hedge funds as large institutions game the bond buying needs of the ECB. Every week, in an effort at transparency, the ECB announces its total purchases so those in the know and with access to the European cash bond markets have a huge edge. If you don’t have access the more interesting play may be to buy the stocks of banks like Deutsche and Goldman, who have the facilities to front run the ECB. If Goldman and Deutsche don’t have record years trading European debt, all the bosses should be fired … just thinking inside the box.