There is a very MINUTE chance of any FED action ahead of the November 8 presidential election. The polls are far too close and as previously stated only if Hillary had an insurmountable lead would the FED raise rates in an effort to regain some of its lost credibility. THE MOST SIGNIFICANT PIECE OF THE FED STATEMENT WILL BE THE FOMC VOTE. The previous meeting saw a shift to 7-3 for maintaining the current policy with all the dissenters being regional Federal Reserve presidents. Stanley Fischer has been–the Governor who speaks loudly but carries a small stick–failed to bring action to his frequent speeches about raising the fed funds rate. If the Fed vice chair were to bolt from the unified group of FOMC Governors and dissent against Yellen and Brainard that would lead to a more hawkish view on FED policy. I THINK THE VOTE WILL BE 8-2 as Boston Fed President Eric Rosengren will move back to supporting Yellen .
Will this be deemed a more dovish Fed? I think that would be a mistake for it would in no way signal what the Fed will do at the December meeting. The political questions may not be resolved with the culmination of the Presidential election as a Clinton or Trump victory stands to be challenged in the court. As one of the astute analysts I know (KM) has surmised, if Hillary wins, a Republican-controlled House may move impeachment proceedings. There is no certainty to this but it certainly conveys that U.S. politics will be very messy in post-election Washington. Today’s market action was a response to Wall Street’s previous complacency about a Hillary Clinton victory.
I don’t trust polls in today’s electronic media-driven world, but the market senses the shifting sands of popular opinion as Comey’s bureaucratic attack has shaken previous certainty about the steady hand of Clinton. The market always prefers stability and Clinton the Known is deemed a far better helmsman than Donald the Unhinged. Many believe that Trump will favor Main Street over Wall Street but that is another unknown. Regardless Wall Street has not prepared itself for what a Trump victory would mean. Nothing like buying hurricane insurance the day before a major storm.
Wall Street assumes Clinton would work best with a divided government: A Republican House to prevent the excesses of a Democratic party sweep. The impact of Comey may be that the Republicans retain control of the Senate as well. For the financial markets the best of all outcomes would be Clinton with a Republican Congress. For the global markets Trump is deemed to unstable. BUT AGAIN THE FOMC VOTE will be the most important element for what deemed an inconsequential meeting.
***The next blog will cover the Chinese yuan and its current pricing relative to 1994, present market valuations and, of course, the yuan/Mexican peso cross. As I warned two weeks ago, this is no time to be short volatility. I also want to remind traders and investors to be very PATIENT with the recent rise in European sovereign debt yields and the large drop in European bond futures. It is the first day of November and the ECB has a fresh EIGHTY BILLION of EUROS to spend on large-scale asset purchases. This will be an example of the market impact the ECB and BOJ can exert at any time–between the two central banks their purchase can lower bond yields across the globe as money is fungible in an open financial system.
Those looking to short long-term bonds should utilize central bank purchases to minimize their risk. Be prepared to take advantage of the kindness of Draghi and Kuroda, especially if the EURO is rallying against the DOLLAR. Draghi may wait to after the U.S. election but he maintains the ability to front load ECB purchases. You have been alerted!