Notes From Underground: Oh, Janet, There Is A Santa Claus Rally Brought About By the QE Rain

Yes, the day of decision is upon us and everybody is SURE of a 25 basis hike from the FOMC. IF I WAS IN CHARGE–NO, NOT JOSE CANSECO, WHICH WOULD BE MONETARY POLICY ON STEROIDS–I WOULD RAISE RATES 50 BASIS POINTS AND ISSUE A WARNING OF MORE AGGRESSIVE INCREASES TO COME. Alas, I am but ashes and dust. The FED has prepared the market for a certain 25 but here are the things to watch:

1. How does the vote go? Is it 9-1 with, Lael Brainard opting for no increase because of the recent strength of the U.S. dollar, a formidable headwind for the U.S. economy, and, more importantly, the potential negative impact on emerging market economies? The rise in rates combined with a strong dollar will cause pain for emerging market corporations who have borrowed heavily in dollars. More importantly, watch to see how many of the FED governors vote with the regional presidents. But a 6-3 vote with the dissenters opposed to a rate rise would be very DOVISH and stoke a rally in myriad asset classes.

2. The FOMC statement will be followed by a Yellen press conference in which the tone will be established by the FOMC‘s INFLATION EXPECTATIONS. The employment data is now NONSENSE because by the FED‘s metrics we are at FULL EMPLOYMENT. The fact that we are at full employment is the reason the FED should hike by 50 basis points. The FED‘s policy has caused an excess in equity and bond speculation, which has led to asset prices trading at market manipulated levels. It’s time to throw some COAL into the fantasies of Wall Street sugar-plum fairies. Either the stock market is right about exuberant GDP growth in 2017 or the FED is correct about lower for longer.

THEY BOTH CAN’T be correct. If higher growth begat higher interest rates and sustained wage increases then the equity markets are rising into unsustainable territory. Yes, Bernanke’s Portfolio Balance Channel has been in force for six years since the August 2010 Jackson Hole speech. Equity markets are the proud parents of TINA (there is no alternative). But TINA is rational only at certain valuations. So, what do we look for?

3. So if the FED ONLY raises 25 basis points as expected and the forward guidance is DOVISH, I would expect the currencies to rally after the initial break, as should GOLD after its initial break. The ALGOS will react to the HEADLINE OF THE FED RAISING RATES, but I advise that you should have key support areas in place that should hold. The ultimate KEY for the day, in my mind, will be the performance of the YIELD CURVES for if the FED is deemed to be DOVISH, the 2/10 and 5/30 should resume their recent steepenings. If the FOMC statement and the press conference are deemed hawkish the curves OUGHT TO FLATTEN. Be patient and let this indicator evolve, especially because of the Yellen press conference. The yield curves should be a Thursday play because of the ECB’s potential to distort the U.S Treasury market with its QE program.

THIS IS VERY IMPORTANT AS THE ECB HAS 55 billion euros of assets to PURCHASE and this is a short month since they pledged to be finished by December 22. Watch French and German sovereign debt as they have not rallied much. It APPEARS the ECB purchases have been weighted towards Italy and Spain, but that is conjecture on my part based on the price action since the Italian referendum. The U.S. 5/30 and 2/10 curves are virtually unchanged on the year, even as the U.S. is at full employment and the SPOOS are higher by 10 percent. The increased ECB, BOJ and even BOE purchases have accomplished the compression of global bond yields.

4. If Janet was to be the anti-Claus and deliver a 50 basis point increase in the FUNDS, let the markets clear and see what evolves during the following 24 hours. The huge amount of COMPLACENT risk-on going into year-end would prompt position readjustment. Holiday markets are too thin for “trading highways jammed with broken heroes on a last chance PROFIT DRIVE, will leave you with no place left to hide.” Be vigilant and don’t take unwarranted risks. It is not in Janet’s disposition to take aggressive action and the market has certainly supported that view, but this is the year of Brexit, The Chicago Cubs and Donald Trump’s election. Conventional wisdom is oh so conventional, especially in the era of central bank hubris.


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11 Responses to “Notes From Underground: Oh, Janet, There Is A Santa Claus Rally Brought About By the QE Rain”

  1. Chicken Says:

    The new treasury secretary will be issuing 100 year paper thus any dip is most likely a buying opportunity?

  2. asherz Says:

    Yra-An unchanged or a 50 basis point raise (which is the right move as you advise), anything other than the anticipated 25 point change would be totally out of character from this Fed. Yellin is a quarterback who telegraphs all her surprises from her is not in her playbook. The Fed’s third mandate, a firm equity market, is a sine qua non in her game plan. Wall Street abhors surprises.
    So melt up continues, The bubble keeps expanding and when it finally pops, whenever, we will again hear that you cannot see a bubble until after it’s over.
    You can believe Draghi when he says he is not tapering. There probably was a tradeoff with the Germans: extending QE but reducing purchases from 80 to 60 billion/month. Look for another extension at yearend.

  3. simonsays452 Says:

    Par is dovish = equity rally continues. Par is 25bps and “cautious”/”prudent”/”wait and see”presser. An easy dovish out: Let’s not forget oil is clearly “distorting” inflation dynamics…

  4. Chicken Says:

    Hawkish? Treasury bulls flattened (for now).

  5. Chicken Says:

    “Fiscal stimulus not needed” – Yellen

  6. GreenAB Says:

    As i suspected a couple of weeks ago the Yen seems to be on a straight way down.

    I´m really curious where this DE-SYNCHRONIZED monetary policy will lead us. Both the BOJ and the ECB are far away from ending QE, let alone raising rates. Meanwhile the Fed is mapping a way to at least three hikes in 2017. This setup is completely new.

    In the treasury market the selling brings new selling as everyone is concerned to be stuck with falling bonds at the time when equities are staging a huge rally.

    Somehow this circle has to be stopped or both the Euro and the Yen (and the Yuan) will keep falling. I have a hard time seeing how a strengthening Dollar is going to help multinationals´ earnings (and the S&Ps PE).

    • Yra G Harris Says:

      GreenAB–yes you plotted the yen perfectly.Your post raises the issue about GOLD being traded against /with foreign currencies as the world’s central banks ,the FED aside for the moment,have entered a period of currency debauchment.The U.S. multinationals will be moving production abroad and will fall into Trump’s bad side–the DAX is certainly the star since the RENZI referendum and for good reasons.But as we get news tonight the Greek situation is not leaving the stage

  7. the bigman Says:

    Maybe I am wrong but I can’t help but believe the scene is set for significant inflation: Fuel will pour in from all directions- tax cuts, repatriation, overvalued stocks, infrastructure spending, capital inflows due to strong dollar and higher rates, and the Fed is only making token decreases in the accelerant (funds rate) (and not decreasing the money supply at all). How does this not combust? What am I missing?

    • Yra G Harris Says:

      Bigman—as usual you see the picture now it will be what every trader struggles to find—the timing .Last years post on potential prairie fires being lit –some have happened and now more are coming to the fore.As I have stressed —global politics and debt loads will provide the tinder.Interesting that Janet Yellen went out of her way to say fiscal stimulus is not needed at full employment—this is the issue I have been raising about the Fed’s models with full employment while embarking of an aggressive infrastructure spending program and sizable tax cuts—Yellen has now created a new conundrum

  8. Arthur Says:

    New world order. Gold and real estate.

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