Wednesday, September 18, 2013
We would like to think that our last post was the reason the FED held back on tapering, having taunted the CB'ers with our "You can't pull it off, you don't have the respect of the market for your commitment in the face of anything" taunt. But we doubt that very, very, very much.
TMM's polite "front of house" way of reporting the event is -
The FOMC is now on the record that they are unhappy with 10y yields at these levels given the current backdrop, at least for now and that a 7% UER rate no longer means no more QE. These dovish shifts were surprising because the data appears to have come in inline with the Fed’s own projections, and Bernanke said so. The Fed seems most worried about the rise in mortgage rates and potentially the fiscal issues ahead, and it appears they want to take out some insurance against that. It’s not clear exactly what will ease their concerns, so until the Fed signals otherwise, yields may be range bound.
Positioning suggests that the rates move could move further. But we note that relative to the FOMC’s own projections, the front end now looks fully priced. The median FF projections for YE 2015 and 2016 are 1% and 2%, respectively. EDZ5 and EDZ6 are trading at ~1.3% and ~2.4%. Adjusting for the historical 15bp spread between 3m Libor and Fed Funds, that leaves a risk premium of 15bps and 25bps, respectively in those contracts.
And the impolite behind the scenes TMM response is - WTF?
This has lifted the phrase "Don't fight the FED" to a completely over the top "Don't f**k with me you m*fkr" response. But there is a paradox here. If forward guidance is meant to be taken seriously then how come the derivative of forward guidance, namely forward guidance of forward guidance can be so totally and utterly shot down in flames. How can you, Mr B., expect us to believe we will end up where you guide us if you let us go so far off the path of expectation in the case of QE. You had the chance in August and early September to guide expectations of QE but no. You watched us all the way to the cliff edge and then nudged us over. A backlash against the assumption of the Hilsenrath leakage days?
So well done Mr Moderation. You may well just be trying to say "3% is too much in UST10y" but you are going to have to pull off some particularly wordy magic in your statement to abate the headlong spew in markets back into everything that has drifted off since May's first mention of tapering.
TMM are prepared for carnage, or rather Bernankage (that's going in the glossary together with Carneyage) as the world lights celebratory cigarettes in the global credit crisis room that has just had another 300psi of gasoline vapour pumped in, by buying the ying-yang out of yen, buying the cahoonies out of carry, buying the 'eck out of equities and the 'emming hell out of EM. And as for Gold - We can hear the roars of "toldjasos" echoing from the cabins in the woods. Staunch that, Florence Nightingale.
Ben's parting gift to central bank history is to go down as the FED chair that made Greenspan look not so much a hawk, but more a velociraptor.
Fed guidance -