What's in the price?

42 and counting....will there be a 43?  History says that equities typically rally on Fed days, but as noted previously there seems too be some complacency out there.  Liquidity is by far and away the most powerful argument in favour of buying stocks here, so if the Fed does anything to suggest its withdrawal, there could be a reaction.

Most readers will have access to ample previews of today's meeting elsewhere, so Macro Man need not rehash the exercise here.  Suffice to say that he expects the growth and unemployment forecasts to be nudged lower, with inflation perhaps ticking slightly higher.  As for the godforsaken dots, he reckons they are broadly stable or perhaps tilted very slightly higher (on financial stability concerns.)  He wouldn't be surprised, incidentally, should the Fed decide to dispense with them altogether one of these days.

Of more interest, of course, is what might be priced into markets.  As noted above, stocks do not seem to worried about any challenges from los Federales.  The performance since just before the last quarterly Fed meeting has been solid, notching a 4.5% total return.




What about bonds?  Obviously Treasuries have performed very strongly for most of this year, including much of the recent period of equity out-performance. More recently, however, they've rolled over a bit, suggesting the pricing of at least a modest risk premium that the Fed turns hawkish.    Well, either that, or it's a reaction to the perception of a greater inflation threat (which in a sane world would imply a hawkish Fed!)


The short end is perhaps even more cognizant of the risks of a hawkish out turn.   EDZ5 isn't anyone's idea of a long-duration eurodollar contract, but Macro Man finds it useful as a benchmark to gauge the timing and magnitude of the early part of the tightening cycle.   Although the contract does still not fully priced the median of "the dots", we do know that Yellen kind of wants us to ignore them.  Tellingly, however, Z5 is now priced lower than it was the day before the hawkish surprise in March.


What about FX?  Given the lack of volatility it's hard to know if anything has been priced or if FX punters have simply nodded off a la Abe Simpson.     Looking at the DXY or EUR is problematic because of the ECB's  recent activities, so Macro Man plotted USD/JPY.   Back to sleep, Grandpa!


Finally, Macro Man checked out the price of oil.  Unsurprisingly, it has displayed the most impressive price action, rallying 9% or so since just before the March Fed meeting.  On the face of it, one might think it would therefore be ripe for a correction, particularly in the even of a hawkish Fed.   Of course, the Fed isn't the reason it's up here, so it's not altogether why anything the Fed does should take it demonstrably lower, either.

So there you have it.   From Macro Man's perch, stocks look most vulnerable to a hawkish Fed, and some fixed income instruments could be most impacted by a dovish one.  Not exactly earth-shattering, admittedly, as there will clearly be a reaction across all assets in the event of a skewed surprise.   Good luck!
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macrottt
admin
June 18, 2014 at 12:36 PM ×

Hi Macro Man,
Always a pleasure to read you.
Thanks for your point on EDZ5 comparing it to the previous "dot" report.
Just one word on FX... EM FX have followed ST rates consolidation fully. EM Longs have reduced their risk exposure. We have for instance USDMXN, USDINR and USDTWD all back on their 200D-MA.
If the Fed doesn't turn hawkish - [and frankly doing that just before the summer would be really stupid (as Stan Fisher hopefully explained to all his new buddies at the FOMC)], then EM FX should have a strong catch up rally...

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Anonymous
admin
June 18, 2014 at 3:55 PM ×

http://www.nydailynews.com/sports/soccer/hottest-fans-2014-world-cup-gallery-1.1833149?pmSlide=1.1833141

Macro Man at the World Cup?!

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Anonymous
admin
June 18, 2014 at 3:55 PM ×

http://www.nydailynews.com/sports/soccer/hottest-fans-2014-world-cup-gallery-1.1833149?pmSlide=1.1833141

Macro Man sighting at the World Cup?!

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Anonymous
admin
June 18, 2014 at 4:02 PM ×

USD/INR and onion prices..

http://timesofindia.indiatimes.com/india/Onion-prices-rise-about-40-in-a-week/articleshow/33877660.cms

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abee crombie
admin
June 18, 2014 at 4:31 PM ×

I'm gonna go with a hawkish stmt today. why not.

and way out there prediction, the bund is the one that sells off the most on it ;-)

lets see

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Anonymous
admin
June 18, 2014 at 5:11 PM ×

USD/INR and onion prices..

http://timesofindia.indiatimes.com/india/Onion-prices-rise-about-40-in-a-week/articleshow/33877660.cms

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Leftback
admin
June 18, 2014 at 5:40 PM ×

Nah. Massive yawn, dovish statement, Treasury shorts to get the COLD STEEL yet again. Next.....

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Leftback
admin
June 18, 2014 at 5:47 PM ×

Equities to spike briefly, then sell off on the gradual realization that the Fed can see that the economy is still a steaming pile of dog-do. Treasuries to spike, retrace and then resume the summer rally.

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Billy Bob
admin
June 18, 2014 at 5:51 PM ×

Taper $15bn just to let everyone know who's boss. Now they have their buddies all out of the equity market (and substituted them with those nasty "alien" foreign buyers) they can ensure a nice little pullback for everyone to then be able to say "well, stocks have pulled back" before ramping this thing to oblivion just before a total pull out of the market (and then subsequent Crash of Crashes).

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abee crombie
admin
June 18, 2014 at 8:36 PM ×

43 and counting for equities. Z5 was all over the place but maybe now we get a chance to sell at better prices

New highs, blue skys for equities. JBTFD

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Retail Chump
admin
June 18, 2014 at 8:45 PM ×

As a retail chump, I'm surprised at how unintelligent many of the institutional players are (present company aside). Allow me to make things clear: The Fed will ramp US equities at every opportunity, the Fed will ensure treasury yields stay low, the Fed will not allow a strong dollar. It's not rocket science people...

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Anonymous
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June 18, 2014 at 9:19 PM ×

Maybe I'm too old for this game but I keep expecting a return of the 'old testament' fed - I continue to be shocked by how they hold everyone's hands while walking them into riskier and riskier assets and increasing valuation levels. I have no idea what sort of valuation frameworks they are looking at for equities, but when the notes came out last month where they were concerned about "social media stocks" - Twitter, and biotech declines I was surprised. Really - the fed is worried about TWTR and some biotechs? But today for me takes the cake where Yellen is basically saying "equities seem fairly valued" - with respect to what - bankrupt every 20 year sovereigns trading at 3%? The game of EPS improvements via debt-for-equity swaps can only go on so long, even if they are invisible to the most popular valuation metrics. I think stocks are expensive at present levels, but more alarming is how much future EPS growth expectations are built around continued access by corporates to very cheap financing to control sharecounts. There is an increasing connectedness between asset classes, growth expectations, and valuation frameworks that makes me very nervous.

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Anonymous
admin
June 19, 2014 at 12:54 AM ×

This ain't no market for old men. This is a market for 28-year old brainless muppets, permanently fixated on the "buy all" button, not asking too many questions...since they all started their careers under the new post-2008 "regime". The next step is the total destruction of capital, as we know it, and, eventually, the abolition of capitalism as a whole. There are now more things in common between the Fed of 2014 and the Chinese Central Planners than between the Fed of 2014 and the Fed of the '80s. No wonder Stein fooked off to Harvard.

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