The big day arrives

The big day that's been on the calendars of Fed-watchers everywhere has finally arrived, and with it a signpost to some of the trends of the last few weeks.   Will the Fed signal "Full Speed Ahead" by articulating a detailed set of exit principles (a necessary prerequisite for ending ZIRP) and perhaps even dropping the "considerable period" language?  Or will it announce "U-turn" by waffling on any concrete timeline for exodus and maintaining the current forward guidance as-is?

For choice, Macro Man would probably lean towards the latter, though a third option "Something for Everyone" could well be the most plausible outcome- announcing a general set of principles (without articulating specifics such as the IOER/RRP  rate spread) while maintaining the "considerable period" language.

Indeed, Macro Man feels relatively confident that "considerable period" will be maintained.   Although there is of course no guarantee that the previous tightening cycle a decade ago will be followed to the letter, it does provide a precedent and a timeline with respect to guidance language that the Fed may well believe can guide markets.

For those of you under the age of 32 or so who have never seen the onset of a Fed tightening cycle, consider the timeline below and possible analogue to the current environment:

June 2003 (September 2014): Fed eases policy   (rate cut in 2003, last announcement with QE in 2014.)

August 2003 (October 2014): "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period."

September 2003 (December 2014):  "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period."

October 2003 (January 2015) : "In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period."

December 2003 (March 2015): "However, with inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period."

January 2014 (April 2015):  "With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation."

March 2004 (June 2015):  "With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation."

May 2004 (July 2015): "At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured."

June 2004 (September 2015): Rate hike.

The analogue above is far from gospel, and if you wanted to suggest that because of the extraordinary easing put in place over the last six years that the current year should be shifted forward by a few months (leading to a rate hike in, say, June of next year), Macro Man wouldn't argue too vociferously.

The over-arching point, however, is that the Yellen Fed is likely going to walk on eggshells in tightening policy, providing as much gentle early warning as possible.    What better way to do so than repeat the mind-numbing semaphore of the Greenspan era?

Anyhow, as Macro Man sees it, once the "considerable period" gets ditched we're in for two "patients" and a "measured" before the tightening proper commences.    He feels pretty sure that the first hike will come in a quarterly SEP month, which would provide forecast cover as well as give Yellen a chance to explain herself to the public.   Certainly we see a similar dynamic at play with the ECB and BOE, where policy moves often occur during quarterly forecast months.

From Macro Man's perch, this will be the first serious test of the dollar trade of the past few weeks.   Sure, payrolls were poor but the market has had a funny way of ignoring Le Chiffre when it suits.  Insofar as much of the USD trade has been about policy divergence between America and the rest of the world, evidence that the US leg may come a bit later than desired could throw a right cross at George Washington's jaw.  (Suggestions that the ECB is struggling to muster demand for TLTROs won't help, either.)

As for rates, Macro Man bought a few red eurodollars yesterday, as trading the range still seems to make sense- particularly if Yellen sticks to her colours and downplays the imminence of tightening.

As for stocks?  You'd have to think a scenario with a somewhat weaker dollar and lower rates would be taken positively; no doubt that's what yesterday's rally was front-running.  Although Macro Man continues to trim length on strength, he cannot yet bring himself to go short, as neither the price action nor a catalyst suggest it's time.

'Twill come soon enough, no doubt; when it does, much better not to have the burden of a stale, money-losing short to overcome (mentally and financially.)

Bonne chance a tout!

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amplitudeinthehouse
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September 17, 2014 at 8:33 AM ×

There will be no "Something for Everyone".
That NY desk will never be trusted again. Period.

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Nico G
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September 17, 2014 at 9:30 AM ×

for a catalyst to go short i am waiting for a different wording from Fed something like

"... for not a consider period of time anymore so you should short this irrational exuberance on all risk assets. As a reminder risk is NOT an asset, but a liability as the youngest of you are now going to feel, rather deeply. Thank you."

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amplitudeinthehouse
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September 17, 2014 at 1:29 PM ×

Your analysis is correct , Macro Man, but another report I read describes the NY desk current fed speak as repetitive due to punters not willing to be their Macro bitch , Yes , if you won't be there bitch in NY than be done with ya.

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amplitudeinthehouse
admin
September 17, 2014 at 1:40 PM ×

Macro Man, this repetitiveness will happen again and again and again and again and again..it's human nature , mans passions will never change.
NY, I'm sorry I didn't want to be your bitch.

ps..you have a empty house to fill'up with.

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Macro Man
admin
September 17, 2014 at 1:46 PM ×

I'm sorry, but what in the world are you talking about?

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Polemic
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September 17, 2014 at 1:47 PM ×

I too am struggling with the NY desk refs and the specific macro fund refs

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amplitudeinthehouse
admin
September 17, 2014 at 2:06 PM ×

Your analysis for the last couple months of the fed speak being directly aim at Global macro funds and my guess associates that were closely trading longside Global macro funds.
I judge your analysis to be fairly on point with respect to how each time the minutes comes over the wire again and again and the underlying sense of direction never really changes and as I spoke of before , that if your not willing to trade along with the NY boys on the global macro desk thereby trading with the size not against it ,thereby being prepared to be there bitch and jump into whatever trade they are in than forget it.
And I have, I've forgotten it.
And as for the house comment, that's for their leader after the bell closes.

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amplitudeinthehouse
admin
September 17, 2014 at 2:15 PM ×

I forgot, since I won't be trading alongside the NY boys I just want to thank you guys for bringing my trading analysis some clarity and closure.

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Anonymous
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September 17, 2014 at 2:20 PM ×

Strong dollar...weak dollar...

http://imgur.com/BmvH2tf

No market sell off due to weak dollar.

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Nico G
admin
September 17, 2014 at 2:20 PM ×

WSJ update on my favorite topic:

Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to research firm Birinyi Associates. Through August, 740 firms have authorized repurchase programs, the most since 2008.

The growth in buybacks comes as overall stock-market volume has slumped, helping magnify the impact of repurchases. In mid-August, about 25% of nonelectronic trades executed at Goldman Sachs Group Inc., excluding the small, automated, rapid-fire trades that have come to dominate the market,involved companies buying back shares.

According to Barclays, companies in the second quarter spent 31% of their cash flow on buybacks, the most since 2008 and up from 14% at the end of 2009. At the end of the second quarter, nonfinancial companies in the S&P 500 index held $1.35 trillion of cash, down from a record of $1.41 trillion at the end of last year, according to FactSet.

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Anonymous
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September 17, 2014 at 2:27 PM ×

c SAYS
Nico,
I read the same thing and two thoughts occurred to me;
1) So much for any arguments that retail are punting in at a major top - doesn't look like it does it?
2) With the volume going into buybacks does the Fed have any idea why corporate investment has been the 'missing' piece in the recovery? Nothing to do with the fact that the most effective way to pump earning is no to invest in stuff that takes years to payback when you can pump what is essentially cheap money back into reducing your float.
What a world we find ourselves in.

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Anonymous
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September 17, 2014 at 2:39 PM ×

Bespoke:"August was the 74th straight month of sub 1% CPI. Longest streak since August 2005 (278 months)."

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Anonymous
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September 17, 2014 at 2:42 PM ×

All across EU , bonds are in green . Spain 10yr almost back down to 2 1/4%

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abee crombie
admin
September 17, 2014 at 2:44 PM ×

Can it be that easy MM? Though its crazy to think its been 10 years since a hike cycle. At this pace most pros in the business will only be around to see a handful of them. Thats why I'm a believer to be a macro trader today you have to play EM pretty aggressive as well, but thats for another day

Agreed dollar test will be the one to watch. Spoo's still feeling topish to me and I think someone had the China reserve cut news feed before, hence the sharp ramp in the US morning

Im looking to take a little blackswan protection after the Fed on the scotland vote. Lots of new short term options out there

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Macro Man
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September 17, 2014 at 2:49 PM ×

Nico, C': what strikes me is that despite the wave of buybacks, the stocks being purchased haven't exactly shot the lights out. By my reckoning, PKW (buyback ETF) has underperformed the broad market by 200 bps YTD. What does that tell us?

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Anonymous
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September 17, 2014 at 2:52 PM ×

Buyback quarterly...

Quarterly buybacks in S&P500 declined year-over-year (-1.1%) for the first time since Q3'12

http://www.factset.com/websitefiles/PDFs/buyback/buyback_9.17.14

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Anonymous
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September 17, 2014 at 3:24 PM ×

C Says
MM,
My thoughts on the situation are that this will not be a bull market topped by the presence of late coming retail as so many have. I think demographics dictate that in this cycle retail that are in the market may well be much better balanced in their portfolios than hitherto. In essence , I am saying equities going up owe more to buyback this time and that is combined with more balanced portfolios that by implication have not engaged for quite a long time in much shorting activity. Indeed ,the latest story looking at the 'calm' in the face of headline risk seems to me to reflect that retail may not be panicking because they don't have sizeable exposure here. leaves me with the view that if markets do come off it might look strangely low volume for quite awhile.

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Polemic
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September 17, 2014 at 3:28 PM ×

Hmm .. I d interpret C s comments slightly differently in that the bull run will indeed end up with a late retail rush, it's just that we haven't had it yet.

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amplitudeinthehouse
admin
September 17, 2014 at 3:33 PM ×

I liked to say to any Fed officials out there let's forget about the Global Macro fund and the bitches that trade alongside Global Macro fund. Its over, done and dusted is any confidence in stepping into a trading room with that team. The more heat applied to the shorts the more this team get off. It's over, let's move on.
Thanks

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Mr. T
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September 17, 2014 at 3:38 PM ×

Anyone else think it a bit odd that SPX rallied more than Shanghai comp on the PBOC news? Maybe I'm mis-attributing too much of yesterdays run to that news but it seemed to line up well.

Also its insane how that got communicated to the markets - a guy at a news agency, on a tip from one banker, none of whom were available for comment. Seriously?

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Anonymous
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September 17, 2014 at 3:46 PM ×

C says
I wouldn't use the term "seriously" and a short sharp news driven rally in the same sentence.

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Anonymous
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September 17, 2014 at 4:30 PM ×

Iceman says..

What are the chances the fed stops QE early tonight but maintains the considerable period language?

A bit for both camps to munch on...

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abee crombie
admin
September 17, 2014 at 4:45 PM ×

Agreed Mr T, it was an inside job, but hey who am I to judge, I'm sure it wont be the last time as well. They wanted to catch the European offside and they did a good job as Stoxx was looking weak all AM.

Interesting thoughts on buyback and retail participation. For what its worth, my thoughts on the current market is that it is slowly topping. If you look at the stocks that are doing well, a lot of them I dont think ppl will be buying on pull backs, but moreso selling out as they go higher, a la value investor mantra (eg MSFT, AAPL, even the banks at this point) so I think there could be a nice pullback if it starts gaining momentum. But overall I still think we are in a secular bull market. Retail will come in much later when the economy improves, earnings growth is higher.

This isnt rocket science. The market is going up

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Nico G
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September 17, 2014 at 4:53 PM ×

Anon 2:27

"What a world we find ourselves in.'

been punting for 18 years now - trying to NOT alter my logic to current state of affairs - and that means suffering or not participating since 1430 SPX kiss back

i still hope to be back and aggressive when 'old normal' logic resumes

MM

underperf of bought back stocks is the very consequence of it: the smart money punts away from the dogs they know are being bought by managers only to boost their pay out, and that such resources are not spent on capex i.e. closer to their longer investment timeframe

despite the dispersion you mentioned that good old index arb still helps to float the broader market from a direr picture. One just needs to look at indices deprived of such short term wealth extraction/management payoff they ain't doing that well

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Nico G
admin
September 17, 2014 at 4:56 PM ×

Anon 2:27 again

you are spot on

my favorite rule of marketing 'do not produce better products, just find dumber customers'

clearly resembles the current strategy shortcut of many

"do not produce better earnings, just reduce the float'

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Anonymous
admin
September 17, 2014 at 5:42 PM ×

us market looks to be topping in terms of participation, breath, small caps...one observation-the number of short vol strategies being advertised is amazing..yes realised is low and vol here might be a tough expensive compared to recent realised, but the no-brainer trade of selling every pop on vix might end very badly as that boat getting overcrowded

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amplitudeinthehouse
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September 17, 2014 at 5:59 PM ×

Glad the NY session is over, now back to where I should be , running with my UK sisters :)

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amplitudeinthehouse
admin
September 17, 2014 at 6:47 PM ×

The entertainment is never far away.

https://www.youtube.com/watch?v=88DtUfCnycw

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Leftback
admin
September 17, 2014 at 7:40 PM ×

Well it was Waffles all round for afternoon tea at the FOMC, wonder if they ever have Eccles* cakes?

Enjoyed the analysis, MM. Agree that March 2015 is not likely and that a lot of Treasury shorts will be pantsed before we get to a hike.

LB had a MOST enjoyable day, as his on-line broker managed to obtund his attempt to sell some options ahead of the Fed, thereby incurring a small loss. Another unheralded hazard of macro punting: "our system does not recognize this symbol". As a consequence we are now going to:

1) Watch football.
2) Inhale whatever Amps has been smoking.
3) Throw darts at a print out of the broker logo.

We now return you to your regularly scheduled program "The Obama Miracle: The Great American Economic Recovery" and other favorite "Reality" shows.

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Leftback
admin
September 17, 2014 at 7:44 PM ×

P.S. Possible reversals in DX, USDJPY and US10y. Sell/buy the news.

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amplitudeinthehouse
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September 17, 2014 at 8:03 PM ×

LB, never you mind what I'm smoking , let's just say there must be a proud mother in Queensland , Australia thinking what a wonderful watch of proceedings!

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amplitudeinthehouse
admin
September 17, 2014 at 8:23 PM ×

LB, as for reversals, I'm out of the DX , AND F****IN STAYING OUT.

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amplitudeinthehouse
admin
September 17, 2014 at 8:31 PM ×

LB, I figured it out how to trade the NY exchange cotton.
You need to have a home advantage , if not , than you need to be blood. Otherwise your there bitch!

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Anonymous
admin
September 17, 2014 at 9:29 PM ×

It's all good....sure it is...

Real Median Household Income from Peak Year...

http://imgur.com/9rl2bxe

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Anonymous
admin
September 17, 2014 at 10:02 PM ×

So... The Fed forecasts 2.6-3% GDP growth for 2015 while they raise the front end of the curve 137.5 bps

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Anonymous
admin
September 17, 2014 at 10:04 PM ×

Most Fed Officials See Rate Hike In 2015 - WSJ ( same group of officials in 2012 agreed 2014 GDP would be 3.5 to 4% .... now down to low 2%)

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September 17, 2014 at 10:21 PM ×

They're are giving numbers random.. don't Worry. .. usd is the automatic brake

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Anonymous
admin
September 18, 2014 at 7:22 PM ×

now that the smoke has cleared ... did anyone get a hold on what amp really was smoking?

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macro_man_fan
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September 23, 2014 at 4:39 PM ×

hi macro man, what do you think of china's credit market when the eventual bond price crash/rate hike comes in US and other Asian countries?

thanks

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