A Fed poll

Well, that was...exciting.  The long-awaited return of volatility has arrived with quite a fanfare (or is that a requiem?), with yesterday's whip-saw price action unlike anything observed since the US downgrade furore in 2011.

How crazy was it?  Macro Man got one of those "eurodollars screaming higher, no offers in sight" texts from one of his brokers yesterday morning, even though neither of us are currently in a seat.   One can only presume that plenty of punters who are in seats got similar messages, if not shoulder taps from risk managers.

Indeed, the late-session selling that has characterized so much of this "meltdown" in stocks is highly symptomatic of both margin call-related selling and rebalancing from the uber-leveraged-ETF-that-separates-the-public-from-their-money crowd.

Macro Man was intrigued to see the VIX print 30 yesterday as Spooz shanked 3%; in the good old days before the GFC, 30 was usually a good bellwether for at least a short term bottom.  Sure enough, stocks did rally sharply thereafter, though the above-noted factors knocked them off of their intraday high.

A key question for many investors, macro or otherwise, is how or if the Fed will react to recent developments.  On the face of it, it's frankly absurd to even raise the question.   A 10% sell-off in equities is hardly outside of the realm of normality, and most forecasters still expect US growth of something close to 3% in the second half of this year, with ongoing improvement in the labor market.  The downdraft in energy prices is bad for those involved in its extraction and distribution but good for everyone else; as Polemic has noted in the comments recently, the magnitude of the recent sell-off is more consistent with a purging of financial excess than a reassessment of the fundamentals.

And yet......this is the same central bank that pushed through an intra-meeting cut because of a French rogue trader in early 2008.  The same CB that likes to reference 5y5y breakevens when they tank (even though a prime driver of the pricing of inflation bonds is energy, which the Fed strips out of its own inflation targets.)  The CB that has reminded us ad nauseum  that asset purchases are not on a pre-set path, and that the pace of QE can go up as well as down.

Macro Man isn't naive enough to suggest that yesterday's fixed income melt-up was the result of a sober re-assessment of the likely trajectory of Fed policy.  It wasn't.   And yet, for yields to stay here for any meaningful period of time, it will likely require just such a re-assessment.  An obvious catalyst would be for the Fed to shake up the market's (erstwhile) perception that monetary policy is entering a quiet period on auto-pilot while the FOMC girds its courage to actually start tightening.   What better way to shake up that lazy view (and to show the equity guys that Janet's got your back) than by not ending the taper in a couple of weeks, but extending it through then end of the year?

What do you think?   The blog traffic-o-meter has gone shooting higher over the last couple of days, which is usually a great sign that something has gone horribly wrong somewhere.  Please respond to the poll below to help us gauge whether the expectations for the Fed have shifted....or just the price of fixed income.



EDIT:  Responses here.