It's all about inflation

So.  Today's the day when markets will, presumably, be freed from the yoke of Fed QE for the first time in two years.  After the judders of a couple of weeks ago, equities now seem relatively sanguine about the prospect; could you have envisaged 10 trading days ago that the VIX would be below 15?

What's interesting to note is that while Spooz have roared back nearly to their highs, US fixed income has trod a decidedly more careful path.  Indeed, overlaying a chart of SPX futures with EDZ5 illustrates how resilient rates have been; simply eyeballing the chart suggests that EDZ5 "should" be 30 ticks lower.

Of course, a few things have changed in the interim.   James "5 Minute Macro" Bullard suggested during the equity sell-off that the Fed could defer ending QE.   In the realm of adult analysis, the ongoing weakness in commodity prices could certainly be taken as a deflationary signal.   Well, it could if the Fed were ever prepared to take rising commodity prices as an inflationary signal, which they seemingly aren't.   But hey, what's a little hypocrisy between friends?

As such, the market will pretty clearly focus on the inflationary language in the statement for clues as to where the Fed stands.  The September statement that "the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year" may well be altered in the wake of the commodity downdraft and the slightly below expectations September CPI.

The magnitude of any change will set the tone for trading over the next couple of days- the larger the magnitude of the change, the more dovish it is likely to be taken.   Of course, given current pricing, one could argue that a dovish outcome is already priced- in certain segments of the market, at least.   Looking at Macro Man's usual-suspect EDZ5, a purchase of the 99.25/12/00 put fly at 2.5 does not look like a terrible way to bet on an outcome that's not quite as dovish as hoped.

Of course,  the phrases "not quite as dovish as hoped", "Yellen", and "profit" are rarely spotted in the same room together.  Given that punters seem to have abandoned all interest in bearish rates plays, however, if fading a dovish consensus were ever going to work, a day like today could well be the time.