Just in case

Since the Fed last announced policy in September, this is what's happened:


* The SPX has rallied 3.5%


* The DXY has rallied 1.5%


* Oil has fallen 8%


* US 5Y5Y inflation breakevens have declined by 11 bps


* High yield CDS spreads have widened by 50 bps...though they've also narrowed nearly 90 bps since their wides earlier this month


* Fed funds futures have lowered their pricing of year-end rates by 12.5 bps (i.e., half a rate hike.)

On balance, you'd have to think that these market developments don't exactly make a December lift-off seem any more likely, do they?   Sure, Spooz have ripped, and as a nice short hand for sentiment that's a positive.   But the things that more directly impact or reflect inflation- the Fed's current bugbear- have gone the wrong way.  What about a stronger dollar, lower oil, and tighter inflation breakevens represent "progress" towards meeting the inflation goal?   It's difficult to see.

What about domestic economic developments?   Some of the highlights include:

* Very strong vehicle sales

* Ongoing labor market strength reflected by initial claims data

* A CPI that was slightly higher than expected if you squint hard enough

* Resolution of the debt ceiling issue before it had any impact

* Weak employment data

* Weaker than expected ISM/Regional surveys

*  Weak PPI

* Weak retail sales

* Weak September durable goods orders

* Two Fed governors publicly opposing a 2015 lift-off

Again, it's difficult to see in aggregate how this collection can be taken, in its entirety, to represent progress towards the Fed's goals.

What about international developments?

* China has failed to completely implode

* However, PBOC has eased policy again amongst tepid domestic demand

* The ECB dropped the heaviest hint possible that more easing is in the pipeline for the December meeting, two weeks before the Fed announces policy

* EM assets/currencies have quit selling off unilaterally,  though individual fortunes have been mixed

* CPI releases disappointed in Europe, the UK, Canada, Australia (as MM is writing this), China, etc....

So more easing amongst America's major trading partners and plenty of dovish talk elsewhere.  Regardless of what Macro Man or anyone else thinks about what the Fed should do, one has to concede that it would take a fairly brave central bank to lift rates in this context; Ben Bernanke's autobiography title notwithstanding, this Fed does not seem to be that central bank.  "Wait and see" indeed.

Now, readers don't need your author to tell you that policy is going to be unchanged today; you already knew that.  Similarly, judging by this week's poll, most of you have already decided that they're standing pat in December as well.   The weight of evidence would appear to support that view, though there are still a few key releases before the nail is finally driven into the coffin.

Still, the Fed would have you believe that this is a "live" meeting, and they can hike rates even with no pre-scheduled press conference.   Sure they can- they'll just call a last-minute presser, right?   Yellen will ring Hilsenrath, et al on the Bat phone and have them skulk down to the Eccles building when they would ordinarily be busy at their desks (it is Fed day, after all), and no one will notice.

Nope, no one will ring favoured financial market participants and whisper "Blue Horseshoe loves press conferences", there will be no leaks or rumours, and it will all go swimmingly, right?  There are never any leaks from the Fed!

You can never say never in this game, and it is still of course possible that Yellen and co. shock the world and lift rates in December's meeting.  Clearly pricing has become extreme enough that a lot of "just in case" eurodollar put flow has gone through over the last few days.  Granted, most of it has tended to be fairly wing-y stuff for a couple of ticks....but one would have to think that any legitimately hawkish surprise (ha ha ha)  would have an outsized impact upon the price.

There is a similar flow going through around the (legitimately more interesting) BOJ meeting tomorrow night; one week risk reversals have moved fairly dramatically for calls over the last week or so (Thanks to MG for pointing this out.)   Again, this doesn't necessarily reflect any legitimate conviction that the BOJ will go(though everyone knows they have two hopes of hitting their inflation target: Bob Hope and no hope), but simply a cheap bet just in case Kuroda surprises like he did last year.

Although one has to exercise some degree of selectivity, "just in case" trades can play a useful part in a macro portfolio, offering mitigation or alpha generation from potential tail risk scenarios.  Such is also the case with central banks.  Most of the Fed would like to put up rates...but they'll end up remaining on hold, just in case.

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23 comments

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October 28, 2015 at 11:05 AM ×

With respect to December liftoff, watch AAPL today. Tim Cook said a considerable amount on China; more in line with Nike's results than the China bear case...

Tim Cook on China

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Anonymous
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October 28, 2015 at 11:22 AM ×

Riksbank is targeting the wrong inflation...
https://twitter.com/auaurelija/status/659325455368105984

...and not just Riksbank, but every other central banks, blowing bubbles in asset prices (property, equities) whilst simultaneously destroying jobs, home affordability and increasing debt burdens. All of which destroyed the real economy and widens the wealth gap.

The final outcome is likely to be a series of sovereign debt crises, and massive political turmoil, the overthrow of many western governments and the execution/imprisonment of central bankers. Sounds far-fetched? Examine the recent Portuguese elections, the EU immigration crisis, Brexit possibilities and the rise of nationalism/extreme politics in both Europe and the US. Examine also Iceland's continued imprisonment of bankers from 2008.

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Booger
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October 28, 2015 at 11:48 AM ×

So the score so far on central bank tightening has been:
1) every central bank that actually hiked since 2009 has had to give it back
2) every central bank that had a hiking bias has gone neutral or dovish

Except the Fed until recently, so my base case scenario is that the Fed will be giving up on the tightening bias in the next 6 months. ECB, Japan, China, EM, Comm-bloc will probably ease further, and the Fed itself may take on the full foetal position if leading indicators weaken further. In which case the monetary divergence remains about the same and there is likely to be range movement in DXY unless spoos breaks down. It is hard to imagine a dollar breakout to the upside without further monetary divergence or without some real risk aversion/breakdown spoos.

Although I'm bearish commodities, I'm wary of shorting comm-bloc or EM FX here as a U.S slowdown, if it occurs could cause a final pullback in DXY. I still think short spoos is setting up to be very attractive and although frustrating to date it will be likely be payday sometime in the next few months. Worth persisting with testing with small shorts with tight stops on spoos IMO.

Here is my fantasy for the week: dovish, but not too dovish, just right dovish FOMC, I wake up to short spoos around 2080-2100 and then shocker GDP print.

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Bruce in Tennessee
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October 28, 2015 at 1:13 PM ×

It seems to me that the path taken by global central banks has slowly allowed our daily thinking to deviate a long way from 2008. As I review the overnight economic news more and more of the focus is on housing and equities, as was expected and desired by bankers when perpetual ZIRP became the law. But others correctly note the death of manufacturing,not just in the US, but now a significant decrease in China, a la steel. I understand the trader's mentality, I have been a critic of Hussman, who understands what is happening, but allows his funds to have losses because he trades more like a professor than a trader. But at some point it seems to me that the slow, engulfing ooze of the La Brea of extended global debt and waning demand will catch up with equities, including the US. When comes the child to say that the Fed remaining on hold has no clothes? So far, I have been amazed...

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wcw
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October 28, 2015 at 2:03 PM ×

In re 'shocker GDP', videlicet http://www.frbatlanta.org/cqer/research/gdpnow.aspx

Q3 is coming in around 1. From over 3, blue-chip consensus is down to 2 and sinking.

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Anonymous
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October 28, 2015 at 2:22 PM ×

Excellent synopsis of where we currently are

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Anonymous
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October 28, 2015 at 2:36 PM ×

this TINA mentality in equities has been relentless.I had been short over summer and caught bounce well but reshorted too soon-spx 2020 ish ,for now have bought some 2100 calls to stop me out but i feel risk reward here looks very compelling on the short side given where spx 2016 estimates are.
i like the pundits on tv talking about numbers ex energy being ok...in that case how do numbers ex apple look please?
fed on hold being a reason to push new highs sounds very sill but price pays for now...
I'm short and sitting tight with stops defined
BTW do we think lows for the year are in- that would be the biggest surprise into year end!

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Anonymous
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October 28, 2015 at 2:55 PM ×


Danielle Dimartino lays it all out on what the Fed fears on Bloomberg

Starts at 22 minutes: Ends after 4 minutes. Seems interview was cut.

http://media.bloomberg.com/bb/avfile/News/Surveillance/vWsKUCc6Dx5w.mp3

Fed preventing price discovery from ever occurring . They fear it.

Tomorrow 1 year anniversary of the end of the taper and still waiting for the first .25 rate increase.

Don't know where the systemic risk is but they know it's there in a 210 trillion dollar debt market. Saw potential ripple effects of minor China devaluation.

Credit can't find a natural home Corporations after buying back shares now doing acquisitions. Hitting the upper limits on financial engineering.

Pension fund desperation. 7 years into zero interest rates and pension funds still assuming 7.68 percent return.

169 billion added to high risk private equity credit type funds since 2012


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Anonymous
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October 28, 2015 at 3:23 PM ×

BBG:RBS Sees 'QE Infinity' From Global Central Banks

http://www.bloomberg.com/news/videos/2015-10-12/rbs-sees-qe-infinity-from-global-central-banks

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Mr. T
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October 28, 2015 at 3:31 PM ×

Still sounds like people are too bearish, or at least bipolar. The high probability outcome is somewhere between "IBVC moonshot" and "system collapse". The time spent finding reasons why we are looking at system collapse would be better spent looking for higher probability trades imho.

The macro policy systems to me seem much more stable than unstable - instability and capital slosh arising from policy variability which is gone. Have we ever seen a period of G10+ policy being so tightly aligned? We see subtle tightening and loosening via DXY and rates, maybe thats all we'll get - policy going in different directions in such a tightly coupled global economy makes little sense.

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Anonymous
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October 28, 2015 at 3:32 PM ×

Another 10y German Bund auction failure. Bids for €2.97bn of 10y Bunds vs €3bn goal. German 2y yields drop to -0.35%, lowest level in history. Yields negative out to 6 years.

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Anonymous
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October 28, 2015 at 3:40 PM ×

re mr t 3;31

personally i am very bearish but not looking for a system collapse..bearish as i was , i did stick my hand out at the end of last month but my bearish on the us markets stems pretty much on a valuation level and i also feel CBs running out of ammo in the sense that each iteration has smaller shelf life in terms of effect

that was me commenting on 2:36

good luck all into year end

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Anonymous
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October 28, 2015 at 4:52 PM ×

#Sweden's bond yields negative out to 5yrs, Switzerland's yields negative out to 10yrs,

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Anonymous
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October 28, 2015 at 5:26 PM ×

Somebody took and beating and got hurt pretty bad...

Carlyle-Owned Hedge-Fund won’t immediately pay back about two thirds of nearly $2 billion investors recently asked to withdraw
Several Claren Road clients said they were dismayed because the firm had repeatedly represented to its clients that its portfolio was highly liquid—meaning wagers could be unwound easily.

http://www.wsj.com/articles/carlyle-owned-hedge-fund-firm-hands-investors-a-big-iou-1446028815

Many more to come. Just tip of the iceberg. Welcome to hell.

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washedup
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October 28, 2015 at 5:56 PM ×

T - I agree with the not getting carried away in either direction idea - that said, I will point out a couple of things:

1. Macro is undeniably worse on a global basis than it was last year in Q4 - I doubt we are growing even at 2.5% globally
2. The most common hedge fund trade was to be long stocks like valeant and other merger-arg plays de-jure, with short spoos as a hedge - worked like a charm for a couple of years and then the last 3 weeks happened - that trade being reversed is in large part why equity indices are rallying - you could argue many fund that were long 'value' names in healthcare didn't realize their hedges (the credit hedges have gone nowhere, by the way) would essentially make them act short GOOGL, AMZN, and AAPL - ouch!

Now, the fact that its a short squeeze doesn't make it any less likely to get out of hand, especially if, as LB and MM have alluded to, the seasonal gamma chasers step in, but I will make the same point I have been making for a while. The environment smells more and more treacherous, central bank dovishness or not.

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Anonymous
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October 28, 2015 at 6:29 PM ×

On the short side, I saw there is likely to be a mini-correction toward 1950-2000 in the next few days. It is more technical. But I would like to enter my short after BOJ's meeting this week, expecting that BOJ is going to hit the JPY long as ECB and PBOC have provided covers for them.

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Anonymous
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October 28, 2015 at 6:37 PM ×

spx/estx spread should start to go now i think....is a slow burner but this fx move should fire it up(this has been in the "long term trades" drawer)

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washedup
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October 28, 2015 at 6:49 PM ×

Fed: Pssstt.. hey equity market
Risk: Wasup beatches
Fed: Um, that, um thing we needed to discuss...
Risk: What? don't f@3ng waste my time again
Fed: Nah, just, is it ok 2 u know?
Risk: Is WHAT ok, and speak louder, and can't u see Im busy? where's dudley with the coffee and donuts anyway?
Fed: We were thinking of rai..
Risk WHAT? what did u just say???
Fed: Nothing..
Risk: Be a man, fed - stop wetting ur bed - and ur late with the rent again - u keep this up and ill send dimon to break ur kneecaps again - is that what u want, eh fed? for ur kneecaps to be broken like 2008?
Fed (sobbing): No, please no.. just forget this conversation happened.
Risk: Too late for that wusses - come here kocherwhateverurname is - its time for my massage - Im in the mood for that swedish NIRP style ur supposed to have learnt about - make it slow and good - aaaah there... like that......

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Anonymous
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October 28, 2015 at 7:15 PM ×

Do we now just rerun the playbook from before the September meeting? Short EM?

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Booger
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October 28, 2015 at 7:23 PM ×

Assuming GDP print is disappointing, short oil is attractive here

Assuming BOJ stands pat, short usd.jpy is also attractive. What are the chances of them surprising 2 years in a row. Also, do they have much more local assets they can buy locally to expand QE?

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Anonymous
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October 28, 2015 at 7:48 PM ×

LOL shorts lose again

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abee crombie
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October 28, 2015 at 8:34 PM ×

nasdaq probably needs to make a high before bears can play again. Look for FB to blow out earnings next week, then sell it like all the other tech names that beat big time.

at least EURUSD is working ;-) One would think that would eventually spill over into EZ Equities, though just looking at EZ earnings for Q3, they are coming in really weak, missing on EPS and earnings growth is down 25%. So unlike Spoos whose EPS are still beating (rev's missing) Europe has a problem. Of course the market price will move before beat's catch up and already we see a slight turn in Forward EPS #'s but just a heads up for the EZ cheerleaders (count me as one as well)

Fed day Yo-yo trade worked again.

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Anonymous
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October 28, 2015 at 10:08 PM ×

lol@washed. Can you do one for the ECB & Merkel? I'm in the mood for some cheap German porn...

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