Having a go at tomorrow's statement

Just one more day to go.  Markets are understandably jittery, and that's just commenting on the actual people involved;  algos and robots, meanwhile, are "providing liquidity" only in the sense of throwing Molotov cocktails in the direction of already jumpy price action.

As the weight of anticipation builds to a crescendo, Macro Man thought it might be useful to sketch out his ideas of what tomorrow's statement will look like.  In fairness, he's hardly the first to do this; indeed, he's received some prompting from friends in the marketplace who have already finished the exercise.

In any event, Macro Man agrees with the general belief that the FOMC will try to execute a "dovish hike" to both lift off of zero and to avoid undue disruptions.   Some of this may entail further downward revisions to the dot plot, which these days seems to be clockwork feature of the quarterly SEP.  Beyond that, however, Macro Man expects some of the following elements to be in the statement:

* Characterizing lift-off as "removal of accommodation" rather than "tightening" or "firming"

* Using a code word to suggest that the pace of rate rises will be slower than normal.   Macro Man has plumped for "cautious" in the statement below

* Throwing a bone to financial stability by suggesting that they'll monitor the impact of the decision

* Continuing to downplay the likely extent of the cycle

* A unanimous decision.   The committee should circle the wagons for the first rate hike in a market generation

* Some reference to IOER and the RRP facility

Here's your author's best guess, assuming the keep the basic structure  of recent statements rathe than starting from scratch:

The Federal Open Market Committee decided today to raise the target range for the federal funds rate by 25 basis points to 1/4 - 1/2 percent.

Information received since the Federal Open Market Committee met in October suggests economic activity has been expanding at a moderate pace.  Household spending and business fixed investment have continued to increase; however, housing sector activity has moderated somewhat and net exports remain soft.  The labor market continues to improve, with solid job gains and declining unemployment.  On balance, labor market indicators show that underutilization of labor resources has diminished since early this year.   Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.  Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.   The Committee judges that labor market indicators have moved sufficiently close to levels consistent with its dual mandate to warrant a modest decrease in the level of policy accommodation.  The Committee continues to see the outlook for economic activity as nearly balanced but is monitoring financial market developments.   Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually towards 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.  The Committee continues to monitor inflation developments closely.   

To support continued progress toward maximum employment and price stability, the Committee judged that a modest reduction in the level of policy accommodation was warranted.  With continued underutilization of labor resources and inflation expected to remain low in the near term, the Committee believes that it can be cautious in removing policy accommodation.  In determining whether it will be appropriate to raise the target range for the federal funds rate in the future, the Committee will assess progress- both realized and expected- towards its objectives of maximum employment and 2 percent inflation.   This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.   The Committee will closely monitor the impact of today's decision on financial markets and financial conditions, and  stands ready to act as needed to mitigate the adverse effects on the economy arising from any disruptions in financial markets.   
 
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and mortgage-backed securities  in agency mortgage-backed securities and rolling over maturing Treasury debt at auction.  This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

In determining the level of appropriate future policy accommodation, the Committee will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.  The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainerd; Charles L. Evans; Stanley Fischer; Jeffery M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.

In a related action, the Board of Governors approved a 25 basis point rise in the interest rate paid on excess reserve balances to 1/2 percent. The Board also directed the Open Market desk of the New York Federal Reserve Bank to conduct reverse repurchase agreements with approved counterparties on a full allotment basis at an interest rate of 1/4 percent.

More on the FOMC tomorrow.

Elsewhere, China has done the most Chinese thing possible with respect to the new FX regime.   The PBOC announced the components and weights of the new reference basket over the weekend on the CFETS website, and helpfully gave a couple of reference prices (100 as of Dec 31 2014, and 102.93 as of November of this year.)    The weightings from the CFETS website are as follows:


Simple, right?   Or B)

Three issues with the announcement are

a) The weightings don't add up to 100.   They add up to 100.0002.   Pretty small potatoes, perhaps, but a bad start.

b) The press release says that the index is calculated based on CFETS's own fixings, and they have reference rates for last December and the end of last month.   One problem:  the CHF is in the basket, and CFETS didn't provide daily Swiss fixings until five weeks ago.   So how the hell can they include it in a basket with a starting reference rate of a year-less-a-couple-weeks ago?

c) The press releases were unclear whether these are fixed weights a la the DXY, or merely starting weights that can then drift over time with relative currency performance.  That's a pretty fundamental issue of index calculation.

Unsurprisingly, as a result no one can seem to replicate the value that CFETS announced for November 30 (102.93).   After a bit of work Macro Man has come pretty close; he's managed to calculate an index with a value of 102.79 on November 30, which is a damn sight better than his initial pass, which produced an index nearly 1% higher.

The upshot appears to be that despite this effort at transparency, China has produced an FX index that no one can replicate and that they can therefore massage whenever they want (within certain limits of course.)   How very Chinese....



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Anonymous
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December 15, 2015 at 7:58 AM ×

Nothing on YMZ5?

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Anonymous
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December 15, 2015 at 8:37 AM ×

BOJ buy programs kicking in again on today's EU cash open.

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AL
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December 15, 2015 at 8:40 AM ×

I was thinking ..... how about a 12,5 bps hike?

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Anonymous
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December 15, 2015 at 8:48 AM ×

I can see the Fed announce a 25bps hike, then add dovish language in the press conference - at the same time the Fed, BOJ etc will simultaneously step in and buy equities. Once equities pop, all the algos will take over and massive short covering will ensue. Shorts will get hosed again.

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vlade
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December 15, 2015 at 8:53 AM ×

MM, Fed funds is now a range (0-0.25), so the active FFR is at the top of the range. IMO, Fed can now increase the range, instead of creating a new fixed target. The easiest is of course to just shift the range to 0.25-0.5, which still allows Fed to effectively keep the rates at 0.25 right now and gradually over a next couple of months to move it to 0.5 (or not).

An alternative that I'd be pushing if I was a voter, is to set a new range as 0-0.5 That gives the scope to raise the effective rate but at the same time sends markets a clear message that IF needed, the zero-bound can be had on a drop of a hat, w/o any emergency meetings or suchlike. Have your pie and eat it at the same time.

Of course, it would create more ambiguity in the future path of the rates, which Fed may well wish to avoid, the question is, whether the ambiguity is really a bad thing

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Anonymous
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December 15, 2015 at 9:04 AM ×

anon 837 838 ...dude can you tone down on cbs buying equites rhetoric....pretty much all u have to say everyday?doesnt add much value here and we get your point - no point repeating ad-nauseam

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Anonymous
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December 15, 2015 at 9:34 AM ×

man cbs are buying everyday - given thats the case its not news so why even bother adding it here.

on a more relevant note oil and eurstoxx bounced so it looks like we may santa rally from here

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Anonymous
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December 15, 2015 at 10:38 AM ×

CB's buying every day, but equities have gone down everyday for a while now? Not possible it is simply rollover and seller exhaustion? Ramp this morning got going ahead of ZEW. Most are likely done now until Yrllen clears her throat so drift up. If she is as dovish as expected, good chance of shorts covering and being done. Opex will take care of the rest.

If credit and oil bounce a little, won't see sellers until week 3/4 in Jan. Be too many bulls with full bellies from thebtwo week layover.

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Anonymous
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December 15, 2015 at 12:18 PM ×

http://libertystreeteconomics.newyorkfed.org/2012/07/the-puzzling-pre-fomc-announcement-drift.html#.VnAEQNLuvy0 Interesting article

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Macro Man
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December 15, 2015 at 12:31 PM ×

@ Various Anons: Enough with this tiresome 'CBs buying equities' nonsense. No, they aren't.

@ Vlade, I know about the range...that's why I wrote the decision as "The Federal Open Market Committee decided today to raise the target range for the federal funds rate by 25 basis points to 1/4 - 1/2 percent."

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December 15, 2015 at 12:35 PM ×

'The Fed and Lay's Potato Chips!'

Unwarranted Fed rate hikes, like eating Lay's potato chips, are rarely done just once.

Will the Fed raise rates tomorrow as expected and then what will be its plan going forward?

Read the article at LI here: http://go.shr.lc/1P4Go6K

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washedup
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December 15, 2015 at 1:40 PM ×

MM - Yellen et al are probably furiously copying your statement as we speak - therefore, with their main task accomplished, they shall no doubt spend the rest of today and tomorrow playing golf, engaging in tickle fights, reminiscing about that fun time kocherlakota placed a banana on fisher's seat, and debating tactics for their upcoming interviews at Goldman.

The financial markets thing will be kind of interesting to see, in that the broad headline number is clearly not (yet!) worrisome, but the high yield carnage is - perhaps you give them extra credit for recognizing that nuance?

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Anonymous
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December 15, 2015 at 2:10 PM ×

@ anon 12:18PM, amazing and baffling. Some kind of a joke? Talk about 'seasonality' and stocks.

Rossmorguy

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vlade
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December 15, 2015 at 2:45 PM ×

MM, it was more that most people expect Fed to at most to shift the range (as you did), while IMO the real "dovish rise" would be to widen the range instead.

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Macro Man
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December 15, 2015 at 3:03 PM ×

@ vlade, I think that would be political suicide. To make a range widening anything but the hollowest of gestures, they'll need to increase IOER to the top of the range. Can you imagine the press headlines: "Fed pays banks 0.25% more, leaves Main Street with zero"

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Anonymous
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December 15, 2015 at 3:19 PM ×

Der schwanz is lange und cremig.

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Leftback
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December 15, 2015 at 3:59 PM ×

Options expiration week dynamics in play again here. Puts were cashed in yesterday on the dip below SPX 2000, and now vol sellers are going to do their utmost to make the remaining OTM Dec puts expire worthless.

Even high yield ETFs bounced today, spread to Treasuries is noticeably tighter - but that segment of the fixed income space now trades in lock step with $wtic. Fascinating. The real bottom for high yield will presumably only arrive once we see the low for crude oil, and that will not come until 2016, maybe?

Bargain hunting here at Falling Knife/Hammock Capital is really focused on the REIT space today. Dovish guidance (via the dot plot, as MM suggested) and profit taking by shorts is likely to ignite a massive squeeze this week. This is an area where you can calmly walk over and pick up 9-12% yield and then ride the recovery in the space for a couple of quarters of tepid economic performance and Fed inactivity.

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abee crombie
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December 15, 2015 at 4:44 PM ×

AAII Bullish percentage in December. Perhaps we [the market] are a bit too negative on Equities here, even though the charts & breadth look horrible.

http://imgur.com/HRPSPTs

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Anonymous
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December 15, 2015 at 6:06 PM ×

@washedup at 1.40 - thanks, that made me giggle.
Chris

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CV
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December 15, 2015 at 7:02 PM ×

Gun to head, I think we squeeze higher here, and make new highs into Q1. Fundamentals look sh't, but call it a hunch, and would also be in line with my game plan since the August/September puke.

The credit market debacle is serious and will blow up, but it can fester for a while before it really hits home, that the is the problem with these things.

We're arguably in the part of the cycle where maximum damage is handed out to BOTH long and short punters, before the inevitable slide lower.

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Anonymous
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December 15, 2015 at 7:56 PM ×

Thank you for a lovely post from the future. This about captures it all. I do think that financial stability will be discussed along with the dollar, energy and high yield during the press conference. At that time, perhaps Dame Yellen will indicate what would be on her hypothetical QE4 shopping list as well. Not that it has come to that. But I suspect if any spillover from junk into equities happens, the Fed will put on their "Its a liquidity problem, not a solvency problem" and put on their work overalls and head promptly to the printers.

- beachdude

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Anonymous
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December 15, 2015 at 8:06 PM ×

Maybe the FOMC info will be leaked to HFT firms (like it was before) ?

Look here's the evidence (from the HFT firm themselves) showing previous FOMC data leaks:
http://www.nanex.net/aqck2/4436.html
http://www.nanex.net/aqck2/4441.html
https://sniperinmahwah.wordpress.com/2013/12/04/the-fed-robbery-new-evidence/
https://secure.fia.org/ptg-downloads/FIA-PTG-Statement-10-2-2013.pdf

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Anonymous
admin
December 15, 2015 at 9:47 PM ×

Oil up almost 10% in 2 days.
Equities rallying for 2 straight sessions, Dow up 500 points.

Bear Market.

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Anonymous
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December 16, 2015 at 12:17 AM ×

Anon. Bear Market ....rally?

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Leftback
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December 16, 2015 at 2:06 AM ×

LB's Contrarian Corner here.... let's think through a few ideas.

First, recall the recent ECB meeting? The FX market was so heavily overloaded short € that we saw an absolutely humongous Buy The News squeeze when Draghi failed to debase the currency to a greater degree than had already been anticipated. That rolled over into USD selling and JPY buying and it was equity negative.

Now, this week we have a FOMC meeting coming up. The FX market is heavily overloaded long $. A 25bp hike is clearly priced in to the front end of the Treasury market and interest rate differentials e.g. US2y/Schatz etc. If we get dovish forward guidance, this might be a Sell The News moment for USD, and you can argue that the chart for DXY has already rolled over. If the Fed doesn't hike it will be absolute carnage for Bucky. Given the role of USDJPY in recent months, that would be strongly equity negative. This is not an outcome that many are predicting but I think the MM peanut gallery [at least some of the non-Anons] understands the logic behind this argument.

So given the above analysis, there are a few things we do like. We like JPY as a 5 minute macro punt here. We like Treasuries, especially the belly of the curve, which given positioning in US10s could do 10-20 bps in 2 days easy on a squeeze. There are a few other things that are more speculative - like GDX and ZAR for those who like a bit of extra hot sauce on their corn flakes. We tend to be boring so we are probably going to focus on the long bond or the yen depending on what we see when we wake up.

Anons - OpEx week rally, to be precise. Bull v Bear debate still on hold. For those convinced of a Santa rally, we are going to suggest that Dec 21 or 22 might be the day to get on board, but let's see how it plays out. The conventional wisdom is that a hike will unleash a dollar rally, bonds will get eviscerated and stocks will soar. We think all of those may well be wrong.

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Nico G
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December 16, 2015 at 3:48 AM ×

Yield differential between US and European HY now at a record level - from -575bps at the apex of the crisis to +375 today (!)

meanwhile European equities strongly underperform the US. For anyone able to trade high yield this is one every decade formidable arbitrage hedging Spoos-Eurostoxx spread (already pertinent per se) with current HY differential

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hipper
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December 16, 2015 at 4:26 AM ×

LB that sounds sane enough. I'm hitting myself for not lightening up EURUSD short on ECB day. Going much lighter this time, along with some GDX. Assuming the hike is priced in and DXY/risk continue their positive correlation, the guidance/dot plots will set the direction after algos calm down.

Hike/dovish is risk off and hike/hawkish could be actually risk on (in the short term). No hike would result in carnage everywhere, especially the EZ. It would be stupid for the Fed to miss the boat this time when expectations are favorable/priced in. I think they've already anticipated as well how crowded the "One and Done" club is in the treasury market etc. and will cater accordingly. In the miraculous case that there's actually a truly hawkish signal then it should make sense to assume that bucky was just taking a small "breather" and ready to go on rampage again. But otherwise it's hard to see where the catalysts are going to be, and that would be bad for equities as well excluding any delayed santa rallies (which yesterday was part of).

Also look at the diagram where elements of core inflation rising more than 3% year go up drastically. Could next year could be about suprise inflation, which no one now seems to be expecting?

http://bit.ly/1NoClBE

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Anonymous
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December 16, 2015 at 1:48 PM ×

"Could next year could be about suprise inflation, which no one now seems to be expecting?"

Yes.

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