The Federales ride into town

Saddle up, the Federales are ridin' into town.

Now obviously, no one expects an actual policy shift out of the Fed, so the issue is really going to be how much of a climbdown there will be on the growth and inflation forecasts.   Some acknowledgement seems inevitable; not only has oil tumbled some 30% peak-to-trough since the day before the December announcement (carrying inflation expectations with it), but most growth figures have been poor as well.  Although the Atlanta Fed GDPNow model is not a replica of either the staff or FOMC members' forecasts, it does provide a useful publicly-available historical snapshot of the growth forecasts of a solid macro model.

                                                                    Source: Atlanta Fed

As you can see, as of late November the forecast was tracking at 1.8%, slightly below a reasonable estimate of trend growth.  That's now quite a bit lower.  Of course, the Fed would tell you that they are much more concerned about 2016 growth than that of Q4 2015, but they have had a tendency to forecast through the rearview mirror, and why change the habit of lifetime?

Of course, a lot of this has been priced, courtesy of both the equity market and fixed income.  (Which doesn't stop certain fund managers well known for being long fixed income baying for more support from the Fed.)  Jan '17 Fed funds, for example, has taken out a full 25 bps since December's rate hike and is now priced just 28 bps below the Jan '16 contract.  They only have to go one more time to essentially break even on shorting this, and everything on top of that is gravy.   If you are structurally short equities, this looks like a fantastic hedge (given the likely equity market scenario that would require the Fed to do no more tightening this year.)

Certainly Apple's earnings announcement did little to suggest a nascent recovery in either US or foreign demand, though whether that reflects a tapped-out global consumer or merely fatigue with Apple's particular brand of gewgaws remains to be seen.  (Samsung earnings are released on the 28th, and will add another data point to elucidate whether the entire pie is stagnant/shrinking, or merely Apple's slice of it.)  Either way, it looks like the company has entered the "cash cow" phase of its lifespan; then again, Microsoft's been there for years and currently trades at a substantially higher multiple than Apple (albeit with a somewhat higher dividend yield.)  In any event, the days of Apple earnings being the ne plus ultra driver of equity market sentiment look to be permanently behind us.

Tomorrow, at least, policy calendar is the driver.  As the NY Fed suggested in 2012, equity market out-performance on Fed days has been, in the parlance of the 1990's, "real, and it's spectacular."  Well, perhaps it's not quite as spectacular as it used to be.  At the time that study was released, the performance of the SPX on Fed announcement days from 1994-2012 was 95% annualized.   As is so often the case when you publicly identify an apparent anomaly, mis-pricing, or arbitrage opportunity, much of the juice has vanished.   Since that Liberty Street blog post was made, the annualized return on Fed days has been "just" 25%.

Oh, and if you're wondering how the market has reacted when the Fed is on hold (i.e., not moving rates, or doing QE, or changing forward guidance, or doing the Twist, etc.) over the past couple of decades, the answer is "pretty well."   In 82 observations over that period, the annualized return is 65%, with solid results observed even over the last year or so.

Perhaps the correlation is spurious, though the strength of the relationship would suggest probably not (something like 57% of the cumulative price appreciation in the SPX since February 1994 has come on the day before and day of Fed announcements/policy changes.)  Moreover, one could argue that the macro environment (viz. the withdrawal of petrodollars from the global financial system) is now different from that of the period comprising the vast bulk of the sample.   Still, it's a fun little stat, and in the spirit of making a verifiable market prediction based on central banks, Macro Man will go ahead and forecast that the SPX will rally 0.258% tomorrow, the average daily move for "on hold" decisions in the entire 1994-2015 sample.   As an added bonus, Spooz are currently down half a percent at the time of writing, so you even get a bit of "central banks supporting equities" mumblety-swerve for free if the forecast is right!