When doves fly

There's that question answered.  Janet Yellen emphatically affirmed yesterday that little has changed for her since the March FOMC meeting.  While it's certainly frustrating for many who choose to take a normative view in analyzing Fed policy, there's little point in getting angry for the rest of us.   This is what it sounds like when doves fly.

Macro Man could spend all day writing about the speech, but let's summarize it in a few bullet points.

* She mentioned "oil" 17 times
* She mentioned "global" 11 times
* She mentioned the dollar 7 times
* She used the word "financial" 20 times
* She used the word "labor" 9 times
* She referred to the "downside" 2 times
* She referred to the "upside" 0 times
* She spent 3 paragraphs on the downside risks to growth
* She spent 1 paragraph on the upside risks to growth
* She spent 4 paragraphs on the downside risks to inflation
* She spent 1 paragraph on the upside risk to inflation
* She spent 3 sentences discussing how to remove accommodation
* She spent 5 sentences on how to add accommodation

It really doesn't get much more dovish than that.   Yellen also alluded a number of times to shifts in market pricing for policy rates and the concomitant impact upon bond yields, singing the praises of this development, which in her view apparently explained the relative resilience of the US economy, employment, and inflation.  The notion that large swathes of the domestic economy might be relatively insensitive to changes in the global environment and short term swings in interest rates was apparently one that she did not care to countenance.

In any event, the proposition that the bond market is efficient and effective in responding to changes in economic developments is certainly debatable.  While getting an accurate and timely reading on "changes in economic developments" can be a challenge, using an economic surprise index is probably a reasonable proxy to measure shocks to embedded economic forecasts.  Since Yellen took office, the responsiveness of bond yields to shifts in economic surprise has been tenuous at best:


What is clear, however, is that the Fed takes its cues from market pricing.  Only once since 1994 has the Fed hikes rates with the market pricing less than a 50%   chance of such a move the week before...and that was the very first hike in February 1994.  (The false tightening readings before rate cuts came in 2008, when the Fed funds market was wonky, to say the least.)


Not every market expectation is created equal, however.  While Macro Man has not performed a thorough exegesis of Fed communications prior to rate announcements over the past 22 years, it is certainly his recollection that the FOMC, particularly under Greenspan, was more forthright in lecturing both Congress and the market in the past.  The current iteration of the Fed, on the other hand, has done little to impose its will upon markets despite its rather unhealthy fetish for forward guidance.  The Yellen Fed is like a poker player who always folds whenever you shake up the pot a little bit.

Regardless of what you think of the Fed's policy decisions, one legitimate criticism is the ongoing torrent of verbal diarrhea from the various members of the FOMC.    Yes, all animals are equal...but it's pretty clear that some are more equal than others.  Particularly given the veritable Everest of uncertainties that Yellen catalogued in her speech, it really isn't helpful for so many different views to be articulated if the Fed is truly interested providing useful guidance.  On the other hand, if they just want to provide participants' medals for all those who don't qualify for membership of the Doves' Club, then the status quo works just fine.

In any case, it's pretty clear that Yellen would be a lousy drinking partner; after all, her glass is always half empty.   Looking forwards, as a public service Macro Man is pleased to provide you with a handy guide to future rationalizations as to why policy must remain on hold just a wee bit longer:

April 27: Insufficient evidence of China recovery, non quarterly meeting (unofficial)

June 15: 8 days before Brexit vote, too dangerous to risk market volatility

July 27:  Summer markets are too illiquid to handle a hike, non quarterly meeting (unofficial)

September 21:  Too close to US election

November 2:  Too close to US election, non quarterly meeting (unofficial)

December 14: You saw what happened after the last time we hiked in December, right?

In the meantime, the rest of the world and certain FX punters should console themselves that the infamous Greenspan/Bernanke/Yellen put for the SPX has now been extended to a dollar call (h/t MG.)  It seems that way at least, though with everyone else also apparently intent on easing monetary conditions it may be hard for the Fed to talk down the dollar, even though Yellen's trying her damnedest.

In that vein, price action in commodities will continue to be very interesting.  Later today Macro Man will post a few commodity charts as part of the CTA proxy model project.



Previous
Next Post »

28 comments

Click here for comments
Rossco
admin
March 30, 2016 at 7:37 AM ×

That's a great summation.

In choosing between doing the right thing and managing (saving) the bond market. I don't see that there is any motivation to do the former from any central banker currently in office.

Maybe all those CTA's who are short $ keep piling in ? Looking forward to seeing your charts

Reply
avatar
Anonymous
admin
March 30, 2016 at 8:34 AM × This comment has been removed by a blog administrator.
avatar
Anonymous
admin
March 30, 2016 at 8:39 AM ×

BoJ and ECB now considering stronger stimulus (to fight the Fed). lol.

Reply
avatar
Polemic
admin
March 30, 2016 at 9:48 AM ×

To paraphrase the Rocky Horror Picture Show "Dammit Jannet. Stocks love you"

And to directly quote Dragon's Den "I'm out". Shorts stops triggered. I'm off for lunch.

So much less stress without a position.

Reply
avatar
Anonymous
admin
March 30, 2016 at 10:36 AM ×

Blue and spoos it is again then

Reply
avatar
Anonymous
admin
March 30, 2016 at 11:07 AM × This comment has been removed by a blog administrator.
avatar
Cityhunter
admin
March 30, 2016 at 11:37 AM ×

@Pol,
Lets see what happen after the window dressing period. A top is not formed in one day usually. But yes, stocks love Jannet.

Reply
avatar
jbtfd
admin
March 30, 2016 at 11:37 AM ×

Spooz threatening 2015 highs (as I predicted here a few weeks ago). Once again JBTFD works. You can forget macro ideas in a Central Bank manipulated market.

Reply
avatar
Anonymous
admin
March 30, 2016 at 11:43 AM ×

Jbtfd, u still at 25? Why not 100 ? You waiting for a breakout to all time highs ? Cause you dont sound like u r expecting a dip

Reply
avatar
Booger
admin
March 30, 2016 at 12:19 PM ×

MM, I think we all rail about the inability to raise rates. Everyone knows they should have started normalised in ... umm.. 2013? But the decision was made and we are where we are. I am beginning to think Yellen is an absolute genius compared to Bernanke and Greenspan.

She is not raising into a slowdown and will not be accused of contributing to the inevitable recession. At least she doesn't purport to not being able to see overvaluation.

I think we should not underestimate the Fed as possibly being the best leading indicator out there. Perhaps there is more to be concerned about than a minor Q1 GDP slowdown.

Agree they are saying they are not hiking soon, possibly at all this year. Rate hike expectations may need to be hosed further so I don't think it is safe to be long dollars yet.

It would be remarkable if we saw higher highs in Spoos with declining earnings and the current fundamental backdrop. The best risk reward in the next few weeks might be looking for a top to short in Spoos 2080-2100 area. Spoos may well peak a month or more before the dollar forms a bottom. The next leg up in the dollar may be based on risk aversion. Until now and then there could be a correction to 90-92 on DX.

Oil will be interesting to see what comes out of the OPEC meeting. With the last 3 being disasterous for the oil price, I think they will have figured out that they need to announce a cut. In which case it could be a case of sell the news there.

Yesterdays discussion on valuation: valuation critically depends on what you define as the long term discount rate for stocks. If you think inflation is not going to mean revert in the next 30 years then stocks are well priced. It does seem like insanity to discount the next 30 years of future cash flows based on the current 30 year rate, which is at 100 year lows. Like it was to discount stocks by the 1980's rate when inflation was at 100 year highs.

Reply
avatar
Macro Man
admin
March 30, 2016 at 12:24 PM ×

@ Booger Given their forecasting track record for GDP, unemployment, inflation, and Fed funds, the notion that the FOMC has some super secret insight that no one else possesses stretches the bounds of credulity. If one wished to be unkind, they might submit that the Fed's concern is the strongest possible signal that things are about to take off, given their forecasting history...and not for the "magic beans" impact that a short end rally has on growth, as Yellen suggested in her speech.

I do agree re: equity discount ratios.

Reply
avatar
Anonymous
admin
March 30, 2016 at 1:06 PM ×

Anonymous

jbtfd said...

Spooz threatening 2015 highs (as I predicted here a few weeks ago). Once again JBTFD works


Twat.

Reply
avatar
Macro Man
admin
March 30, 2016 at 1:12 PM ×

Hey, at least jbtfd puts his "name" to his posts and has maintained some semblance of continuity, even if he only sings when he's winning. The anonymous trolls fixated with other people's P/Ls and/or central bank participation in equity markets are the proper twats. Either way, the policy is now twattishness = deletion

Reply
avatar
washedup
admin
March 30, 2016 at 1:16 PM ×

MM - at the risk of being thrown off the board for repeating myself, I keep hearing echoes of fall 1998, namely:

1. Fed scared into dovishness because of global concerns - check
2. Commodity complex making EM the flash point - check
3. Dollar rally causing consternation in policy circles - check
4. Equity valuations stretched and the bull market being called DOA (retrospectively) by Druckenmiller - check
5. freshly minted MBAs citing startups as their most preferred destination - check
6. Airlines making booming profits - check


Whats next? Reunion tour for backstreet boys and n sync?

Reply
avatar
Anonymous
admin
March 30, 2016 at 1:20 PM ×

It would be fine if jbtfd added anything to the discussion, but to mention that we are still 25% long of some unknown "long quantity"? Does that really add anything to the discussion other than I told you so? Could this poor fool take 3 Bloomberg screens are find a point that might aide in investing? Does "I'm still long because I am" add anything to the discussion? And why isn't he 100% long his precious? Has he lost his mind? Jbtfd, jbtfd!

Some are born to the twattish throne.

Reply
avatar
Anonymous
admin
March 30, 2016 at 1:52 PM ×

.
i think the biggest mind fuck now would be a reversal in the USD....start of leg up
equites I'm sitting on some offside shorts in spoos and looking to nibble on some puts today and into quarter end- us equities are behaving as if this fed confusion is the same trade as QE...sensed a fair amount of panic yesterday with the scramble for IWM..

Reply
avatar
Corey
admin
March 30, 2016 at 2:16 PM ×

Pls explain "call on $" theory. Way I sees it is Fed is on hold and they/everyone believes they will raise later. But by the time "later" gets here there is always something to prevent them - well arguably the actual business cycle will probably be the next thing to prevent them which means $ down. As far as ECB/BOJ, until those nutjobs renounce negative rates, their policies are only going to strengthen their currencies, no?

Reply
avatar
CV
admin
March 30, 2016 at 2:18 PM ×

This move has month/quarter end written all over it. I wouldn't be surprised to see a good sharp move lower on Friday and next week. If it goes out on a high, March will end up being a bumper month, and Q1 will just about be even-Steven; which will suit a lot of burnt PMs.

Yellen's dovishness surprises me by its intensity, not so much by its existence. If that makes sense! Someone appears to have persuaded her that "overshooting" inflation to the upside is actually a good idea, and of course that the world is a very bad place as a whole.

Reply
avatar
Bruce in Tennessee
admin
March 30, 2016 at 2:21 PM ×

http://www.cnbc.com/2016/03/29/yellen-pushes-back-at-the-hawks-stocks-higher.html

"Janet Yellen gave her audience limited lip service to 'baseline' projections and expectations for dual mandate improvement and rate normalization, but carpet-bombed her audience with possible downside caveats. In so doing, she created the distinct impression that she had little confidence in the Fed's baseline outlook,"

...I think we are looking at the interplay between markets and the Fed wrongly. The markets, of course, want as much liquidity as possible so equities keep going up. What we're looking at is serial failure by the Fed. Their mandate isn't ZIRP, it really is just a normal economy. Now, at this late date, we see that the US and the globe can't tolerate (or at least central banks don't think so) a "normal" economy of unfettered rates. So we get NIRP, China implosions, openly socialist candidates in a capitalist country, and one and done here. This is the prolongation of the "This sucker's going down" thought, and with each Fed failure to allow normalization, it becomes more and more entrenched. (I use Fed failure, not because I discount the fiscal points, but because they embarked on this course by themselves, and sold it to us.)

2 cnets..

Reply
avatar
Macro Man
admin
March 30, 2016 at 2:24 PM ×

@ Corey

The idea is that when equities go down, the Fed reacts dovishing, supporting stocks...thereby furnishing the market with a de facto put to guard against losses.

Given the frequency with which Yellen has referenced the dollar and global developments, the FX analogue is that as the USD strengthens and hurts everyone (funny enough, weren't they complaining about $ weakness a few years ago?) , the Fed now reacts to counter USD strength...thereby providing the ROTW with a dollar call.

And note that by ROTW, I don't refer to EZ and Japan, but rather China and the oil producers.

Reply
avatar
washedup
admin
March 30, 2016 at 2:33 PM ×

BinT - fail to see your point bro - we are trading the market not the economy correct?

After displaying the grace and coherence of a group of coked up chipmunks, the federales seem to be communicating that post dust settling they are as a group dovish, mostly because yellen never saw a rate she didn't want to cut - fine - put that in the box - the next issue on my docket therefore, is will they be allowed to stay in that mindset - in that sense the PCE disappointment a couple days ago was a lot more equity friendly than anything yellen said. What can change that? Payrolls - if its a barn burner markets will be gallinaceo truncum once more - plays somewhat into CV's quarter end observations - else, WTF knows there do seem to be a ton of shorts out there.

Reply
avatar
Anonymous
admin
March 30, 2016 at 2:47 PM ×

Booger,
Fair point about the discount rate, but it doesn't mean that these valuations can't persist for an extended period of time from here. Data is mixed, but demand for housing is stirring in the face of high rents, and all it would take is for housing to take the baton from oil and off we go again. Janet needs construction wages to replace what was lost last year in the oil patch. She won't see inflation until that trend is firmly established and Hillary is in the WH.

Reply
avatar
Corey
admin
March 30, 2016 at 3:18 PM ×

Ohh, yeah I get it now. Agree w CV on Q end. Think commods will trade off fundies and would guess that those who think output will ramp a bit due to higher prices will be proven correct - regardless of ccy.

Reply
avatar
Leftback
admin
March 30, 2016 at 5:51 PM ×

LB is a little mystified about two things.

First, why would La Paloma Blanca perceive the need to say ANYTHING at all in the current quiet market? The US economy didn't exactly need her to chase yields lower or depress the USD just at the moment. Curious, especially in light of the solid number from ADP today.

Second, why would anyone find La Paloma Blanca's utterances yesterday surprising? What possible information did she convey that could move fixed income or equity markets? We have after all known where her dots were for some considerable time, and there is no indication this has changed.

Btw, anyone ever wonder where the trolls and jbtfd'ers come from? Perhaps they are all hanging out as described here:

Millennial Day Traders Punting Triple ETFs - What Could Go Wrong?

Reply
avatar
CV
admin
March 30, 2016 at 6:08 PM ×

Indeed LB; the Danish media was running a story earlier this week about a teenage day trader who was killing it with his own proprietary tactical stock-picking model. A sign?

What's interesting from a psycological point of view, though, is that while futures trading has allowed punters to lose their shirt with alarming speed for ages, the younglings seem to be particularly attracted to these triple levered ETF products. It won't end well, but there is perhaps a silver lining for the market as a whole. While transacting in futures through a semi-professional broker or a spread better is virtually impossible for the average retail punter due to the margin required not to get stopped out after two ticks, the levered ETFs offers a relatively easy and simple way to play the casinos.

Essentially, Blackrock, ETFS et al have simply created ETF products for the small punter to play the game, and they are reaping the rewards accordingly.

Reply
avatar
abee crombie
admin
March 30, 2016 at 8:14 PM ×

I will continue to argue, as I have argued for the last month or so, that a tacit "detente" agreement is in place between the FOMC and PBOC. The Fed won't meaningfully ramp the dollar, and the PBOC won't meaningfully break the peg. Janet's speech is confirmation of the US side of the agreement, and the recent moves in the CNH (as well as the statements of Chinese officials) are confirmation of Chinese side.

The big question in the months ahead centers on the European and Japanese responses to all this. So far it looks as though Mario has complied with this detente concept by focusing on credit easing and not interest rate easing. He is not pushing the DXY higher via a weaker EUR. The only wild card is Japan. What will they do on the 27th of April? I'll write more on that in the coming days. But as a preview I think they too will favor balance sheet led credit easing over a traditional beggar-thy-neighbor interest rate easing.


In addition, I will be writing something shortly on the amazing performance of our favorite trade for 2016 - Spoos and Blues. What Janet did yesterday was absolutely perfect for that trade. And as of this morning it is up nearly 9% YTD after seeing very little draw during the chaos of Jan/Feb

Reply
avatar
washedup
admin
March 30, 2016 at 8:42 PM ×

@abee "Janet's speech is confirmation of the US side of the agreement"

So why the cacophony of disagreement from janet's henchmen? They were just pissed because they didn't get to stay at the mandarin oriental in shanghai?

Reply
avatar
Leftback
admin
March 30, 2016 at 9:26 PM ×

The last word on La Paloma Blanca, this time from Mish, who has a way with words:

Measuring The Effect of Yellen Yap

Oh well, there goes that cozy research position at the Fed. LB will have to soldier on at Hammock Capital Management.

Reply
avatar