The Fed's Memorial Day barbecue

Fireworks or fizzle?  Markets eagerly anticipate finding out what sort of Memorial Day barbecue Janet Yellen plans to serve today less than an hour before markets close ahead of the long weekend.  While fixed income has rallied over the last couple of days courtesy of month-end extensions and some solid auctions, it certainly looks as if at least a portion of yesterday's rally was in anticipation of Janet grilling a few nice fat hawks on her verbal skewer this afternoon.

It's easy to look at a chart of the last few months and say "a hawkish Fed is in the price."  Any time  fixed income price chart ends at the bottom right hand corner, that's usually not a bad assumption.

In this case, however, a little nuance is required.     First, there's the matter of the recent shift in communication.  Not only have Rosengren and others been banging the drum that 2-3 rate hikes this year are still possible or even likely, but the minutes of the April Fed meeting appeared to validate that message as well (albeit with the usual caveats.)

This is a distinct change in tone from what we'd heard previously.  If one or two regional presidents disagree with recent FOMC communications, that's to be expected; hey, sometimes it feels like Jim Bullard can disagree with the most recent statement in three different ways over the course of an afternoon.  However, when the message from the regionals is corroborated by the minutes, surely that represents a change in stance, however nuanced.

Now, it's certainly true that neither Dudley nor Fischer took the opportunity to enhance the message of the minutes in their recent speeches beyond the most boilerplate of affirmations.   That being said, they in no way at all contradicted that message or suggested that it had been misinterpreted.

As such, it seems difficult to countenance that Yellen would come out overtly dovish despite her history of doing so.  At worst, it seems possible that she may dodge attempts to nail her down on providing more explicit guidance for the June meeting- after all, she's at Harvard to receive a medal, not speaking to the New York Economic Club.

Just judging by the titles, Jerome Powell's speech 45 minutes earlier may be just as illuminating if not more so; "Recent Economic Developments, the Productive Potential of the Economy, and Monetary Policy" certainly sounds like it might have the odd juicy tidbit in it.   While it's true that Powell is not often thought of as part of the core cabal, he is a governor so his comments are worth listening to.

Getting back to the original question at hand, looking at the current eurodollar curve, it's hard to say that it's priced for a hawkish Fed.  The chart below shows the first 4 packs over some recent key dates:

5/27/15:  a year ago
12/16/15: Dec FOMC
1/27/16: Jan FOMC
3/16/16: Mar FOMC
4/27/16: Apr FOMC
5/18/16: April minutes published
5/26/16: yesterday, obviously

As you can see, the curve is much flatter and generally a lot lower than it was last year or even in January.  Greens and blues are pricing in a lower yield than they were at the close of business on the day of the super-dovish March FOMC.  Whites and reds aren't exactly pricing yields much higher, either.  Given the change in oil, Spooz, and most importantly, Fed rhetoric, does this make sense?

Possibly, if you wish to strongly argue that prices on March 16 had not yet found equilibrium.  Yet it would still appear that the balance of risk strongly favours a steepening, which really just means a sell-off.  If you believe that the Fed won't go unless the market has "properly" priced it, then this is one of Yellen's last chances to afford herself the flexibility (or even luxury) of going either way at the meeting.  Even if she chooses not to take it, it seems hard to credit that she would effectively slam the door shut by submarining what's been a reasonably consistent message from Fed speakers over the last few weeks.

There may not be fireworks, but Macro Man still can't help but wonder if she'll throw a few squabs on the barbie...