Fed post-mortem

Well, in the end the Fed did largely what Macro Man expected.  The hint of a December move was, if anything, more overt than anticipated, and the three dissents were pretty telling about the mind of the regional presidents.  Countering that, of course, was the inevitable and inexorable decline in the dot plot, which Macro Man covered yesterday.

The press conference was fairly interesting in a fingernails across the chalkboard kind of way.   (Younger readers may be puzzled by this analogy; please rest assured that performing this act produced a sound that was truly excruciating.)  It came as little surprise that Yellen was asked why they didn't hike, given that she talked up the economy in her remarks, and the rambling nature of her reply- "uh, policy isn't as accommodative as we used to think" - was less than convincing.

So unconvincing, in fact, that she faced multiple queries on whether the decision was politically motivated.  While Macro Man has little doubt that the Fed does not actually discuss political considerations at FOMC meetings, that one prominent member of the Board has given money to the Clinton campaign, and by a stunning coincidence has been mooted as a potential Treasury Secretary, significantly undermines the claim of political neutrality.

(As an aside, can you imagine the furor that would result if it had emerged that, for example, Mark Carney had donated money to the Tories in 2015 or the Remain campaign this year?)

In the end, the market did what it always seems to do on Fed days- both stocks and bonds rallied.  The bond market rally in particular is worth considering.  Insofar as concerns over any BOJ curve steepening measures had helped drive the US long end lower over the past couple of weeks, that pressure should come to an end.   Kuroda and co. will not be selling long end bonds; indeed, they implemented measures to be able to buy them if a sell-off gets out of hand.  Somehow, Macro Man doesn't reckon they'll be needed any time soon.

Moreover, by reiterating several times in response to questions that the neutral policy rate continues to decline, Yellen gave domestic monetary reasons for shorts to cut and run.  One need not be overly cynical to wonder how long it will take for the market to start pricing out some of the 60% probability priced into the short end for a December hike.    After all, the ancients knew that because the sun rose in the east every day (barring the rare eclipse), it was virtually certain to rise tomorrow.  For the last decade-plus, the Fed has not hiked on any day (except for a single rare eclipse), so it's virtually certain....

Jesting aside, with December firmly in play fixed income markets will now be quite sensitive to marginal bad news, particularly on the labor front, obviously.   One might say that there is a positively asymmetric payoff profile to being long the front end, which could ultimately filter up the curve.   Long bond futures are at a rather sensitive point; once that gap gets entered, it is very likely that we at least retest the bottom of the corridor of uncetainty.

As for stocks, it was a liquidity and yield grab all the way.   GDX posted a nice 7% day, and utilities rose 2%.  Both look like breaking out of their recent doldrums, and if Macro Man is right about the bond market then the battered "bond replacement" yield stocks might make a nice rental for a few days at least.

And the dollar? Well, we're approaching put up or shut up time for USD/JPY, which hasn't liked it below 100 all year.  From a valuation perspective Macro Man is fairly agnostic at current levels, though it feels like the market wants to have another go at the downside.   Were that to occur in the context of a short end rally with no real catalyst, it would be an interesting fade.   For the time being, however, Macro Man is content to sit on the sidelines and let the market get too far over its skis.

Summer ends today, and with the onset of fall we begin the long march to December....by way of the Scylla and Charybdis of November's presidential election.  While the autumn is starting sunny and warm for the liquidity chasers, it's worth recalling that it will be cold and windy ere too long, and that at some point risky assets may get their own dose of autumn chill.   That 2200 level is going to look like an awfully nice risk parameter to get short against if we have another day or two like yesterday....