Just in case

Since the Fed last announced policy in September, this is what's happened:


* The SPX has rallied 3.5%

* The DXY has rallied 1.5%

* Oil has fallen 8%

* US 5Y5Y inflation breakevens have declined by 11 bps

* High yield CDS spreads have widened by 50 bps...though they've also narrowed nearly 90 bps since their wides earlier this month

* Fed funds futures have lowered their pricing of year-end rates by 12.5 bps (i.e., half a rate hike.)

On balance, you'd have to think that these market developments don't exactly make a December lift-off seem any more likely, do they?   Sure, Spooz have ripped, and as a nice short hand for sentiment that's a positive.   But the things that more directly impact or reflect inflation- the Fed's current bugbear- have gone the wrong way.  What about a stronger dollar, lower oil, and tighter inflation breakevens represent "progress" towards meeting the inflation goal?   It's difficult to see.

What about domestic economic developments?   Some of the highlights include:

* Very strong vehicle sales

* Ongoing labor market strength reflected by initial claims data

* A CPI that was slightly higher than expected if you squint hard enough

* Resolution of the debt ceiling issue before it had any impact

* Weak employment data

* Weaker than expected ISM/Regional surveys

*  Weak PPI

* Weak retail sales

* Weak September durable goods orders

* Two Fed governors publicly opposing a 2015 lift-off

Again, it's difficult to see in aggregate how this collection can be taken, in its entirety, to represent progress towards the Fed's goals.

What about international developments?

* China has failed to completely implode

* However, PBOC has eased policy again amongst tepid domestic demand

* The ECB dropped the heaviest hint possible that more easing is in the pipeline for the December meeting, two weeks before the Fed announces policy

* EM assets/currencies have quit selling off unilaterally,  though individual fortunes have been mixed

* CPI releases disappointed in Europe, the UK, Canada, Australia (as MM is writing this), China, etc....

So more easing amongst America's major trading partners and plenty of dovish talk elsewhere.  Regardless of what Macro Man or anyone else thinks about what the Fed should do, one has to concede that it would take a fairly brave central bank to lift rates in this context; Ben Bernanke's autobiography title notwithstanding, this Fed does not seem to be that central bank.  "Wait and see" indeed.

Now, readers don't need your author to tell you that policy is going to be unchanged today; you already knew that.  Similarly, judging by this week's poll, most of you have already decided that they're standing pat in December as well.   The weight of evidence would appear to support that view, though there are still a few key releases before the nail is finally driven into the coffin.

Still, the Fed would have you believe that this is a "live" meeting, and they can hike rates even with no pre-scheduled press conference.   Sure they can- they'll just call a last-minute presser, right?   Yellen will ring Hilsenrath, et al on the Bat phone and have them skulk down to the Eccles building when they would ordinarily be busy at their desks (it is Fed day, after all), and no one will notice.

Nope, no one will ring favoured financial market participants and whisper "Blue Horseshoe loves press conferences", there will be no leaks or rumours, and it will all go swimmingly, right?  There are never any leaks from the Fed!

You can never say never in this game, and it is still of course possible that Yellen and co. shock the world and lift rates in December's meeting.  Clearly pricing has become extreme enough that a lot of "just in case" eurodollar put flow has gone through over the last few days.  Granted, most of it has tended to be fairly wing-y stuff for a couple of ticks....but one would have to think that any legitimately hawkish surprise (ha ha ha)  would have an outsized impact upon the price.

There is a similar flow going through around the (legitimately more interesting) BOJ meeting tomorrow night; one week risk reversals have moved fairly dramatically for calls over the last week or so (Thanks to MG for pointing this out.)   Again, this doesn't necessarily reflect any legitimate conviction that the BOJ will go(though everyone knows they have two hopes of hitting their inflation target: Bob Hope and no hope), but simply a cheap bet just in case Kuroda surprises like he did last year.

Although one has to exercise some degree of selectivity, "just in case" trades can play a useful part in a macro portfolio, offering mitigation or alpha generation from potential tail risk scenarios.  Such is also the case with central banks.  Most of the Fed would like to put up rates...but they'll end up remaining on hold, just in case.