Some Fed, a little Rix, and the BOJ.

"In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."

One might be excused for suggesting that the above paragraph represents little short of common sense for a central bank that has repeatedly suggested for most of this year that the majority of its members have anticipated raising rates by the next meeting at the latest.  OK, perhaps not complete common sense- the last clause of the excerpt does little to disabuse cynics of the notion that the on/off switch to lift-off is hooked up directly to a live feed of the SPX.

To be sure, the Fed statement changed in another ways as well; by removing the comment that "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term", the Fed has also suggested that the on/off switch is also connected to feeds of the Shanghai Composite, USD/BRL, etc.  One really has to question the validity of their analytical framework if they can be legitimately concerned about downside risks to inflation because of a bit of market volatility, and then ignore those previously-expressed concerns just a few weeks later.

The market reaction was interesting, to say the least.  As noted yesterday, a sneaky thematic flow had emerged buying out-of-the-money downside in US fixed income, which in retrospect signaled that either longs were getting nervous or putative shorts were getting itchy trigger fingers.  The strip was down several ticks even going into the announcement, and the sell-off in reds and greens after the announcement hit the tape was pretty solid for a statement that was far from a promise of action in the next meeting.  Mind you, EDZ6 is still some 20 ticks above its level just before the September meeting, so yesterday's move was more of a normalization than anything else.

And so we are left back pricing close to a 50/50 proposition for lift-off in December- maximum uncertainty.  Macro Man was unsurprised, therefore, to see equities tumble into negative territory after the announcement, and rather bemused to see them rip thereafter.   Yes, he is very constructive on European stocks, but in his worldview uncertainty over Fed tightening is the worst case for US equities.  Of course, once excitable afternoon does not a trend make, and as we approach the summer (e.g., all-time) highs in the SPX, Opportunists will no doubt salivate at another chance for a high risk-reward set-up to go short.

Speaking of high reward, the dollar looks set to re-engage with its inner bull market.   Price action after the Fed announcement was very impressive, with EUR/USD dropping nearly 2 big figures peak-to-trough.   Tellingly, the (mostly euro) DXY has broken through the trendline that's defined its consolidation period for much of the year.  Although there's been a fair amount of USD buying over the last week since Draghi's press conference, Macro Man would characterize the position as broad but not deep; many people have got some, but few have had the time to build big positions yet.  In contrast to much of the price action since March, the EUR/USD decline off of the recent 1.15 high has unfolded in 5 waves, which is usually a good sign that a trend is in force.

The macro developments over the last week are all generally supportive of the long VG/short ES position suggested in this space last week.  The next catalyst could come as early as today, via the advance Q3 GDP report.  The Atlanta Fed GDPNow forecast is below the market's (1.1% vs 1.6%), though was revised up yesterday thanks to a solid preliminary goods trade report.  It seems reasonable to expect that any number well out of consensus in either direction will nudge Fed expectations away from 50% in December, with predictable (or not!) implications for asset markets.

Switching gears, tonight sees the BOJ announce policy.  Sweden has already extended its QE program, announced yesterday...and they've got growth in excess of 3% y/y (versus 0.8% for Japan.)    Amusingly, despite specifically referencing the currency, EUR/SEK and NOK/SEK both dropped shortly after the announcement:

Still, if one takes the BOJ's inflation target and their timetable at face value, then Kuroda should absolutely be doing more QE:

Obviously, the recent hump was a function of the consumption tax, which has now filtered out of the data...leaving headline inflation close to zero.   One small bright spot is that Western-style core inflation (ex food and energy) has turned up, though even that remains woefully short of the 2% target.

One of the primary transmission mechanisms that Abenomics has tried to employ to effect inflation is wage growth.  The good news is that wage growth is near ten-year highs;  the bad news is that it's barely over zero.  Even in Japan, it seems as if the Phillips curve has flattened.

The sharp depreciation of the yen during the Abenomics years has carried into well into undervalued  territory according to many conventional measures, including Macro Man's own PPP calculations.  However, you have to say that if the yen is undervalued, it hasn't been reflected in the trade statistics.   Yes, the trade balance has improved...but is still in deficit.  Of course, this reflects a) the epochal shift in Japan's trade account resulting from the country's energy orientation away from nuclear, and b) the relative dearth of global demand generally.  Japan has one of the better export profiles amongst Asian countries....and its exports have fallen to flat y/y.

One can certainly argue, therefore, that from a purely economic perspective, further easing is justified.   (At least in relation to other countries' policy reaction functions.   In absolute terms, it is absurd for the BOJ to try to engineer 2% CPI inflation when the weight of domestic and global forces are leaning the other way.)   Of course, there are domestic financial stability/market functioning concerns that may give Kuroda and co. pause for thought.  However, even if the Fed decides to quit playing beggar-thy-neighbour, everyone else is still doing it.  As such, at this juncture it looks like a question of when rather than if the BOJ extends its QQE program, even if today might be a touch early for them.   "Just in case" trades look like a decent proposition, therefore, especially for live meetings where relatively little is expected.