The market has already delivered its verdict swiftly in the face of the global equity market correction– reducing substantially the probability of a rate hike in September, and pricing in a full rate hike only by March next year. We assign a higher probability than the market for a lift off in September but acknowledge that the risk has shifted towards later, a slower pace and a lower terminal rate. For now, we hold on to the put on EDU5 that we initiated two weeks ago. "Data dependency” over the next couple of weeks might really mean “equity market dependency”. If the equity market drops 10%, the Fed will most likely not hike, no matter what the payrolls data is.
When it comes to soliciting opinions, the NY Fed in general, and former Goldmanite Bill Dudley in particular, care about just one group of "advisors" - the Investor Advisory Committee on Financial Markets (a group created in July 2009 after the 2008 market crash) also known as the billionaires who run the country's biggest hedge funds, prop desks and PE firms, including JPM, Credit Suisse, Apollo, Blackrock, Blue Mountain, Brevan Howard, Tudor, Fortress, and lo and behold, David "Balls to the Wall" Tepper.
The private economy and its millions of savers exist for the convenience of the apparatchiks who run the central bank. In their palpable fear and unrelieved arrogance, would they now throw millions of already ruined retirees and savers completely under the bus? Yes they would.
After July's disappointing drop in UMich Consumer Confidence, August did not help. Printing 91.9, below expectations of 93.0, UMich is hovering at the 2015 lows. Both current and future sub-indices dropped with hope falling to its lowest since 2014 (biggest 7mo decline in 2 years). Income growth expectations dropped and business expectations dropped to lowest since Sept 2014. This follows the highest conference board confidence in 2015 and lowest Gallup confidence in a year. Bill Dudley will be disappointed after proclaiming this a key driver of The Fed's rate hike call (more important than jobs).
The relief rally from the market drop that resulted over fears of a Fed rate hike, has pushed financial conditions back to a level which allows the Fed to hike again, which in turn means the market can drop again having risen enough to allow the Fed to do what it has done.
As Bloomberg reports, "China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter. Channels for such transactions include China selling directly, as well as through agents in Belgium and Switzerland, said one of the people, who declined to be identified as the information isn’t public. China has communicated with U.S. authorities about the sales."
With prices and valuations elevated, and earnings deteriorating, the backdrop for a continued "ripping bull-market" is at risk. The problem for the "perma-bulls" is that the deflationary backwash, combined with already weak economic fundamentals, continues to erode the ability for earnings to meet elevated future expectations. It is likely earnings will continue to disappoint in the quarters ahead and put further downward pressure on asset prices to close the current gap between "financial fantasy" and "economic realities."
In the past week, ever since the Fed's FOMC minutes which sent the S&P tumbling from 2100 to their lows in the overnight session, some 13% lower, the US economy underwent the functional equivalent of a 15 bps rate hike, or more than half the rate hike that the Fed has been so terrified to engage in for years.
Perhaps the biggest market moving event of the day, more so than the Durables data, was Bill Dudley's speech. However, at least based on the prepared remarks there is no discussion of the economy. From Bloomerg. Now all eyes turn to the Q&A which is where any questions relevant to the recent move in markets will most likely emerge.
Certain market realities were starkly exposed this week as a result of the China currency moves, Bloomberg’s Richard Breslow writes. As Keynes is supposed to have said, “When the facts change, I change my opinion. What do you do, Sir?” Yet markets have been lulled into relying on the belief that this is no longer the case, and even if it is, any change will be stage managed for the comfort of institutional money managers. Gone are the days when you had to guess at the Fed’s policy by interpreting weekly money-market operations. But that can’t be done in any practical sense.
After China's shocking currency devaluation, which some more conspiratorially-minded observers have concluded was China's retaliation to the west for the IMF's recent snub that pushed back China's evaluation for inclusion into the SDR to some indefinite point in 2016, the only question on everyone's mind is whether the Fed will delay or outright cancel any imminent "data-dependent" rate hikes as a result of the implicit tightening of monetary conditions thanks to China, and the dramatic appreciation of the USD which would not have taken place without China.
Confused if the Fed will hike rates in September, or December, or never? Don't worry, the Fed is just as confused, at least until NY Fed's Bill Dudley has his biweekly meeting with Goldman's chief economist Jan Hatzius at the Pound & Pence, where over a lobster club, the current Goldmanite tells the former Goldmanite what to do. Which, if the most recent note just released by Goldman is any indication, means that the Fed will sorely disappoint all the "Septemberists", as Janet Yellen will opt for a December rate hike instead.
Just in case there was some confusion how to read today's blistering jobs data, here comes NY Fed's head and former Goldmanite with the explanation:
DUDLEY SAYS FED STILL LIKELY TO START RAISING RATES THIS YEAR
His comments initially pushed futures to the lowest since this mornings furious ramp to green but since then ES has managed to rebound modestly and is now unchanged since the speech because it is clear that the Fed is just as clueless as everyone else what to do.
US Manufacturing PMI dropped to its lowest since January (54.0 May vs 54.10 April) but rose modestly from early month preliminary indications. So despite the harshness of the winter weather and the port strikes, US manufacturing is worse now than at any time since the peak of piss-poor-weatheriness. New orders rose at the weakest pace since Jan 2014 and input costs rose, and Markit suggests The Fed wait on rate hikes and despite Bill Dudley's utterances, Markeit notes the "survey provides further evidence that the strong dollar is hurting the economy." Against this weakness, ISM Manufacturing - in all its seasonally-adjusted glory, rose and beat by the most since Oct 2014 with new orders rising (umm?) and prices paid surging. And finally, construction spending - having not risen for 3 months - it recovered considerably, spiking 2.2% MoM - the most in 3 years.
“It is unacceptable, illegal and corrupt for anyone at the Fed to deliver inside information that could provide a financial advantage to the privileged few and lead to the manipulation of financial markets”: Hensarling