Janet Yellen

For only the 5th time in the last 25 years, the S&P closed up over 1% on Humphrey-Hawkins testimony day. Today's screamfest seems all about a growing "common knowledge" that the economy is weaker than everyone hoped and Yellen will untaper as soon as possible (despite her saying the absolute opposite of that). Stocks surged (S&P's best 4-day run in over 2 years); Credit spreads collapsed. Gold soared to 3-month highs (+5% from Taper). The USD roller-coastered notably on JPY & EUR weakness. While bonds sold off (not un-tapery) the move was very modest (and bond yields have dislocated notably from stocks). Of course, USDJPY was in charge keeping the S&P over 1,800; and Nasdaq in the green year-to-date - Mission Accomplished (but Dow lost 16k into the close). A massive squeeze of shorts in the last few days has doubled the market's impressive performance. VIX tested down to almost 14%. Why not BTFATH, Yellen said there was no bubble so we are good to go?

Gold has rallied another 1.2% today and touched resistance at $1,294/oz during Yellen's first testimony to Congress. Gold is testing resistance between $1,294/oz and $1,300/oz. A close above $1,300 should see gold quickly rally to test the next level of resistance at $1,360/oz.

Just as Goldman has predicted (and the market had seemingly hoped would not happen), Janet Yellen, in her first speech as new Fed chair "stayed the course" on the Taper:

YELLEN SAYS FOMC LIKELY TO CONTINUE QE TAPER IN MEASURED STEPS
1YELLEN SAYS RECOVERY IN LABOR MARKET IS `FAR FROM COMPLETE'
YELLEN SAY FED TO `CONTINUE TO MONITOR FOR EMERGING RISKS'

Of course, the Q&A (and hawkish follow-up panel) may well be the "common knowledge" setting moment for today but for now, the Taper is on and forward-guidance

Pre-Yellen: S&P Futs 1801, Gold $1285, 10Y 2.68%, USDJPY 102.3

A sneaky overnight levitation pushed the Spoos above 1800 thanks to a modest USDJPY run (as we had forecast) despite, or maybe due to, the lack of any newsflow, although today's first official Humphrey Hawkins conference by the new Fed chairman, Janet Yellen, before the House and followed by the first post-mortem to her testimony where several prominent hawks will speak and comprising of John B. Taylor, Mark A. Calabria, Abby M. McCloskey, and Donald Kohn, could promptly put an end to this modest euphoria. Also, keep in mind both today, and Thursday, when Yellens' testimoeny before the Senate takes place, are POMO-free days. So things may get exciting quick, especially since as Goldman's Jan Hatzius opined overnight, the third tapering - down to $55 billion per month - is on deck.

We at the Fed are the platonic guardians of the global financial system.  And our logic is undeniable….

Fed Chair Janet Yellen will deliver her inaugural monetary policy testimony on February 11 and 13. Her prepared remarks will be released at 8:30amET and the testimony will begin at 10amET. Goldman, unlike the market of the last 3 days, believes that Ms. Yellen is likely to "stick to the script" in her first public remarks since taking over from Bernanke but they look for additional color on the following issues: (1) the recent patch of softer data; (2) the Fed's thinking on EM weakness; (3) the hurdle for stopping the taper; (4) the amount of slack in the labor market; and (5) the future of forward guidance.

It is becoming more uncomfortable to make fun of Dennis Gartman's always incorrect calls (see here and here and here and here) than to watch Richard Simmons Obamacare commercials, but... well - it's just too funny.

After Friday's surge fest on weaker than expected news - perhaps expecting a tapering of the taper despite everyone screaming from the rooftops the Fed will never adjust monetary policy based on snowfall levels - overnight the carry trade drifted lower and pulled the correlated US equity markets down with it. Why? Who knows - after Friday's choreographed performance it is once again clear there is no connection between newsflow, fundamentals and what various algos decide to do.  So (lack of) reasons aside, following a mainly positive close in Asia which was simply catching up to the US exuberance from Friday, European equities have followed suit and traded higher from the get-go with the consumer goods sector leading the way after being boosted by Nestle and L'Oreal shares who were seen higher after reports that Nestle is looking at ways to reduce its USD 30bln stake in L'Oreal. The tech sector is also seeing outperformance following reports that Nokia and HTC have signed a patent and technology pact; all patent litigation between companies is dismissed. Elsewhere, the utilities sector is being put under pressure after reports that UK Energy Secretary Ed Davey urged industry watchdog Ofgem to examine the profits being made by  the big six energy companies through supplying gas, saying that Centrica's British Gas arm is too profitable.

While The White House crows of the falling unemployment rate (which everyone now knows is entirely useless as an indicator of anything), the rapid-drop in this indicator is a major headache for the Fed. While forward-guidance is crucial in replacing the "common knowledge" that the Fed remains easier-for-longer as bond-buying is tapered, despite it's dismissal by vice-chair Stan Fischer and BoE's Carney (and even an almost admission of its weakness by Bernanke), Yellen faces a market that is betting massively (actually in record size) that short-term rates will rise and Fed heads like Lacker shift to "more qualitative ways" of maintaining the punchbowl.

This is an important jobs report. Not because it matters in the least whether the US economy added 170,000 new jobs or 185,000 new jobs. Not because it matters a whit whether the unemployment rate goes up or down 1/10th of 1 percent. No, the importance of this jobs report rests in two related linguistic games. Here's how to translate the lingo.... and then how to trade it.

Once again the smell of NAPALM is in the air

The biggest fear the market currently has is not the ongoing crisis in the Emerging Markets, not the suddenly slowing economy, not even China's credit bubble popping: it is that Bernanke's successor may have suddenly reverted to the "Old Normal" - a regime in which the Fed is not there to provide the training wheels should the S&P suffer a 5%, 10% or 20% (or more) drop. Whether such fears are warranted will be tested as soon as there is indeed a bear market plunge in stocks - the first in nearly three years (incidentally the topic of the Fed's lack of vacalty was covered in a recent Reuters article). So, assuming that indeed the most dramatic change in market dynamics in the past five years has taken place, how does one trade this new world which is so unfamiliar to so many of today's "younger" (and forgotten by many of the older) traders? And, more importantly, how does one look for the signs of a bottom: an Old Normal bottom that is. Courtesy of Convergex' Nicholas Colas, here is a reminder of what to look forward to, for those who are so inclined, to time the next market inflection point.

We find it truly extraordinary that anyone is surprised the financial system is under duress again.

Alarms are going off in assorted plunge protecting offices, now that the USDJPY has breached the 102.000 "fundamental" support level, below which the Yen can comfortably soar to sub 100.000 in perfectly even 100 pip increments. The first trading day of February has brought another weaker session across Asia though some equity indices such as the KOSPI (-1.1%) are in catch-up mode given they were shut towards the back-end of last week. Over the weekend, the Chinese government published its latest official manufacturing PMI which showed a 0.5pt drop to 50.5, a six-month low, and consistent with consensus estimates. DB’s Jun Ma believes there was some element of seasonality affecting this month’s result including the fact that Chinese New Year started at the end of January (vs February last year), anti-pollution measures in the lead up to CNY and efforts to control government consumption around the holiday period. The official service PMI was released overnight (53.4) which printed at the lowest level since at least 2011. The uninspiring Chinese data has not helped market sentiment this morning, with the Nikkei plunging -2% and ASX200 once again under pressure. S&P500 futures have fluctuated around the unchanged line this morning although if support below the USDJPY fail solidly, then watch out below. Markets in Mainland China and Hong Kong remain closed for Lunar New Year.

"As we and others have said, the Fed is overly reliant upon models that do not account for real-world elements of instruments, markets and traders in the derivatives age. Models cannot possibly take into account unpredictable interactions among huge positions and traders in new and very complicated instruments. Thus, the Fed should be careful, humble and conservative. Instead, it is just blithely plowing ahead as if it knows exactly what is going on. Intelligent captains sail uncharted waters with extra caution and high alert; only fools think that each mile they sail without sinking the vessel further demonstrates that they are wise and the naysayers were fools. This is a formula for destruction. The crash of 2008 should have been smoking-gun evidence of the folly of this approach, but every mistake leading up to the crash, especially excessive and “invisible” leverage and interest rates that were too low, has been doubled down upon in the years since."