Monetary Policy

Fed Reveals Rate Hike "Plumbing" Details: Removes Cap On Reverse Repos, Limits Each Counterparty To $30 Billion

Perhaps even more important than the actual rate hike announcement, the one statement the market was particularly focused on was the Fed's "implementation note", which lays out the Fed's thought process on how it will actually raise rates in order to maintain the Fed Funds in the 0.25%-0.50% range. What it reveals is that in addition to removing the daily limit on aggregate borrowings through its overnight reverse repurchase facility, previously set at $300 billion (recall that according to Citi, the Fed may need to drain up to $1 trillion in excess liquidity to effect the 25 bps hike), it will have a per counterparty limit of $30 billion per day, which may or may not be enough.

Fed Mouthpiece Reads Liftoff Tea Leaves

"When the Fed moves next will depend importantly on how inflation evolves. The Fed’s preferred measure of inflation has run below its 2% objective for more than three years. The central bank focused extra attention on the inflation outlook in its statement, saying it would “carefully monitor” actual and expected progress toward the goal. This point implied the Fed will be reluctant to raise rates again unless it sees inflation actually moving up. For now, officials said they were “reasonably confident” inflation would rise."

The Complete Fed Decision Preview: All You Need To Know

At 2 p.m. EST, the only thing the financial world will care about and discuss will be the Fed's [first rate hike in 9 years|epic disappointment]. So for those who still haven't made up their mind about what the Fed's [dovish|non-dovish] rate hike means, here is all you need to know.

How Traders Are Preparing For The Rate Hike: "It's A Good Time To Beat The Crap Out Of A Punchbag"

Summing up the anxiety ahead of today's Fed decision - which talking heads just this morning explained is "priced in" and is a "non-event... been so telegraphed" - market professionals believe "it seems a good time just to go and beat the crap out of a punchbag." As Bloomberg reports, real traders say they "just don't want to do any damage today," as they trade around the events, "I think we're going to see a lot of volatility," and Treasury risk is already spiking to 5-month highs.

After The BOJ And ECB, Will Yellen Disappoint Next? SocGen Warns There Is "Risk The Market Will Be Wrong-Footed"

According to ScGen, the Fed is widely expected to start tightening policy on Wednesday and adds that "after the BoJ and ECB, we see a risk that the market will be wrong-footed for a third time, and that extreme positions built ahead of tightening will be reversed.... In particular, we are short US small cap equities vs large via being short Russell 2000 vs S&P 500.... As the Fed tightens and the market enters into a lower-liquidity environment (and higher-volatility regime), we think the premium on small caps is no longer justified."

3 Charts The Fed Should Consider

With economic growth currently running at THE LOWEST average growth rate in American history, the time frame between the first rate and next recession will not be long. For investors, there is little “reward” in the current environment for taking on excess exposure to risk assets. The deteriorating junk bond market, declining profitability and weak economic underpinnings suggest that the clock has already begun ticking. The only question is how much time is left.

Common Sense Declares "Something Far Worse Is At Work In The Economy"

Since that transition in mid-year, oil prices have again persisted rather than rebounded and of late have turned to new “cycle” lows. Yet, neither transportation nor retailers have traded as if further benefits were accruing in terms of that “stimulus.” This is not to say that stock investors have boarded the recession view, only that there is a clear shift in risk perception that has undoubtedly rebalanced and reprioritized risk parameters. If the left side of the chart below was risks being viewed very favorable in terms of the economic fallout of low oil prices, the right is undoubtedly (much) less certain.

Virtually Every Wall Street Strategist Expects "No End To The Bull Market"

Soaring junk bond redemptions; rising investment grade (and high yield) yields pressuring corporate buybacks; record corporate leverage and sliding cash flows; Chinese devaluation back with a vengeance; capital outflows from EM accelerating as dollar strength returns; corporate profits and revenues in recession; CEOs most pessimistic since 2012, oh and the Fed's first rate hike in 9 years expected to soak up as much as $800 billion in excess liquidity. To Wall Street's strategists none of this matters: as Bloomberg observes, virtually every single sellside forecasts expects "no end to the bull market."

10 Investor Warning Signs For 2016

Wall Street’s proclivity to create serial equity bubbles off the back of cheap credit has once again set up the middle class for disaster. The warning signs of this next correction have now clearly manifested, but are being skillfully obfuscated and trivialized by financial institutions. Nevertheless, here are ten salient warning signs that astute investors should heed as we roll into 2016.