Monetary Policy

If this weekend's gruesome terrorist attack on Paris ended up being hugely bullish for stocks, then two subsequent events, a stadium-evacuation scare in Hannover (where Angela Merkel was supposed to be present) and a raid in north Paris which left several dead in the ongoing manhunt against the alleged ISIS mastermind, appear to have but some question into if not stocks then algos whether a rising wave of terrorist hatred across Europe is truly what central bankers need to unleash more QE. That said, we expect the current weakness to last only until the traditional USDJPY carry ramp pushes stocks traditionally higher.

Having recently shown The Fed to go 6 for 6 in a day of FedSpeak failures to spark animal spirits, it appears this is actually not so unusual for some members of The Fed. As WSJ found, when it comes to watching the Federal Reserve, it’s a good idea to keep an eye on Atlanta and San Francisco but for 9 of the policy-makers, economists rank their 'FedSpeak' as less than useful... with soon-to-be-replaced Kockerlakota the least useful Fed speaker of all...

The Trade-Weighted US Dollar has risen almost 19% over the past 18 months - the fastest pace of increase on record - and is now at its highest level since 2003. As we noted previously, this is not unequivocally good for American corporate profits... and if you believe The Fed's Stan Fischer - the worst effects of this soaring exchange rate are yet to come... Most of the impact of exchange rate moves come after that first year. So we’re only just getting into the business end of the impact of the dollar’s strength on the US economy. And the Fed are about to hike?

The notion of free markets, mechanisms where buyers and sellers can meet to exchange securities or various kinds of goods, in which each participant has access to the same information, is a fallacy. Transparency in trading across global financial markets is a fallacy. Not only are markets rigged by, and for, the biggest players, so is the entire political-financial system.

The odds of a December rate hike have slipped in recent days from over 70% intraday to 64.0% today as, while economists remain convinced that rates will rise in December, traders appear a little less confident. One of the most outspoken - having doubted The Fed (and questioned the economy's ability to handle even a 25bps rate hike) since Spring - DoubleLine Capital co-founder Jeffrey Gundlach said on Sunday that the Fed may hesitate to raise rates given rocky economic and financial conditions making it clear, as Reuters reports, "certainly [a Fed] No-Go is more likely than most people think. These markets are falling apart."

As so often happens in these upside down days, was the best thing that could happen to the market, because another economic slowdown means the BOJ, even without sellers of JGBs, will have no choice but to expand its "stimulus" program (the same one that led Japan to its current predicament of course) and buy up if not government bonds, then corporate bonds, more ETFs (of which it already own 50%) and ultimately stocks. Because there is nothing better for the richest asset owners than total economic collapse.

Greenspan’s phony disinflation success led to the Fed’s embrace of fully mobilized and massively intrusive monetary policy in the guise of the Great Moderation and the wealth effects theory of financial asset levitation. In due course, Greenspan’s self-aggrandizing but purely experimental forays of massive central bank intrusion in the financial markets were supplanted by the hard-core Keynesian model of Bernanke and Yellen. Alas, they operated under the grand illusion that a domestic wage and price spiral would tell them when the domestic GDP bathtub was filled to the full employment brim, and therefore when to lift their foot from the monetary accelerator. It never happened, and they never did. The era of Lite Touch monetary policy was by now ancient history.

Following the weakness in the few minutes of after-hours trading on Friday's US session that overlapped with the first headlines from France, we are getting a first glimpse at the posible fallout from the Paris terror attacks. The Middle Eastern stock markets tumbled significantly with Saudi Arabia's Tadawul All Share index down 3% (biggest drop in 3 months) to its lowest since December 2012, and Dubai's FMG Index plunged 3.7% to its lowest since 2014. Short-run implication for the equity market is likely to be negative according to Goldman, with a notably higher risk premium regarding uncertainties about the medium-term political implications.

While the world was following the tragic events unfolding on Friday night in France where hundreds of innocent civilians were killed or injured, an important economic development took place at the IMF, whose staff and head Christine Lagarde, officially greenlighted the acceptance of China's currency - the Renminbi, or Yuan - into the IMF's foreign exchange basket, also known as the Special Drawing Rights. Here are the initial early responses by various Wall Street analysts.

U.S. stock investors may be complacent regarding the ability of the stock market to withstand higher interest rates. Their confidence may come from the fact that, historically, markets have not peaked until 12-24 months after the Fed begins to tighten. This assumes the tightening cycle begins with the first official rate hike. But if it really began with the increase in the Shadow Rate, then a December rate hike will already be 19 months into the tightening cycle! Plus, given how overvalued stocks may currently be, and the amount of corporate debt accumulated to finance share buybacks, this bull market may be far more vulnerable than most to higher interest rates.

"They helped us understand what was going on beyond what you see on the screens."

Will they, won't they, should they or shouldn't they? Those are the questions being hotly contested by the mainstream media on a daily basis. Of course, the reality is the Federal Reserve faces the huge obstacle of weak global growth and deflationary pressures which could very well keep them on hold well into 2016. The potential loss of credibility in the Fed by the markets could be the bigger issue to be concerned with. For now, we wait.

While the U.S. equity markets, until the last few days, seemed unconcerned about the prospects of the rate hike, the so called canaries in the coal mine are once again sending troubling signals, as the consequences of a reversal of Fed policy after 7 years of crisis management are significant, and the stresses are amplified as policy change looks likely to occur while most other central banks are taking the opposite monetary policy tact.