Monetary Policy

Having disappointed an expectant market by voting overwhelmingly (8-1) to leave monetary policy unchanged, the initial plunge in USDJPY and Japanese stocks has found a mysterious (and massive) JPY seller and Nikkei 225 buyer. USDJPY is now 100 pips and Nikkei 225 500 points above post-BOJ dip lows... because hawkish is the new bullish...

"House prices have decoupled most from local incomes in Hong Kong, London, Paris, Singapore, New York and Tokyo. Buying a 60-square-meter apartment exceeds the budget of most people who work even in the highly-skilled service sector. Loose monetary policy has prevented a normalization of housing markets and encouraged local bubble risks to grow"

Contrary to the popular view, a fall in the growth momentum of prices is always good news for the wealth generating process and hence for the economy.

"... judging from market-based implied measures of longer-term inflation expectations, the effectiveness of the ECB’s announcements has proved limited so far."

- Goldman Sachs

It appears even Goldman Sachs was surprised by the recent rally in US equities - especially in light of the explicit hawkishness of The Fed yesterday. In a trading note this morning, the bank says that market risks are real and rising (but are not overwhelming) as it explains, we assume with no intent at humor or sarcasm, that they "prefer to think of the recent equity rally as 'macro-free' rather than 'low quality'," reiterating their view of the cycle and of markets as "fundamentally upbeat." They do, however, admit over the last month, the likelihood of a drawdown in the US equity market further increased, and remains at mildly elevated levels.

For generations, single family housing development was a driver of US economic growth. Today, there is no single family housing industry to speak of. These 7 charts derived from this week’s release of new house sales data from the Census Bureau illustrates just how bad things are.

Haruhiko Kuroda owns 52% of all Japanese ETFs. And now he wants more. Facing a lack of willing JGB sellers, the BoJ now faces the possibility that ramping up its easing efforts will entail expanding the bank's already elephantine equity portfolio. "At a fundamental level, I don’t support the idea of central banks buying ETFs or equities. Unlike bonds, equities never redeem. That means they will have to be sold at some point, which creates market risk."

"The rise in household savings rates amid so much central bank support is paradoxical to us, and mimics what we highlighted in the credit market earlier this year. Companies in Europe are deleveraging, not releveraging"

We're all minions now of the stock market. By cowering in terror of a stock market tantrum, the Fed has surrendered everything: its vaunted (and completely phony) independence; its duty (yes, go ahead and laugh) to the nation and the real economy - everything. The Fed is nothing but an abject slave of the market.

Based on the overnight market prints which are an oddly reddish shade of green, it took algos about 12 hours to realize that the reason they soared for most of October, namely hopes of an easier Fed which were launched with the terrible September jobs report and continued with increasingly worse US economic report in the past month, can not be the same reason they also soared yesterday after the announcement of a more hawkish than expected Fed statement which envisioned a stronger US economy and a removal of foreign considerations, which even more curiously took place on even worse data than the Fed's far more dovish September statement.

"What does this mean for investors? It means that at some point in the next year or two, I think we are all going to have a Henry Hill “Goodfellas” moment, where we think that we understand the conversation going on around us, where we think that we’re engaged with our social system in the usual way … and then everything will go sideways in a split second, and we will suddenly and with extreme clarity realize that we don’t understand anything at all except that we’re sitting at a table with a maniac."

Every day when you flip on the media, there is someone telling you that now is the time to "buy" into the market. Of course, if you are buying, then who is selling? The only "net buyers" of equities this year have been "individuals," while "professional" firms have been "net sellers." This is the epitome of the classic "smart money/dumb money" analysis where individuals are used by institutions to offload positions that are no longer optimal. The question is with corporate profits and earnings declining, weak economic data, and the threat of tighter monetary policy - will individuals once again be left "holding the bag" while institutions derisk portfolios in advance of the next decline?

Perhaps "The Japanification of Monetary Policy" would have been a more appropriate title... "well it didn't work for them, so we should all try more of it" appears to be the repost of policy-makers worldwide which, inevitably, will lead to the total collpase of their credibility (and th every 'faith' of the world's investors shattered).

With EURUSD having crashed to a 1.09 handle, some would say Draghi's work is done (in terms of crushing US corporate revenues) but there is a bigger problem for the ECB head. The market has already entirely priced-in a cut in the ECB Deposit Rate (in fact is already pricing in even more - at -35bps, from -20bps) which may be an issue as two ECB governors have come out today, jawboning investors not to expect more easing soon. This has sparked a reversal in EURUSD and risk assets are rolling over...

• After the anticipation of the previous meeting, markets focus on the statement and whether the FOMC still see December as a date for lift-off
• The vast majority expect the Fed to keep the Fed Fund Rate on hold at 0.00-0.25%, however there is a minimal outside bet (~4%) that the Fed will hike rates by between 15-25bps

EXPECTATIONS