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Forget "Lower For Longer", The Fed's New Message Is "Sooner But Slower"
Via Scotiabank's Guy Haselmann,
If I had to simplistically decipher the Fed’s (often mutating) communication, I suspect that the FOMC is trying to convince markets that it is looking at a multitude of factors and will act accordingly when they deem it necessary. I suspect its efforts to discuss various contingencies are attempts to convince markets that it is flexible and open-minded in a highly uncertain world. Theoretically, such a position makes sense.
However, it may not be this simple. After decades of providing stimulus for every ebb in economic activity and without withdrawing it sufficiently enough, the stair-step downward path has basically emptied the ammunition cupboard. Rates are not just at zero, but the Fed’s balance sheet now hoards around 45% of the entire secondary market float of Treasuries longer than 10-years. Consequently, the balance sheet has probably reached its practical limit. (QE4 – nope.)
Many have recently drifted toward believing the Fed will be ‘lower for longer’. My view is that the Fed will be ‘sooner, but slower’. In other words, I expect the Fed to hike in March or sooner, but then run into problems that will slow the pace (and make it difficult to get to 1% by the end of 2015).
It is too bad that the Fed is just ending QE now, because it should actually be hiking.
The case is compelling. Economic performance has been decent. Q3 GDP is likely to print above 3% next week. Many other economic indicators have been strong in recent months. The unemployment rate is 5.9%. Claims are the lowest in over a decade. Market interest rates are low. The S&P 500 is only about 3% off its all-time high. Inflation has been stable. Oil has fallen 25% since July.
Moreover, today’s equity market ‘melt-up’ should be a warning sign to the Fed of the moral hazard, one-way, bubble-like conditions it has instigated.
I warned an equity market ‘melt-up’ might be the necessary warning sign that ultimately extracts the FOMC from its overly-aggressive accommodative stance. Moreover, I outlined in my “Cold Turkey” note from 10/15/2014, the numerous reasons why current Fed policies have been or have become counter-productive.
Domestic factors supporting an early hike are all aligned. While international factors are more troubling, those countries are taking their own action to confront their own domestic challenges. Other geo-political uncertainties surrounding Ebola, the Middle East turmoil, or terrorism always exist, so they cannot be weighed too heavily.
By waiting until March or later, the Fed could miss its ideal window of opportunity to hike, because concerns today could easily morph into full-blown global crises next year.
In the meantime, ‘lower for longer’ hopes have propelled markets into a state of melt-up euphoria. I suspect that this perception will be reversed at next week’s FOMC meeting, when forward guidance –i.e., the words “considerable time” - are removed from the statement; and as acknowledgments of the improving state of the economy are added.
It was not a change to the domestic economic landscape that triggered the shift in Fed expectations to ‘lower for longer’. The main factor was last week’s violent ‘risk-off’ trade which was triggered by a leap in uncertainties due to fears of Ebola and the potential for a renewed Eurozone crisis. It was also due to portfolio P&L and margin call problems resulting from enormous volatility in currency and commodity prices (particularly in oil).
One consequence was a flight into the safety of Treasuries. Those fears have since partially receded (for the moment). However, the rise in uncertainties led the market to price-out several Fed hikes that were expected in 2015. One lesson is that in a highly uncertain and quickly changing world, and fragile economic environments, it is too dangerous to price-in too many hikes too soon. Yet, it may also be unwise to completely price-out all hikes before June 2015 and then use that pricing to justify a shift in FOMC expectations.
As such, I recommend investors replace ‘lower for longer’ with “sooner but slower”.
I still maintain my view that (commodity-like) long-dated Treasuries will move to lower yields over time (for the reasons outlined so frequently in earlier notes).
- Tactically, however, there will be times when legging into a curve flattening trade makes sense to protect the core long against a re-pricing event; e.g., the employment report, a FOMC meeting or an early hike (or next week’s GDP). After the event passes, I would cover the front end short and resume with the long-only position until the other reasons I’ve outlined in earlier notes play out. (I might even be right for different reasons, but so far so good.)
“Now everything’s a little upside down, as a matter of fact the wheels have stopped, what’s good is bad, what’s bad is good, you’ll find out when you reach the top, you’re on the bottom.” – Bob Dylan
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Futures are set to gap UP on the ebola news. It's all about the Fed meeting next week. People will ignore ebola in so far as the last ebola dip was proven to be a non starter.
#ebola
Volunteers needed:
WHO expects about 200,000 experimental Ebola vaccines should be ready by mid-2015
http://tersee.com/#!q=ebola&t=text
The Fed's rate policy in 30 seconds
https://www.youtube.com/watch?v=wz-PtEJEaqY
200,000 experimental Ebola vaccines should be ready by mid-2015
200K huh?
That doesn't seem like near enough, Maybe we should shutdown air traffic until we get some more.
Someone get Flounder on that.
THAT'S WON'T HELP EITHER!!!
WE NEED A GLOBAL EBOLA TAX!!!!
That's Nobel Prize smart there man.
and we'll be at 200.000 infected by januari...
RIGHT ON TIME!! CENTRAL PLANNING TO THE RESCUE!!
The Fed can't normalize rates, the market knows any talk about raising rates is jaw flapping.
Yellen, Dudley, Williams, Evans, Rosengren, Bullard and Fisher are just continuous money printers.
Only stops when a currency crisis hits with the dollar free-falling in value. Otherwise it's monetizing onward.
First we get to see Japan implode, then the US?
Europe, then Japan, then China, and last but not least Amerika.....
once one dies the rest fall into the grave; the world as planned by the most powerfull. usher in a euro style money system of west vs east. will the basket carry anything of tangible value?hmmmm. east will win this easily. they are planning for this fiat demise with a rubble/yuan backed by ________. yup, the ONLY truely unmanipulable asset-physical in possesion, on display, accountable, and a ture value of wealth. that said, somehow humans will fuck that up to game it and hence the beginning of another demise....
The Fed only became a bit nervous when a few eclownomists started muttering about 'Fed is risking losing all credibility' so the Fed spun some rumors how they're exiting QE for reels but we know that's horse shit.
Rates cannot go up because it will blow the interest payments.
Markets cannot go down because it will collapse the Banks balance sheet Assets and collaterals.
Jawboning till the end.
In June:
http://www.independent.co.uk/news/business/news/mark-carney-interest-rates-could-go-up-sooner-9533848.html
In Oct:
http://www.telegraph.co.uk/finance/bank-of-england/11181732/Interest-rates-could-stay-low-permanently-says-Bank-of-England-deputy-governor.html
Ebola has already been fixed, they put a top Jew on the case after all.
Guy:
We will have a ninth planet in our solar system long before the FED raises any rates...
More like poorer for longer
More Soviet Central Planning.
That's the ticket.
Awesome....we'll all get to drive funky looking cars that don't run very well.
Let's make that more accurate - if you are not the 0.1%, poorer for ever.
By deception, we will control the economy is the Fed's creed.
The top twenty percent are doing just fine.
Get real.
Yes, but 18 of the 20 are gubbermint drones.
I know an engineer who works for Pacific Northwest National Laboratory. His wife is a realtor. They are well into the top 20%. Neither would consider themselves government employees, and they're both "conservative Republicans."
The medium-sized town where we live abuts a superfund site that sucks mega-zillion-dollars from Washington year after year. Both this guy and his wife -- and every car dealership owner, cosmetic dentist, and luxury home builder only makes money because the government spice continues to flow, yet none of them seem to get it.
So, your point is well taken, but rather inconsequential, because the 18 you mention is really 20 and there is no other 2.
End the FED and just let the politicians handle the pint button...
That effectively happened when they suspended the debt ceiling. Last I heard, they extended the borrowing past election. So, after election they'll most likely suspend it again.
DONT PANIC!
Its all under control folks, we are making it up as we go along.
http://takemelive.com/external/rtrawsrv2
watch it now live.
The world order: New rules or no rules.
Hate to be sophomoric so early in the morning . . . aw, what the heck:
"Sooner, but Slower" - the Fed's adopting every high school boy's dream
Plus magical Fed pixie dust on top.
Why wuld the Fed's balance sheet be at the practical limit? They will keep the game going much longer.
1% is a huge high hurdle rate? Its like the Fed Special Olympics. I'm betting they never even get there.
lower but longer
sooner but slower
I think I should wank now
fed has been lining up their excuses to prolong staying IN the market. they aren't leaving any time soon. 2 hawks leaving, obama gets to nominate replacements, $18 trillion debt, companys borrowing $$$ to up dividends & buyback stock. ZH did a great piece a few weeks back about while companys are sitting on record cash, they also are sitting on record debt. feds new reason to stay in = europe. i think it was the fed minutes or 1 of yellens last talks where she mentioned europe as a reason to keep rates lo. they dont even need to do QE anymore; markets doing it for them. great rotation is underway except its out of stocks, into bonds because theres no friggin growth due to crushing global debt levels. im sure this wont help matters:
ECB DRAFT DOCUMENT SHOWS 25 BANKS SET TO FAIL HEALTH CHECK
I agree with your post, but the "hawks leaving" part may be inaccurate. The FOMC District voting rotation is pre-determined by the FOMC calendar, not by Obama. Certain Districts vote in certain years on the FOMC, with only the NY Fed President having a permanent, ex-oficio vote.
Any talk of raising rates is bluffing. They know it, the market now realizes it.
The Fed should just announce the debt will never be paid back, and we'll just print it away.
Bernanke's son borrowed over $400,000 in student loans because he knows they'll just inflate it away.
Bernanke knows it as well because he and his wife make enough where he doesn't need to take a loan.
Hang on a minute.
Economic performance has been decent - OK, I don't have a strong opinion on that one.
Q3 GDP is likely to print above 3% next week - because GDP INCLUDES Government spending amongst other things. Not sure if the US is including drugs and prozzies yet.
The unemployment rate is 5.9% - And the participation rate is at its lowest for the last 40-50 years.
Claims are the lowest in over a decade - Because of the number of people who can no longer claim or are counted as "discouraged".
Market interest rates are low - You mean HISTORIC lows,and the ONLY reason for that is that the Fed and Government is toast if rates rise.
The S&P 500 is only about 3% off its all-time high - and the only reason it's got there is because of unprecedented actions by the Fed.
Inflation has been stable - NO, you mean it's GROWTH is stable, it's not the same thing at all!
Oil has fallen 25% since July - hmmm, anything to do with the price NEEDING to be lower to try and get one over on Russia.
The rest of this posting raises as many comments. THIS IS NOT A RECOVERY for ANYONE other than the upper 1 (or 0.001) percent.
DavidC
"Lower for longer" and "Sooner but slower" would be great titles for porn movies.
Ditto David, i stopped reading after this...
Economic performance has been decent. Q3 GDP is likely to print above 3% next week. Many other economic indicators have been strong in recent months. The unemployment rate is 5.9%. Claims are the lowest in over a decade. Market interest rates are low. The S&P 500 is only about 3% off its all-time high.
Fucking BLS bullshit...
Raise by 5 or 10 basis points. Do subsequentl raises equally small. Seems like the market just needs to get past the simple psychological hurdle of an actual rate rise. Just do it.
Millions and millions of people now depend upon the Fed Bank and infinite money creation just to survive. There is nothing else, so are they really going to do anything that might end the party? NFW! Never! They can’t change direction. The “wealth effect” they believe in and want, would end and we would spiral down into chaos. Millions of 401K’s would evaporate, and without stock buybacks, the markets would tumble. Without super-loose consumer credit, millions more would lose their jobs. The Fed is now so powerful and so totally worshipped, they can jawbone the markets ever higher and just bluff their way along for years.
There is no "wealth effect". Just as there is no "trickle down". 401Ks are retirement funds. They do not fuel current spending. If one's 401K goes up, most times you don't even have acces to those funds pre-retirement. Those at or close to retirement have cut back their allocations to the riskier markets and thus haven't participated in the massive risk ramp bubble. Those with market exposure outside their retirement accounts are the 1%. No need to speak of this group. The've already stocked up on yachts and plow a much smaller share of their income into economy growing activity. Also not accounted for is the massive amount of subfloor rotting that's going on underneath the linoleum the Fed is busy shining. Debt and the massive amount of malinvestment that is occuring as a direct result of the Fed actions will ultimately unwind. Even the Fed is starting to worry about the stablility of the financial markets. The recent re-run of bio-techs to all time highs after Yellen directly pointed to this group as an area of concern is a huge in-your-face fuck you to her. Essentially saying "what do you expect bitch". You're handing out all this free money, what the fuck else are we going to do with it. Maybe it's naive, but I think she may take notice of this blatant disregard. The Fed knows the market's in a bubble.
“Now everything’s a little upside down, as a matter of fact the wheels have stopped, what’s good is bad, what’s bad is good, you’ll find out when you reach the top, you’re on the bottom.” – Bob Dylan
https://www.youtube.com/watch?v=tjBn2YE-RoA
That's what she said? Tyler that was too easy.
That key paragraph that a few others above have already quoted:
"Economic performance has been decent. Q3 GDP is likely to print above 3% next week. Many other economic indicators have been strong in recent months. The unemployment rate is 5.9%. Claims are the lowest in over a decade. Market interest rates are low. The S&P 500 is only about 3% off its all-time high. Inflation has been stable. Oil has fallen 25% since July."
This is the standard 'Pap' shoveled into the mouths of Muppets nationwide, by the $Fee-based crowd... The fact that THEY know it's BULL-SHIT on its Face, but Parrot it like truth from an angel, should give one pause right outta the chute.
Guy Haselmann - you're smarter than that buddy...
slower for longer is good when you're with a lady, but no tso good when you're with a slut, and over at the Fed, they are alllll sluts, fellow babies.
End the fucking Fed.
Now then, what's going on with Russia's privately-owned {by whom? anyone know?} bank? Are they doing all they can to help Mother Russia, or, are they fucking up?
Bueller?
i'm no financial guru, i barely understand the long, short, call,puts i read on this site.
i came to this site for more indebth financial, ( new eyes, and ideas), information on what i was being told, and what i was living.
i'm trying to salvage, a combined 80+ yrs., (and my wife continues), of frugal lower to middle-class wages of me, and my wifes, living, and savings for retirement, and something for our children, and grand-children.
for 40 yrs. i didn't realize i was in a financial war with the .0001% over my earnings, and savings.
now i see, they call it a global economy, in reality it's the BIS controling a global financial war.
thank you zh.
You know, this is all starting to take on a creepy, uncomfortable feeling. They won't stop trying to 'stimulate' the economy, first 'lower, longer', now 'sooner, slower'...but apparently the bitch just lays there.
BECAUSE SHE'S DEAD, YOU DUMB FUCKS! NOW GET YOUR FILTHY HANDS OUTTA HER PANTIES...WHAT ARE YOU, A BUNCH OF GHOULS?
Let the rest of us take her and give her a decent Christian burial, for the love of God...it's the least we can do.