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T-Minus One Day: How Were The Markets Positioned The Day Before The Last Three Rate Hikes
Nine years after the Fed's last rate hike on Jun 29, 2006, the 17th and final consecutive 25 bps rate increase in a tightening cycle that started in June of 2004, we are now at D-day, with just over 24 hours until the Fed's alleged first rate hike announcement in nearly a decade.
So as the Fed huddles in the Marriner Eccles building for its latest "most anticipated ever" meeting at least until the next one, looking at such deplorable economic data such as the first headline deflationary CPI print since January, following a series of disappointing manufacturing, housing and retail sales reports not to mention a payroll number that absent sugarcoating was a solid miss as well, not to mention global emerging markets that one after another are sinking into recession and exporting record amounts of deflation to the US, one wonders: what happened the last three times the Fed launched tightening cycles in 2004, 1999 and 1994? And more importantly, what did the market think was going to happen?
First, here is what the Fed Funds futures believe is the probability of a rate hike tomorrow: as of moments ago, it was 30%, down a fraction following the CPI report.
So what about in prior years?
As Morgan Stanley points out in a report by Guneet Dhingra, both 2004 and 1999 were perfectly expected, at least as far as the market is concerned, rate hike cycles.
In the 1999 hike cycle, the Fed hiked 25bp, or 50bp, or stayed on hold when these outcomes carried at least a 50% probability in market pricing, on the day before the announcement (see Exhibit 2). This means that the Fed did not deliver significant surprises in its 1999 hike cycle. For example, in October and December 1999, the market implied probabilities for an ‘on hold’ outcome were well above 50% on the day before those FOMC meetings (see Exhibit 2). Similarly, the other outlier outcome - the 50bp hike in May 2000, was also priced in with a 50% probability on the day before the announcement.
The 2004 hike cycle was even more ‘predictable’ as the market priced in at least a two-thirds probability of +25bp hikes at least four weeks before the FOMC, and close to 100% probabilities on the day before the FOMC meetings (see Exhibit 3). This was a result of the ‘measured pace’ language that the Fed used in the 2004 cycle.
A summary of the implied probabilities stretching from 2 months to 24 hours before any given rate hike in the 1999 and 2004 tightening cycles:
In other words, the lastt two rate hike cycles were very much anticipated by the market and did not come as a surprise. Where it gets interesting is looking at what happened in 1994.
As Morgan Stanley reminds us, and the 50% or so of current Wall Street workers who were not active back then, "The 1994 hike cycle was one in which the Fed did not sufficiently manage market expectations prior to liftoff. This resulted in a February 1994 rate hike that was followed by high levels of market volatility and a significant tightening in financial conditions."
So what happened in 1994 and why does Morgan Stanley think the Fed has "learned its lesson from 1994, and the significant tightening in financial conditions that occurred that year."
The 1994 hike cycle – while broadly anticipated – surprised investors in terms of the timing and magnitude of rate hikes along the way. With an improving economy in 1993, the stage had been set for a rise in interest rates. However, as Exhibit 4 shows, the Fed surprised the market many times, including with its first rate hike in February 1994. Going into that hike, the market had only priced in a ~22% probability of liftoff one week before the February 1994 FOMC meeting.
A quick primer on why the Fed hates surprises: "Surprises matter to the Fed, because surprises can lead to a bigger tightening in financial conditions than is warranted." I.e., the market will dump.
And yet, this is where Morgan Stanley is way off, because while it is correct that 1 week before the rate hike, the Fed Funds future implied rate hike probability was just 22%, 5 weeks prior it was 53% and 6 weeks prior it was 61%.
But most importantly, the day before the February 1994 rate hike, the probability had soared to a whopping 70%, and it only went higher from there for the March and April rate hikes as can be seen in the table below.
In other words, as much as Morgan Stanley wants to pass of the 1994 rate hike cycle as a surprise, or a mistake, it was anything but with implied rate hike probabilities all higher than 70% the day before the rate hike!
What about the "2015 rate hike cycle"? As noted up top, as of this moment, 1 day before the alleged first rate hike in 9 years, the probability is a paltry 30%.
So if the 1994 market reaction - especially in the bond market - was one of shock and awe when the market was quite prepared ahead of the actual rate hike announcement, what would happen tomorrow as the probability is more than 50% less than it was in the "turbulent" 1994.
All that said, this analysis ignores the all too critical point of perception reflexivity, and the reality that the market volatility that surges as the rate hike day inevitably approaches is precisely the reason why the market is projecting such a low probability to a rate hike: the Pavlovian dogs trading various asset classes are so trained to expect perpetual easy money conditions from the Fed, they will do anything, certainly keep rate hike odds as low as possible, to deter Yellen from at least attempting monetary normalization and raising the cost of money for the first time in nearly a decade.
So that is what the markets thought just before the last three rate hikes. As for what Janet Yellen is thinking, tune in in just over 24 hours for the answer although now that even Goldman's CEO Lloyd Blankfein has spoken, saying earlier that "the data does not seem to support a interest rate increase this week", tomorrow's outcome is all but decided.
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What does Gartman say? Opposite will happen.
Gartman's take on rate hike.
If God had any sense of justice, the Federal Reserve would be struck by a 100-foot wide meteor tomorrow made out of pure gold, just as they are announcing their decision.
I strongly disagree that the market cannot handle a rate hike. I firmly believe that our Federal Reserve will hike rates either tomorrow or at some point before December. We are at least 6 years into a strong economic recovery, and I believe that over this period, our economy has picked up enough momentum to sustain itself during a series of rate hikes. What you really don't want is for the economy to get overheated like it did in 2008. Our monetary officials are doing the right thing by slowing this recovery down before it gets away with itself and turns into a bubble.
classic.
They're gonna raise rates by 10 basis points and say it's gonna take 2 years for rates to reach 1%
Their target is 1.6% by the end of 2016.
And none of this matters because the POMO desk will always be buying debt backdoor.
And none of this matters because the dollar is backed by nothing.
Full faith and credit bitchez
Blankfien said it's not a good time -- so that's it. No rate hike tomorrow.
Sarcasm right ?
Million dollar bonus .... Where is this recovery you talking about?
Food stamps ?
No.
Just typical MDB trolling.
[You must be new here...]
No, just common sense. It's prudent to be raising rates now, because as the recovery picks up speed, it becomes progressively more difficult to control. Bubbles are exponential, so if you let them get even slightly out of hand, it could be too late. This is why it is very prudent and wise for our Federal Reserve to raise rates now and ensure a sustainable, linear recovery.
</SARC>
Just helping you out MDB!
Dear MDB, or should I say Braak Obama.
Please, stop the propanganda for once.
Remember what you always say: "A century of failure proves nothing".
Your pal,
Buck Farak
FORWARD SOVIET!
MDB is comedy intended
Let it be
You sound like you work for them. The economy sucks ass for all of us in the real world and a 1/4 pt wont matter either way except the interest on 18 trillion will be sffected and they should take the increase outta your account
They are raising the rate and it could be even 50bps and this has been evident for weeks.
a. Thus was the biggest talked about event for a reason - and that was to prepare and condition against a surprise rate.
b. They may be deliberately looking to wipe out emerging markets as a counter-punishment to China, India, Brazil and Russia for leaving US dollar hegemony. A significant increase will cause dollar flows to the United States which can be used to cow tow China's non-compliance. China did not sail five warships to Alaska for fun. This was a calculated counter-message in light of the munition of their chemical storage depots. The American Weapon depot in Japan that exploded did not happen by chance.
By raising 50 basis points it will finish the Chinese stock market off, however it may have unintended consequences causing a flight to bonds which could have ramifications back into the market.
"...causing a flight to bonds..." Given that we are referring to China, the flight could just as well be to bombs.
As it has been said before on ZH, "The Chinese don't like anyone".
That is a bit extreme but possible! Let's hope you are right! Shemitah!
Or a FEMEM woman jumping on yellen's desk shouting"End FED Pu**y-ship
That would just ruin the gold market.
With all that gold the comex could cover it's contracts. Better make it iron.
Not a huge fan of Google, but that was cool. I am going to have to figure out how to do that for some other forums I go to where there are simply too many old people who hardly know how to turn a computer on.
Just thank the "OLD GUY" who designed your machine.
Then take your arrogant young ass out and do something for someone without reward. Bet you can't do it!
You are what is killing us.
Let me Duck Duck Go that for you.
it doesn't matter what the fed does. a few 25 basis point hikes here and there. it is clear to me that the market knows that the fed put is still there and those rates hikes will be removed and qe4 started when the fed decides the market has dropped too far. so, a rally on a rate hike might occur. nothing has changed--the fed put is in full force (whether rates are 0, 50 or 100 basis points)
and in some extreme case 2 years down the road short rates get to 2% (because the market knows the fed put is still there)...2% isn't shit. its still a negative rate verus inflation,
all this talk about NOTHING. the talk should be about removing the fed from asset price manipulation, ending the fed, etc.
there are no rate hikes in the new normal.
They're not going to raise rates at all. It's being built in to the media narrative so it can be Dow +500 when they don't.
Amazon pulls ‘F— the Police’ shirts, eBay still selling similar versions
http://tinyurl.com/pnpaoy5
Are we supposed to kiss their jackboots when they pass now?
Still more dangerous to be a garbageman than a cop.
People are pissed and do NOT give cops the benefit of any doubt anymore. I should know, Mrs. pods REALLY does not like them.
If they stopped their war on the public, maybe the public would give a fuck about them.
As it is now, I wouldn't piss on their head if their hair were on fire.
pods
ferguson has spoken. support your local police.
If there is a rate hike, it will be the biggest since Lehman.
I hope they hike rates, burn this bitch to the ground.
one day i hope historians will look back on our time with disgust. the financial priesthood running around trying to predict what the monetary gods of the federal reserve will do to manipulate all prices everywhere in the world with the stroke of a pen. the ignorant people blindly believing that the gods and priesthood are in control and are looking out for the best interests of everyone involved. the only difference between today and the heathen cultures of early man sacrificing people to the gods in hope for rain is that our priesthood and gods sacrifice millions worldwide to poverty, death, and destruction.
do jews have preists?
I think they're called pharisees, have fun with that one
This type of thing makes me laugh. We are not talking about reverting to the historical mean. But about a friggin 0.25 hike.
The world is going to end at 0.25-0.5%?
We are in good shape. Lol.
pods
It just might.... uncle Sam can't afford that!
Remember when Russia raised rates in Dec to an eyewatering 17%? Back down to 11 now but still; would the West survive such a thing?
you have forgotten one critical thing: The Westerns have huge debts to the eyebrow, whereas Russia has not.
Uhhggg, can we talk about Greece, or ebola for a while?
http://www.armstrongeconomics.com/armstrong_economics_blog/page/2
Advice for the Fed Posted on September 14, 2015 by Martin Armstrong
I understand that Larry Summers and the IMF, among others, are advising the Fed not to raise rates. They are expecting the Fed to sacrifice domestic policy objectives for international objectives where so many have borrowed in dollars to save interest. This is the real clash between domestic vs. international and the consequence of the dollar being a reserve currency.
My advice to the Fed: YES, raise the lending rate, but do not raise the excessive reserve rate you pay banks. Alternatively, you can lower the excessive reserve rate to zero and leave the lending rate unchanged. This will have the desired impact of forcing the banks to get real.
If the Fed raises the rate, which includes the deposit rate on excess reserves, the banks will only deposit more money and not lend. This would encourage hoarding and further the deflationary cycle.
Greece...ick.
Fuck off! Most of my family lives there and I am sure would enjoy your saying that to their faces. Stupid tomato, you don't know shit. Stop with your opinions based on what you learned on msnbc!
o you think the white collar crime of Wall Steet and the Federal Reserve is bad ?
For more crimes against humanity go to www.firecrusade.com and see Free Document page and click link A Crime Against Humanity
The very gov agencies that are supposed to be protecting the public from dangers of fire and hazardous products, CPSC and NFPA as well as the non gov testing facility UL which often tests products on the governments behalf, have been covering up a deadly conspiracy to commit fraud that has resulted in the deaths of 10's of 1000's and horrible, often times, disfiguring injuries of 100's of 1000's of unsuspecting consumers over last 5 decades.
These agencies have all been in the back pocket of ionized alarm manufactures for over 50 years , which was exposed back in 1976 by a Fire Protection Engineer, Richard Patton. Mr. Patton revealed that the government funded Dunes Test which tested smoke alarms, was not only rigged so ionized alarms would pass the smoldering smoke stage of test but the data was falsified so that ionized detectors could keep the UL stamp of approval, while the superior, safer and more reliable heat detector technologies were deliberately set up to fail the tests.
With each day that passes and the CSPC fails to make a mandatory recall of ion alarms , many more victims will either be killed and or suffer serious injuries as the ionized alarm manufactures flooded the market with ion alarms and it is estimated that over 90% of all homes and habitable structures have these deadly devices, providing the public with a false sense of security.
Buyer beware ! These deaths and injuries have been and are preventable, as the safer more reliable photoelectric / heat smoke alarms have been available for over 40 years. The ion manufactures are fully aware of the problem and have been sued multiple times and paid $10's of millions in damages and the UL has been sued as well. Manufactures, in one lawsuit back in 2001 were ordered to provide disclosure on ion alarm packaging which ended up being a watered down disclosure / recommendation to use both photoelectric and ionized alarms. Being ion alarms are less expensive and majority of consumers do not read fine print on packaging which omits the actual dangers / death / injury factors, consumers assume a smoke detector is a smoke detector, and most people still opt to buy the less expensive and dangerous ion alarms.
Most everyone you know is at risk and should be made aware of these deadly devices as the government agencies will continue to cover up the fraud from the public until such a time a civil lawsuit and verdict is reached to force CPSC to execute a mandatory recall which could take several years. Please post this message on your facebook and twitter sites and forward to as many others as possible. More information and 60 minutes segment / news videos that have covered this issue can be found on www.smokealarmwarning.org
2 down votes ?? Are there Kidde and First Alert executives on this forum ?? If so your days are numbered.... civil lawsuits coming soon as well as petition to request CPSC to ban and recall all ionized alarms.
Does anyone here actually think they're going to raise rates?
Yes - it's coming
And according to them, has been for 7 years!
It is 102 years of rigging.
And raging...against the machine.
One possibility for the run-up prior to a "rate increase" would be to allow the plunge protection team to mitigate the impact. If we see the S&P move above 1993, which it just did and the DJIA 16,750, which it is close, then a 1000 point drop can be mitigated and they can play both sides of the bet. We will find out 2 minutes before the announcement as information will be leaked again.
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The other side is that the market has been sideways, for the most part, since QE3 "ended", which means the driving forces of the markets are clearly the ZIRP & QE; so a removal of ZIRP, unless they announce "one and done", would put severe downward pressure on these markets. Then we can go to more war.
End of the world is coming. Gold is up 1%...
I swore I would never blow coffee out my nose because of a ZH post.
Your comment made me break my vow.
Funny stuff!
Actually that is an indication that they might or might not raise rates; just wanted to be clear.
Bag of chips and beer are ready.
I hope we make it to the halftime show.
Beer & chips for sure, but don't forget to BTFD
Do it!
I double, red dog, dare you!
DaddyO
Is anything real anymore in a Fed manipulated market?
A: NO!
LOL, no way the Fed hikes rates. 100% certain though that there will be jawboning about an upcoming, future rate hike.
Employment metrics are just not enough.
We need another positive Quarter of study.
Happy Hanukkah, Merry Christmas, Bitchez.
--Da Fed
This is so sick. It's no wonder the Feds think they're gods with headlines like this one.
They're nothing but a bunch of scamming crooked thieves, and we're not a much better rolling out the red carpet for them.
Edit: a 1/4 pt rate hike will have negligible effect on the 'market' as it's controlled by them via their machines. Sure, they'll make it swing to and fro but crash,,, I wouldn't bet on it.
they ain't raising shit...as my ol' grandpappy used to say, they're "about as useless as tits on a boar"
Does it matter that in years passed, interest rates were reflective of the underlying economy? In other words, we are not currently in a zero-interest-rate economy and weren't then either. But the 1994 rates were at least close to what the rate should have been than are today's ZIRP.
In 1994, the Fed was just adjusting the rate to temper passions by indicating which direction future rates may trend. Today, finding itself untethered from reality, the Fed has no idea what the underlying implied interest rate is and is trying to get an oar back in the water without capsizing the boat. It would help if the boat was in the water in the first place.
I think the implied interest rate should be somewhere between 2.5 - 3.0% so this miniscule bump risks only causing ripples as daytrading HFTs unravel their trades as organic market forces to step back into the game. Just do it and skip the "one and done" crap.
Biggest rate hike since Greenspan
We'll get tough talk in the FOMC min. before we get a hike...
Ponder how to best manipulate a market that no longer exist.
What happens if they decide to go negative rates ?
I will post more forcefully.
Fuck the rate hike hype and blather.
What the fuck is the Fight Club going to whine and moan about on Friday after the rate hike bluster is over?
Now, if the FED raises rates to 10% to be more in line with their fucking rosy recovery bullshit, then we might fucking care.
The shock treatment to the world economy would be priceless.
The FED is a private ponzi scam as everyone on this board knows, and things will only change when the 'banksters' have licked the last bone clean, then we start over in some new shell game......thats how they roll.
Lots of dead sheeple between then and now.
they didn't have bullard back in '94. janet does.
Please explain just a little..thanks
I don't think even maintaining the status quo can stave off the shitstorm that is brewing in the world right now. It's like we are at the end of a Seinfeld episode, where all the parallel narratives are beginning to converge and reach the calamitous end. Good luck!
This ongoing soap opera re. the Effective Federal Funds Rate may have reached an all-time high level for chickenshittery.
FedFUBAR.
Fuck the FED and
Fuck you.
Fuck the Russians and the Chinese as well.
Fuck all the morons - that includes you- who care about what the Fed does.
Let's recap.
The dollar or FRNs are ILLEGAL.
They are fraudulent and
completely fucking not even defined, as to what they are.
So,
Morons,
Dollars are not money.
Interest rates only pertain to money.
Hence,
You are a moron for following this shit.
I'll take all of your "worthless" fiat USD's, but something tells me you are livng of the dole.
The FED is horse whispering the markets today, a nice little run up of optimism before Janet the Destroyer strikes with a vengence.
It should be entertaining to see how the FED word-smiths the knowledge that we're all fooked no matter what they do.
The market seems to know the can is kicked down the road again. Unless this is a set-up for a crash, which I doubt.
Hike those rates already, everything is good. just look at the Baltic dry index.
http://investmenttools.com/futures/bdi_baltic_dry_index.htm
Looks to me as the status quo since the markets has made solid gains over the past 2 days leading up to the "big" announcement and usually gets a bump upward afterward as well unless they say something unexpected. Based on that, there is a zero percent chance of a rate hike unless they are positioned to take full advantage as noted in the article and this is a "suckers rally",
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On a side note, the FED has lost credibility and will lose more and more unless they do raise rates. In this world only Banker & Friends and Christians win in this world; the Bankers & Friends in the carnal sense and the Christian in the spiritual sense, the one that actually matters.