This page has been archived and commenting is disabled.

This Is The $64 Trillion Question From Today's Fed Statement

Tyler Durden's picture




 

While on the surface, there was something in it for both hawks and doves, with the Fed admitting, and adding, that "the pace of job gains slowed" boosting the domestic economic dovish camp (the language about business fixed investment increasing "at solid rates in recent months" will be promptly removed as the recent re-plunge in oil flows through the energy sector's cash flow statement), it was the hawkishness about the global environment that appears to have been the primary catalyst for today's rally as it gave the market the impression that the global economic jitters from the past three months are now well in the rear view mirror.

Specifically, it was the complete removal of the line that "recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term" and the addition that the fed is "monitoring global economic and financial developments" which were the kicker.

This is how Bank of America's Michael Hanson explained this change:

The October statement removed the notice that “recent global and financial developments” had posed some risks to economic activity and inflation “in the near term.” During the September press conference and in subsequent speeches, Fed officials stressed that they wanted to be prudent in the face of these risks, but had not fundamentally altered their outlook. The FOMC was concerned that downside risks could intensify into a significant global shock, which warranted their caution. But that did not happen, and other central banks have since stepped in to ease and support their domestic economies. Equivalently, the FOMC has indicated that September was an event that got their attention, rather than a shift toward systemic concern about global growth.

In other words, now that first the PBOC cut rates, the Riksbank boosted its QE, and the ECB (and possibly the BOJ) are about to ease as well, the Fed no longer had the leisurely option of being prevented from not raising rates due to its recently expanded mandate of being global financial regulator, and instead was forced to admit that it is the other central banks' jobs to police their own financial conditions.

BofA's take on this is as follows:

Today’s statement suggests the FOMC would need to see more bad news globally to not hike — in contrast with the market belief going into today’s meeting that the global outlook would have to improve in order for the Fed to hike.

This is not entirely correct: a far more accurate way of saying the above is that having suffered the September swoon, Fed is now betting that the recently expanded easing by other central banks should be sufficient to offset the tightened monetary conditions that would accompany a Fed rate hike.

This also changes the Fed's baseline assumption that the rest of the world is somehow fixed when it was the soaring dollar strength that unleashed the Chinese devaluation and the Emerging Market debt crisis in the past few months. Today's surge in the dollar only reminds us f the Fed's reflexive trap: as long as the Fed postures that a rate hike may come, the dollar will keep rising. And that alone puts us right back on square one.

The rest of the Fed statement was very much in line, and had to do with domestic economic conditions. On these issues, Bank of America's assessment was more accurate:

First, the gradual slowdown in the job market:

Jobs: soft, but no reversal

 

... the Fed acknowledged that job growth “slowed” and the unemployment “held steady” since December. But they still stressed the cumulative improvement in labor market conditions, suggesting that may be enough — or nearly enough — to allow them to hike in December. Obviously the markets will be watching the October employment report extremely closely. A number of Fed officials have recently suggested that 100,000 may be the forward-looking equilibrium pace of employment growth. Thus, a jobs report similar to the August and September140,000-range would still be a net improvement in the eyes of many Fed officials. Any further decline in the unemployment rate — as well as the U6 under-employment rate — would give further reason to think about starting to move away from zero in a gradual manner come December.

Then, the overall economy, where the Fed is also tempering its ambitions:

Moderate outlook may be enough

 

The FOMC also maintained that activity is expanding “moderately,” despite the widespread anticipation of a weak 3Q GDP print. In fact, they strengthened the assessment of domestic demand, noting that consumer spending and business investment “have been increasing at solid rates in recent months,” while housing “has improved further.” That suggests the Committee is likely to look past a  soft 3Q GDP growth report; we are tracking 1.5% for GDP but 3.5% for domestic demand in 3Q.

As noted earlier, the business spending, especially in light of the latest dismal durable goods report, will be struck down, but that will only reinforce the Fed's gradual admission that the economy is officially fading.

As for the market's reaction, first there was the bond market, where the biggest variable was the jump in implied rate hike odds. Remember: the Fed will not hike unless the Fed Fund futures at least modestly expects it, so today's jump to ~50% December odds, may be all it takes:

Rates: repricing the liftoff date

 

US rates increased up to 9 basis points led by the 5y sector, which is most sensitive to the path of near- to medium-term Fed expectations.... We believe the market will continue to focus on the possibility that December will be a live meeting and that a tightening cycle could materialize in coming months, steepening out the implied path of the hiking cycle currently priced in for 2016 and 2017. Indeed, the market-implied probability of a December rate hike shifted higher by around 10 to 15 percent following the statement and may now be in the range where the Fed would be comfortable moving without fear of surprising the market. Should the Fed increase rates in December, we believe they will be cognizant of strained year-end liquidity conditions, but this alone will not be sufficient to dissuade them if they believe a move is warranted.

This brings up a whole different issue, namely whether the Fed will be able to raise the short-end via reverse repos, but that's a whole new topic for a different day, as only afterwards will the Fed realize that it is not nearly equipped to push up the trillions parked on the short-end.

We will be closely watching any communications from the Fed regarding how it will deploy its interest rate management tools and expect the size of overnight and term reverse repo offerings to be increased at the time of the first rate move.

Last, and even more important than the "global" issue - because they are reflexively related - is the question how the Fed will handle the soaring dollar.

The USD rallied broadly following the FOMC statement. Against market expectations, the Fed maintained its outlook for “moderate” growth, focusing on the economy’s cumulative improvement since early this year, and removed the risks posed by overseas developments. This suggests a much lower bar for hiking than FX markets had anticipated amidst recently slowing data momentum. Clearly the Fed is data dependent, but with the Fed explicitly signalling December is a “live” meeting the USD will be supported not only as the probability of a hike rises, but also if the market prices a faster pace of hikes thereafter. Combined with the ECB’s strong signal for an expansion and/or extension of QE (and potential depo rate cut) in December last week, rate differentials will once again play be an important FX driver into year-end. With our analysis suggesting much of the USD rally since 2014 driven by overseas developments (not the Fed), a significant shift in Fed expectations has room to propel the USD higher, particularly with positioning at its lowest level since the USD rally began. While Fed hikes could take some pressure off of G10 central banks from easing, it also suggest higher beta currencies could struggle if risk sentiment takes a hit or commodity demand comes down amidst USD strength. 

The $64 trillion dollar question: "The key question is if the US economy is strong enough to handle a stronger USD."

We'll find out very soon. If the answer is no, this may be the first Fed to succeed in pushing the economy into a recession without ever having raised rates at all, by simply talking the dollar higher, and higher, and higher, just to give the impression that the economy is recovering (when it clearly is not) in the biggest game of monetary chicken in history at a time when every other central bank is rushing to devalue its currency, simply to afford itself a buffer as small as 25 bps which it can then "ease" when the official recession finally arrives.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 10/28/2015 - 18:22 | 6723725 trader1
trader1's picture

i was reader0.

Wed, 10/28/2015 - 19:07 | 6723909 philipat
philipat's picture

Why does anyone spend so much time analysing these statements word by word. Do a bunch of unelected and unaccountable academics really have any grip on what is happeneing in the real economy, beyond their models? At the end of the day, they will do what is best fror their shareholders, the Banks, which right now is NOT to raise rates.

Thu, 10/29/2015 - 05:10 | 6725168 Lurk Skywatcher
Lurk Skywatcher's picture

Q) Why do gamblers analyze the form of horses? Why does media analyze Presidential hopefuls? Why do fantasy football fanboys analyze player stats? Why do religious nuts analyze the bible?

A) Any number of cognintive biases - The availability heuristic, the clustering illusion, choice supportive bias, zero-risk bias, recency, selective perception...

 

Thu, 10/29/2015 - 05:57 | 6725196 gherman
gherman's picture

So what? Might as well had emitted something more substantive in the first comment, such as that Bitcoin is here to stay and to rule.

Wed, 10/28/2015 - 18:23 | 6723728 wstrub
wstrub's picture

PSYOPS

Wed, 10/28/2015 - 18:31 | 6723747 buzzsaw99
buzzsaw99's picture

reverse repos, lulz. how are they gonna fraud the tbtf bank's books without the eoq repos?

Wed, 10/28/2015 - 18:29 | 6723764 Truth Eater
Truth Eater's picture

An economy that depends entirely upon what a central bank will do is worse than a penniless drug addict following his drug pusher around.  A market system that looks to that bank to figure out what stocks, bonds, commodities or currencies are worth is a zombie market.  The money system should be invisible to the true market, not the only actor in the limelight.

 

With their twenty minutes of fame, the banks will lead the lemmings over edge of the cliff and into the sea.  Hear the tune being played by the pied piper?  It doesn't matter because the piper always gets paid.

Wed, 10/28/2015 - 18:36 | 6723786 BoNeSxxx
BoNeSxxx's picture

Truly, you should post more often.  Greenie fer ya and kudos for a brilliant description of the market farce (previously known as 'force').

Wed, 10/28/2015 - 20:29 | 6724209 Salah
Salah's picture

Yellen is the quintessential hapless academic.  Her natal chart  (DOB 8.13.46) is 50% air, 50% fire.  Not a smidgen of earth or water.  Makes her a conehead with a cunt, and all that entails (see: biochemistry 101).

God, we're fucked.

Wed, 10/28/2015 - 18:33 | 6723776 Raymond_K._Hessel
Raymond_K._Hessel's picture

if they raise rates, and cats and dogs start living together and the like - who or what will save the day?

Once upon a time, it was JP Morgan

http://www.u-s-history.com/pages/h952.html?PageSpeed=noscript
http://www.fas.harvard.edu/~histecon/crisis-next/1907/

Now, in a way where we are now is pretty different, from the pain in 1907...

but in another, more accurate way... it was the same..bankers and speculators - greatly enabled by the state, moral hazard, and plain old fashioned stupid fuckery... have fucked us.

Here's the problem - problem/solution/reaction or rather, those causing the crisis will come up with a solution which will be worse.

neg rates, bail ins, ID chips under your skin, cops and pols above the law, 1/2 of revenue spent on bombs and coups...

You have to hand it to the proverbial "them" - no one, really, is going to put up a fight, and those few who do will be very swiftly and effectively dispatched as 'terrorists' in the press, if they make the press at all...

Wed, 10/28/2015 - 18:36 | 6723782 Quinvarius
Quinvarius's picture

The world is going to start sanctions on the US here eventually.  Then maybe we get nuked.  I am not worried about the strong Dollar that no one will be using.

Wed, 10/28/2015 - 18:37 | 6723789 Yen Cross
Yen Cross's picture

  I still can't believe that jump in yield with short term bonds. If I was a bond guy, that trade looks ripe to go long in.

 Any type of rate increase and people are going to be diving back into bonds. Even if rates don't go up, PE's are right back where they were with worsening macro and earnings, so buying the short end after a huge selloff like that, looks like decent trade.

Wed, 10/28/2015 - 18:44 | 6723825 LawsofPhysics
LawsofPhysics's picture

Blah Blah Blah...   always like your analysis BUT no spoon motherfucker.

Remind me, whats's the velocity of the FRN doing again?

keep in mind that the velocity of a dead currency is zero...

Wed, 10/28/2015 - 18:39 | 6723805 bbq on whitehou...
bbq on whitehouse lawn's picture

What happens in hyperinflation is the continueous demand for more money. There never seems to be enough so more and more money is printed. What is happening is the Value of that money becomes less and less.
There are no strong dollars only rates of depreciation. The higher the price the less that is baught and soon no product can be sold at a price that would maintain operations.

Wed, 10/28/2015 - 18:40 | 6723807 The best Sun
The best Sun's picture

"The $64 trillion dollar question: "The key question is if the US economy is strong enough to handle a stronger USD."

We'll find out very soon. If the answer is no, the Fed may succeed in pushing the economy into a recession by simply talking the dollar up and without ever having raised rates at all."

 

Is this a joke?

It has been in recession for 8+ years already.

Wed, 10/28/2015 - 19:28 | 6723992 ajax
ajax's picture

 

 

USD has gone from CHF .95 back up to CHF .99 in two weeks. USD at CHF 1,02 and rising till Jan 15th 2015 when the Swiss pulled out of Euro 1,20 floor.

https://www.youtube.com/watch?v=JK7DA0FliIs

You try living on a pension in Europe. OH NO!!! Don't ever consider living anywhere else than the USA!!!

FUCK YELLEN. FUCK THE SYSTEM.

AND REPEAL FATCA if you want to protect and respect the average American living abroad - who makes friends for US business abroad.

FUCK THIS SHIT. PISSED OFF BY THE IDIOCY OF THE USA. UTTERLY PISSED OFF.

 

Wed, 10/28/2015 - 19:01 | 6723894 FrankDieter
FrankDieter's picture

burp

Wed, 10/28/2015 - 19:13 | 6723940 Last of the Mid...
Last of the Middle Class's picture

Boehner spent a trilion plus on his way out. We may not have much of an economy but we got one hell of a stawk market.  At least for now.

Wed, 10/28/2015 - 19:30 | 6724002 crackerjack_finance
crackerjack_finance's picture

Market explosion in the afternoon - post FED meeeting. I guess the market wants a rate hike now.

The USD will indeed explode with EUR/Japan in QE.

This will get interesting.  Watching gold and credit spraeds closely....

 

 

Wed, 10/28/2015 - 19:41 | 6724033 JenkinsLane
JenkinsLane's picture

I hate this Kremlinology bullshit.

Wed, 10/28/2015 - 19:43 | 6724042 Amish Hacker
Amish Hacker's picture

Is the world economy, particularly emerging markets, strong enough to handle a stronger dollar? Get ready for capital flight that sends the dollar even higher, in a self-reinforcing loop.

Then the pundits will point to the soaring dollar and Dow as proof that everything's fixed.

Wed, 10/28/2015 - 19:44 | 6724047 Muppet
Muppet's picture

"the Fed no longer had the leisurely option of being prevented from not raising rates"

 

Who writes, speaks and thinks in such convoluted nonsense talk?  

Wed, 10/28/2015 - 20:40 | 6724241 holdbuysell
holdbuysell's picture

Something terrible has happened...terrible...It's as if 9T in USD denominated debt in EM screamed out in terror...and then was suddenly silenced.

Wed, 10/28/2015 - 20:54 | 6724298 KashNCarry
KashNCarry's picture

Merry Fuckin Christmas!

Wed, 10/28/2015 - 22:48 | 6724676 Grandad Grumps
Grandad Grumps's picture

Deep down, everyone knows that the banks and government are anti-human. But people do not understand why.

Thu, 10/29/2015 - 07:56 | 6725359 gcjohns1971
gcjohns1971's picture

The Fed is acting globally while thinking locally.

The debt backing the currencies of the world cannot, by their very design, be paid, only rolled over.

The Dollar is the same.

It is also the reserve currency.  And that means it is the transmission mechanism of debt contagion.  The Fed's thinking is stuck in the past, at a time when policy spillover effects were limited by The fact that international flows tended towards hard collateral which could not simply evaporate in a default.

A globalised debt-fiat economy means there is no upper bound to potential cross border financial effects. Rather they are limited only by a given country's Reliance on international trade.

In 2008 the world's debt-fiat currencies began default when the size of the debt service costs became more than the REAL ECONOMY (minus the crony economy which only exists to service the recipients of newly created currency) could bear.

Raising rates simply accelerates the debt contagion default.

The fundamental dynamics remain in place.

But with raised rates in the reserve currency, foreign nations will be impaired to the degree that they do not hold appreciating dollars.

But the debt fiat currency problem is world wide.  And it's nature is such that debt must always exceed the currency with which to pay it.

A stronger dollar, then, will trigger the contagion to accelerate elsewhere, while the nature of the Currency System itself will ensure that the contagion comes quickly home.

Do NOT follow this link or you will be banned from the site!