Unemployment

We would say today's main event is the culmination of the Fed's two-day meeting and the announcement slated for 2 pm this afternoon, however with the 90 economists polled by Bloomberg all expecting no rate hike, today's Fed decision also happens to be the least anticipated in years (which may be just the time for the Fed to prove it is not driven by market considerations and shock everybody, alas that will not happen). And considering how bad the economic data has gone in recent months, not to mention the recent easing, hints of easing, and outright return to currency war by other banks, the Fed is once again trapped and may not be able to hike in December or perhaps ever, now that the USD is again surging not due to its actions but due to what other central banks are doing.

Back in 1999, a quarter of all 25-year-olds lived with their parents. By 2013 this number has doubled, and currently half of young adults live in their parents home. Here, according to the St. Louis Fed, is the answer why.

Sorry Fed, here is why your attempt at terminal reflation was doomed from day one.

It's not a good time for this. 

"... if you look at what is supporting equity prices - how much of that support is coming from real economic activity versus from using stock buybacks, using cash on balance sheet for stock buybacks, or mergers and acquisitions, to reduced competition in the marketplace. These are the sort of stories that if there were a small increase in interest rates, you would temper some of that frothiness. Eliminating the incentive to engage in that kind of activity seems to me to be a good idea... There would be a proportion of the population that would have less capital gains - but they’ve been enjoying very big capital gains, and it is a narrow segment of the population."

The weakness seen in world economic activity is partly the result of the lack of a real purge of the financial system in 2008. It has become unimaginable to let entire parts of the system collapse, and the titling of some financial institutions as “systemic” is part of this logic. Policymakers attempting to keep unhealthy economic and financial institutions alive are making a mistake. The very essence of capitalism lies in the process of creative destruction. What we see here is not a way out of the crisis. Instead, we are on the edge of a new financial disaster.

"Investors are now facing the second most extreme episode of equity market overvaluation in U.S. history (current valuations on similar measures already exceed those of 1929). The belief that zero interest rates offer no alternative but to accept risk in stocks is valid only if one believes that stocks cannot experience profoundly negative returns. We know precisely how similar valuation extremes have worked out for investors over the completion of the market cycle, and those outcomes have never been deferred indefinitely. The only question at present is how many grains are left in the hourglass."

Despite ongoing low gas prices, a recovery in stocks, and the nationally-advertised unemployment rate remaining low, Consumer Confidence tumbled in October from eight-year highs to three-month lows. Worse still, "hope" slid to its lowest in 3 months as "jobs plentiful" slid notably with fewer jobs and decreasing income.

Two biggest move overnight came from everyone's favorite carry pair, the USDJPY, which may have finally read what we said yesterday, namely that with the Fed and ECB both doing its job, there is little need for the Bank of Japan to repeat its Halloween massacre for the second year in a row, and as a result will keep its QQE program unchanged. It promptly tumbled from its 121 tractor level, to just above 120.25, where BOJ bids were said to be found. With the FOMC October meeting starting today, the other overnight catalyst was not surprisingly the latest Hilsenrath scribe in which he removed any uncertainty about a Wednesday hike, "leaving mid-December as the central bank’s last chance to raise rates this year."

Last week it was all about central banks, when both the ECB and the PBOC unleashed a massive market rally. This week it will be about even more central banks, this time the Fed, which won't hike, and the BOJ, which may but most likely won't as the Fed and the ECB already did its work for it, sending the Yen tumbling with their actions and/or jawboning.

Having soared 175 pips in two days, on the back of ECB and PBOC actions, USDJPY is rolling over this morning as a senior adviser to Japanese PM Shinzo Abe tells Reuters that The Bank of Japan "can wait a while" before easing more. This follows another adviser's comments on Friday that "further easing wasn't necessary." With a trail of broken markets (bonds first and now stocks), and broken promises (only 25% of Japanese now believe Abenomics will boost the economy), Abe faces an uphill battle in winning the fight against the "deflationary mindset" that officials have been so adamant they have already won.

In our Chinese stock market wrap following Friday's unexpected rate cut, which saw the Shanghai Composite storm out of the gate, we said that "we would not be surprised to see China's stocks sliding back into the red very shortly as "sell the news" concerns return, and as the increasingly more addicted "markets" demand even more liquidity from central banks just to stay unchanged, let alone rise to new all time highs." Sure enough, with just minutes to go before the close, the SHCOMP wiped out all its daily gains and was set for a red close had it not been for the "national team" miraculous last minute intervention which was inevitable after Friday's PBOC rate cut, and which lifted the composite 0.5% into the green as the euphoria was rapidly evaporating.

"If European leaders fail to agree a plan to counter the sudden inflows of refugees, it could mean the end of the European Union. If we don't find a solution today, if we don't do everything we can today, then it is the end of the European Union as such," Prime Minister Miro Cerar said. "If we don't deliver concrete action, I believe Europe will start falling apart."

While even the mainstream media is now aware of the 'turn' in the credit cycle and the decoupling of high-yield credit markets from equity (and equity protection) markets, there is a lot going on under the surface of the broad lending (and borrowing) markets that warrants serious concern.