Article / 29 October 2015 at 12:42 GMT

Daily Shot: Waiting in vain for doves

TradingFloor.com Team / Saxo Bank
Denmark
  • Don't think there will definitely be no December rate hike, warns Fed
  • Markets send equities up despite hawkish Fed tone
  • Sweden extends QE and keeps rates stable
  • Bank of Japan now owns over half of the nation's ETF market
By Walter Kurtz*

Once again we begin with the United States where the Fed has struck a decisively hawkish tone.

The central bank made it clear that a December hike should not be discounted. If the October payrolls report is not terrible, the Fed is likely to raise rates - otherwise it risks losing credibility.

Yellen is telegraphing to the markets to be prepared - and to some extent seeing how the markets will react. 

The US central bank got its answer on the market response. The equity market is shrugging this off, ... 
FOMC reaction
 ... as complacency returns. The "Fear & Greed" index is firmly in "greed" territory and VIX declined further. 
greed
From the Fed's perspective, a rally in the equity markets that coincides with a jump in the hike probability s a signal that the markets are prepared - for now. 

It's interesting that given the a stream of worse-than-expected economic data out of the US (discussed yesterday) one would expect a more dovish statement. This tells us that the Fed is less "data dependent" at this point and instead wants to get this "show on the road".

One possibility is that the December hike will coincide with a shallower rate guidance - assuring the markets that future hikes will be extremely gradual. Perhaps. It's a risky strategy. 

Why is this a potential policy mistake? Here is the USD index (DXY) responding to the FOMC statement. A further dollar rally would exacerbate the rout in emerging markets, potentially forcing China to resume the RMB devaluation. Disinflationary pressures in the US could worsen and the manufacturing sector would take another hit. Nevertheless, it seems that many at the Fed are willing to overlook such an outcome and begin the first rate hike cycle in nearly a decade. 
DXY
Here are some other market reactions to the FOMC statement.

1. The 2-yr treasury yield is back above 70bp.  
2. The euro moved sharply lower. This is music to Draghi's ears as a somewhat stronger euro recently was making the ECB uneasy. 
3. Precious metals took a hit. Speculative accounts have been net long gold and silver (discussed over the past few days), making the metals vulnerable to a correction. 
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Turning to Europe, Sweden's central bank (Riksbank) left rates unchanged but decided to increase the QE program - a direct response to the ECB. Riksbank also suggested that it is ready to take rates deeper into negative territory to fight the "currency war" with the Eurozone. The central bank is trying to prevent the krona from strengthening, potentially intensifying deflationary pressures in Sweden.  

Sweden's 10-year yield declined in response. 

While Sweden's negative rates are helpful in the currency wars, some are questioning if they are appropriate for the nations's economy, which has performed well (discussed yesterday). Here is what the Taylor Rule says the rate should be.
Taylor Rule applied to SE

Could Riksbank's ultra-easy monetary policy be setting up for a property bubble? 
SE property prices, CPI
Norway's economy continues to struggle as low oil prices take their toll - the chart below sows higher than expected unemployment rate. Some are suggesting that Norway needs a modern version of the New Deal. Tapping the nation's massive "piggy bank" to invest in infrastructure to ease rising unemployment may do the trick. 
NO
Let's take a look a Japan for a moment. Here is "QE on steroids" - the Bank of Japan now owns over half of the nation's ETF market. That's right, it's not just about government securities purchases in Japan.  
Japan ETF ownership
Here is Japan's bank reserves (at BoJ) as liquidity gets pumped into the system. But are the reserves growing fast enough?   
BoJ reserves
Options traders think the slope of the hockey stick above is about to increase. There is increased preference for USDJPY calls (the dollar would rally if the BoJ eased again).

We now have the BoC turning dovish, the ECB about to accelerate QE and lower rates, the PBoC cutting rates and reserve requirements, and Riksbank increasing QE and threatening to move rates lower - all announced within a few days. The BoJ probably doesn't want to be left behind.  
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Staying with the commodity theme, crude oil futures spiked nearly 6% on smaller than expected inventory build - as reported by the EIA (US Energy Information Administration).
crude oil
But was it the EIA report? The rally actually started before the report came out. Was the report leaked? 
a leak?
Turning to Food for Thought, we have 5 items this morning:
 
1. Candidates being from "outside the establishment" is more important for Republicans than government experience.  
Republicans
 2. Industries with most self-employed Americans.
US
3. Eurozone households - winners and losers since the great Recession. 
Eurozone losses and gains

— Edited by Clemens Bomsdorf


* Walter Kurtz is an alias

**This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot and select the appropriate command. E-mail addresses are never shared with anyone.

 
 

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