*Taper continues Forward guidance changed, unemployment threshold dropped, see sufficient underlying strength in economy. Bond pukage @NicTrades.
*Federal Reserve cuts bond purchases by $10 billion to $55 billion per month.
*FED DROPS 6.5% JOBLESS THRESHOLD FOR RAISING FED FUNDS RATE.
*FOMC SEES `SUFFICIENT UNDERLYING STRENGTH’ IN ECONOMY.
*13 OF 16 FED OFFICIALS SEE FIRST RATE RISE IN 2015, 2 IN 2016.
*MORE FED OFFICIALS SEE AT LEAST 2.25% FED FUNDS END OF 2016.
*FED: 2014 PCE INFLATION OF 1.5%-1.6% VS 1.4%-1.6% IN DECEMBER – only PCE revision.
Yesterday we wrote: The big question now is what comes next, another shoe to drop … or the glass slipper, perfect fit? Well today, we are equally concerned, but this time we are concerned about tomorrow’s FOMC meeting and Fed Chair Janet Yellen’s press conference. It seemed we were the only ones that may have had concerns today, considering the straight-up price action with nominal back and fill.
Snippets: The read on the FOMC and Janet Yellen’s presser: Neutral to dovish flip as some are sensing an eventual end to the accommodative monetary policy along with the first rate hike expected in 2015 by 13 of 16 Fed officials. On the flip side, plenty of liquidity in the markets along with all that cash on the sidelines. All the while, less and less reaction to Ukraine and Russia taketh what it needeth. The other 800lb geopolitical gorilla in the room remains a hot topic under the surface.
The game plan: (08:14) Chance offered: Low probability of a sustained breakout ahead of FOMC so if initial resistance 1866.75-1868.75. Above there I will fade 1872-1875 zone – looking for exhaustion/sell imbalances in those zones. On the downside, 1859-1861 held overnight and would look for initial support there. Below there, a higher probability long setup for is in the 1849-1851 zone. Post FOMC – be cautious in fading a breakout to the upside. I refuse to do so POST-FOMC Looking to buy 1844.75-1846.75 on a pullback if seen.
WEDNESDAY IS ABOUT JANET YELLEN AND THE FED…SINCE THERE IS SO MUCH ALREADY WRITTEN WITH SCENARIOS, WE WON’T BELABOR THE POINT… THE EXPECTATION IS THAT THE FED WILL TAPER ANOTHER 10 BILLION… THE CURRENT THINKING IS THAT THE FED WILL ALTER THEIR 6.5% UNEMPLOYMENT RATE THRESHOLD FOR SOME QUALITATIVE CHANGES… SOME THINK THE SHORT END WILL BACK UP ON THE FED CHANGES… WE EXPECT THE MARKETS TO MAKE A GOOD SIZE MOVE AFTER THE FED… BUT AS WE LOOK AT THE ANNUAL REPORT FROM THE FED AND THEIR EARNINGS FROM LAST YEAR WE GET CONCERNED:
1) ACCORDING TO THE FT, THE FED HAD UNREALIZED LOSSES OF 53 BILLION LAST YEAR…38 BILLION IS ON THEIR MORTGAGE PORTFOLIO…THE REST IN TREASURIES
2) THE FED HAS 660 BILLION IN MORTGAGE BACKED COUPONS WITH AN AVERAGE COUPON OF 3% OR LESS….THIS IS A DISASTER WAITING TO HAPPEN…WHO WILL TAKE THE FED OUT OF 3% MORTGAGES?… FANNIE??? GONE… BANKS? TOO LITTLE RISK/REWARD
3) THE FED REPORTED A PROFIT OF 79 BILLION IN 2013 BECAUSE THEY DID NOT MARK DOWN THEIR (UNREALIZED) LOSSES…NO MARK TO MARKET, GREAT ACCOUNTING STANDARDS. CONSIDER THIS, THE FED INCREASED THEIR PORTFOLIO 25% IN 2013 , FROM 3 TRILLION TO 4 TRILLION AND THEIR INTEREST INCOME ONLY WENT UP FROM 78 BILLION TO 85 BILLION…7 BILLION INCREASE FOR 1 TRILLION OF INCREASED ASSETS…..I THINK WE HAVE MORE OF A PROBLEM THAN THE MARKETS ARE ANTICIPATING
4) THE LAST FED ISSUE IS THE LATEST FINANCIAL STRESS INDEX FROM THE ST LOUIS FED… IT CAME OUT AT -1.038…WHICH MEANS THE MARKETS ARE SEEING THE LEAST AMOUNT OF FINANCIAL STRESS SINCE 2007. THIS NUMBER NORMALLY IS PLUS 1 AND GOT O 6 IN THE WORST OF 2008-2009…CLEARLY BUBBLE TERRITORY…
SO WHAT ELSE BOTHERS US? … THE RECENT DEBASING OF THE CURRENCY AND THE CHINESE YUAN BANDS. THE RECENT PRESS ON CHINA HAS FOCUSED ON DEFAULTS IN CHINESE YUAN DENOMINATED MARKETS, WE THINK THE REAL ISSUE IS THAT THE CHINESE ARE MAKING MOVES WITH THEIR CURRENCY TO MAKE THE YUAN A COMPETITOR TO THE DOLLAR AS A RESERVE CURRENCY…INTERESTING THAT IN THE LAST FEW WEEKS WITH THE SITUATION IN THE UKRAINE, THAT THE DOLLAR HAS NOT MADE UPSIDE MOVES VERSUS THE EURO…WE THINK THERE HAS BEEN A CONCERTED EFFORT TO SELL DOLLARS BY BOTH THE CHINESE AND POSSIBLY THE RUSSIANS… THE DROP OF 100+ BILLION IN FED HOLDINGS FITS INTO THIS RATIONALE. WE THINK THIS IS THE BEGINNING OF A CONCERTED EFFORT. Attribution: Andy Brenner – RBC.
Today started with 260k ESM traded on Globex, ESM trading range was 1867.50 – 1861.00. Yesterday’s regular trading hours (RTH’s), pit session trading range was 1866.50 – 1853.00 before settling at 1863.80, up 13.1 handles. Fedex Third-Quarter EPS $1.23 vs. Estimate for $1.46; Year Forecast Cut Due to Weather Effects.
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Today’s RTH’s, the June pit session, gapped 11 handles higher to 1865.00 – 1864.80; open failed to hold…some overnight longs getting pushed out here – first 15 min… 1865 1862.50 and back up to a new high of 1867.00 before sitting on the opening range in light, make that no, volume. The midday trade was reduced to trading a couple handles either side of 1865 and going into the FOMC decision the 1866 area was trading. Following the headline risk, a new intraday low of 1855.00 printed before finding footing and bouncing back up to 1863 area. A higher low followed before the bottom dropped out, printing 1842.20 during the press conference and holding the first low, 1855 area following the Fed decision.
jmatt (13:24) POST FOMC volume in the back month Euro$ futures spikes following the announcement. EDZ15, EDH16, EDM16 all trade in excess of 150,000 contracts. Virtually doubling the days volume in all three contract months. These expiries match the Fed target dates for rate increases.
The MrTopStep imbalance Meter, MiM, showed a small sell side imbalance before flipping to a large $790M to buy going into the cash close. The June futures traded 1853.30 on the cash close before settling at 1852.20, up 11.6 handles on the day in above average volume.
Posted yesterday: *william_blount (15:00) welp — yesterday was about the 1852 SPOT, today has been about the 1865.5 SPOT — Mrs Yellen know which spot she wants to touch – 1873.5 or 1844.5. <DING>
But I cannot forget this either: High Cash = Higher Stocks Past 9 months FMS cash levels ≥4.4%…SPX up from 1650 to 1850. March cash still high thanks to geopolitics, China & valuation fears…add risk contrarians. Investors positioned for a post-QE world … Investors are long “recovery” plays in DM & long “reform” plays in EM. Few expect positive surprises from EM/China or negative surprises in US/Europe in coming months. Macro Bulls but want more Capex …Macro bullishness actually rose in March. But investors favor markets where growth up (e.g. UK/Eurozone) not down e.g. EM (China expectations fell to 8-month lows). Investor desire for companies to spend on capex, rather than buybacks/higher dividends/reduce debt, remains near record levels. Risk-off, Protection-on, Cash-high Contrarians note high 4.8% cash levels, equity allocations at 15-month lows, protection at 18-month highs, hedge fund net exposure at 21-month lows. March risk aversion due to geopolitics & China but note investors saying stocks “overvalued” now highest since July 2000! – Merrill Lynch