Thursday, September 17, 2015

Keystone's Morning Wake-Up 9/17/15; Historic Federal Reserve Rate Decision and Fed Chair Yellen Press Conference; Fed ZIRP Policy Continues with No Hike; Fed Becomes the "Central Banker to the World"

The circus is back in town. Strike up the calliope. Here come the parade of clowns preparing for an epic and historic market and economics day. The two-day FOMC draws to a close with the Fed announcing the rate decision at 2 PM EST (7 PM London; 8 PM Frankfurt and Paris; 3 AM Tokyo Friday morning). Fed Chair Yellen takes the stage at 2:30 PM EST typically reading a prepared statement for 10  minutes then Q&A begins that will last about an hour until 3:30 PM EST concluding the FOMC meeting and epic rate decision. Thus, the last two hours of trading today may be one for the record books.

The Fed funds futures indicate a 30% chance of a rate hike today. 60% of market participants expect a hike before the end of this year while 40% do not expect the first rate hike until 2016. Taking the midrange at 0.13% of the current ZIRP policy at 0%-0.25% and adding 25 basis points yields a rate of 0.38%. Looking at the Fed funds futures data, 100% of market participants expect the rate to be at 0.38% in February 2016. Thus, every market participant expects the Fed to raise rates anytime between now and February 2016 (within the next five months).

Markets are confused since the 2-year yield leaps higher above 0.80% to 0.82% yesterday a four-year high. The jump in yields hints that a rate hike is coming today but less than one-third of market participants expect the cut. There are going to be many traders on the wrong side of the trade depending on which way Yellen goes which may drastically impact stock, bond and currency markets.

The Federal Reserve says it is data-dependent and the data is about the same as it has been reflecting a slow, sluggish, lackluster economy. Wages show a tiny smidge of upside but Yellen likely wants to see wage growth at +4% annually and it only runs at about +2.4% now. In addition, the idea behind the Fed's obscene Keynesian money-printing for 6-1/2 years is to create inflation and inflation cannot exist without wage inflation. Thus, the thinking is that Yellen would hold off on a hike.

Fed Chair Yellen is the Queen of the Doves. The dovish triumphant of former Fed Chairman Bernanke, Yellen and member Evans are the main drivers of the Keynesian spending policy the last few years. All three flap white dove wings so Yellen is predisposed to hold off on a rate hike.

The action in stocks and bonds the last couple days is reflective of Yellen offering a very small rate hike but immediately flap dovish wings saying the next hike will not occur until well into next year. This outcome would cause yields to start floating up slightly while stocks rally which has been the trend over the last two days.

Analysts have said the Fed would either move today or wait until the next quarterly meeting in December, however, Yellen may not hike today but indicate that a hike may occur at anytime including October or November shooting down the theory that a rate hike would not occur  until December if it does not occur today (following the quarterly meeting schedule). Yellen may move by less than 25 basis points today but if you are announcing such a paltry hike why do it at all? The IMF and World Bank are on record telling Yellen not to hike.

Yellen has committed to a rate hike by the end of the year which many market participants ignore. It appears she is compelled to announce a hike even if it has to be the last day of the year on 12/31/15. The Fed is likely very worried about its credibility going forward. The obscene Keynesian policies by central bankers only work if traders and investors believe in the central bank. If credibility is lost or confidence shaken in the Fed, trouble will result. Yellen is likely highly sensitive to this dilemma.

The Fed releases the member Forecasts today and the "dot plot" that shows the projections for rate rises over the coming years.

Trading begins for Thursday after the 9:30 AM EST opening bell with the S&P 500 and Dow marginally lower and the Nasdaq marginally higher. Euro 1.1317. Dollar/yen 120.87. Pound 1.554. USD 95.15.

WTIC oil 47.35. Brent oil 49.60. Natural gas 2.667. Gold 1118. Silver 14.92. Copper 2.458.

US Treasury yields are; 2-year 0.807%, 5-year 1.607%, 10-year 2.285%, 30-year 3.072%. The 2-10 spread is 148 bips. German bund 0.784%.

At 12:55 PM EST, the SPX sneaks above 2000 not seen since 19 trading days ago in mid August. Stocks are at the highs for the day with the Dow spiking to 16771. The bulls are sniffing out a dovish Federal Reserve (no  rate hike) so stocks keep lifting higher. The Fed decision is only one hour away.

At 1:31 PM EST, stocks are catching a bid higher. The SPX is up 7 points, +0.4%, to 2002. The Dow gains 54 points, +0.3%, to 16794. The Nasdaq is up 26 points, +0.5%, to 4916 exactly at the 200-day MA resistance level at 4918; price will decide to either bounce or die from here. The RUT is up 12 points, +1.1%, to 1188, breaking out higher. The small caps are clearly leading the way higher. VIX 21.37. Euro 1.1327. Dollar/yen 120.84. Pound 1.5537. USD 95.23. WTIC oil 46.95. Brent oil 48.88. Natty 2.649. Gold 1117. Silver 14.99. Copper 2.455. Treasury yields are; 1-year 0.456%, 2-year 0.787%, 5-year 1.58%, 10-year 2.27%, 30-year 3.06%.  German bund 0.778%.

The Fed decision is only 20 minutes away ........tick..tock ... tick ... tock ..

Minutes before the epic Federal Reserve announcement, stocks are near the highs. The SPX is at 2000, INDU 16778, COMPQ 4909 and RUT 1185. VIX 21.91. Euro 1.1328. Dollar/yen 120.85. Pound 1.5534. USD 95.14. WTIC oil 46.83. Brent oil 48.77. Gold 1118. Silver 15.01. Copper 2.457.

US Treasury yields are; 1-year 0.4535%, 2-year 0.7786%, 5-year 1.5692%, 10-year 2.2635%, 30-year 3.0608%. German bund 0.775%.

The Fed has not raised rates in a decade. 30% of market participants (young adults in the financial industry) have never seen a rate hike cycle.

Epic stock market and economic history is about to be written. The tension mounts. Here we go.

At 2 PM EST (7 PM London; 8 PM Frankfurt and Paris; 2 AM Shanghai and Hong Kong Friday morning; 3 AM Tokyo Friday morning), the FOMC leaves the key benchmark rate at the 0.00%-0.25% ZIRP level unchanged; there is no rate hike. The Fed expresses concern over “recent global and economic developments.”

The Federal Reserve is monitoring developments abroad. The Fed is pessimistic on growth and inflation targets. Housing and household spending is moderately improving. Four Fed members do not see the first rate hike until beyond the end of this year. Lacker dissented in the voting and wanted a one-quarter rate hike.

The Fed does not hike rates and does not provide a hawkish statement. The stock market reacts wildly popping then dropping. Worries may increase that the economy is much weaker than everyone thinks and is susceptible to softness if the global economy falters. The press conference begins in one-half hour at 2:30 PM EST.

At 2:03 PM EST, the SPX is up 7 points, Dow up 20 points, Nasdaq up 12 points and RUT up 8 points. Euro 1.1385. Dollar/yen 120.42. Pound 1.5585. USD 94.71. 2-year yield 0.74%. 10-year yield 2.24%.

At 2:04 PM, the S&P 500, Dow and Nasdaq are negative and the Russell 2000 small caps are positive. SPX 1991. INDU 16690. COMPQ 4885. RUT 1180.

At 2:08 PM, SPX 1995. INDU 16737. COMPQ 4888. RUT 1179. Small caps are dropping the most after the announcement thus far. VIX 20.13. Banks are weak. XLF -0.5%. BAC -1%. GE -1.2%.

At 2:11 PM, markets are relatively calm. US dollar index is 94.77 taking a hit. Euro 1.1383. Dollar/yen 120.44. Pound 1.5583. Treasury yields are moving lower; 2-year 0.738%, 5-year 1.528%, 10-year 2.237%, 30-year 3.041%. German bund 0.775%. TLT gains +0.7%.

At 2:13 PM, stocks print a ‘V’ bottom and recovery and are unchanged from before the announcement. The SPX was 2002 into the news and spiked to 2008 immediately, then collapsed to 1988, then bounced to 2005 right now. All in all markets are about where they were before the Fed announcement. Market participants will storm the ticket booth wanting their money back since the epic and historic Fed announcement is a dud. 

At 2:30 PM, Fed Chair Yellen takes the stage behind a mahogany desk and reads a prepared statement. She expects inflation to remain low for several more months. Yellen wants to see further improvement in the labor market before raising rates. Her tone is dovish and the commentary could have been the same from one year ago. Yellen says an accommodative policy will continue even after the first rate hike. SPX 2004. VIX 19.51. It is very surprising that equities do not move strongly higher considering the dovish language.

Financials remain weak. XLF -0.4%. KRE -1.5%. Regional banks are smacked. KEY -2%. STI -1.7%. PNC -1.4%. ZION -1.7%. Utilities leap higher. UTIL and XLU are each up +2%. USD 94.60.

Yellen says the decision to hike rates will not depend on any one economic factor but instead a broad-based range of parameters. Yellen’s comments are sounding like a lot of song and dance rhetoric. Yellen says the dot plots show a consensus by members for lower yields going forward. Low inflation and global uncertainty are blamed for the delay in a rate hike.

At 2:43 PM, the 2-year note yield drops to 0.698%. The 2-year yield was at 0.82% a couple days ago. 5-year 1.49%. 10-year 2.205%. Stocks begin jumping higher as Yellen speaks.

The Q&A session begins at 2:45 PM. The SPX is up 17 points, +0.9%, to 2012. The Dow is up 126 points, +0.8%, to 16866. The Nasdaq leaps 58 points, +1.2%, to 4948. The RUT catapults 17 points, +1.4%, to 1192. Traders are clearly viewing Yellen’s comments as dovish sending stocks strongly higher.

At 2:48 PM, the SPX is up 24 points to 2019. The Dow is above 16.9K. Equities are exploding higher. All Hail Yellen Queen of the Doves! Kneel and worship at her feet! Yellen provides a thumbs up to the bulls and the wealthy light cigars watching their stock portfolios jump strongly higher. The Fed rewards the wealthy elite class with easy money policies and huge stock gains.

Yellen says a news conference will be conducted after the first rate hike occurs. Yellen continues to call deflationary effects “transitory” a phrase originated by former Fed Chairman Bernanke. Comically, the Fed has said deflation is transitory for the last three years. Transitory means temporary but not in the Fed’s dictionary.

At 2:54 PM, the Q&A continues. Yellen stresses the importance of the labor market since it boosts confidence in the economy. Stocks remain elevated. SPX 2016. INDU 16891. COMPQ 4953. RUT 1193. VIX 18.07. The big drop in volatility creates bull market fuel. Euro 1.1396. ECB President Draghi will not like the higher euro since it hurts European manufacturers and exporters. Dollar/yen 120.23. Pound 1.5617. USD 94.55. The US dollar index drops from 95.4 to 94.5 after the Fed announcement.

Gold pops 12 bucks to 1131. Silver 15.20. Copper 2.4825. WTIC oil 47.24. Brent 49.36. Natty 2.649. 2-year yield 0.71%. 10-year yield 2.22%.

Yellen repeats an earlier statement that the Federal Reserve members expect a rate hike by year end providing a small smidge of hawkishness. The VIX recovers to 19.37 so that causes stocks to retreat off the highs. SPX 2011. INDU 16841. COMPQ 4937. RUT 1189. USD 94.61. Gold 1131.

At 3:13 PM, Yellen comments on the potential for negative rates. The dot plots show Fed member Kocherlakota is considering negative rates. He is on his way out of the Fed so he is simply making a statement that is testimony to his pervasive uber dovishness. She pooh-pooh’s the idea of negative rates but hedges her bets. Germany’s short duration rates have been negative for months. The central bankers have twisted global markets into knots and are simply trying to keep the game going.

Stocks are trending lower beginning exactly when Yellen’s Q&A began at 2:45 PM. At 3:16 PM, the SPX is at 1998 dropping like a stone from 2021 to 1998 in the last 30 minutes. Yellen says an October rate hike remains on the table but this sounds hollow considering she is Queen of the Doves and only knows how to pump markets with easy money.

Humorously, the SPX is at 2002 exactly where it was about 80 minutes ago when the Fed rate decision hit the wires. VIX 20.56 well off the 18 bottom one-half hour ago. 10-year yield 2.208%. The euro is above 1.14 at 1.1404; the clock just fell off the wall in Mario Draghi’s office.

Yellen says the rate hike path is more important than the timing of the hike. Yellen says the housing market is not the main driver of the economy. This is an interesting statement that perhaps hints that she sees weakness ahead for the housing sector and when that occurs she can point back to this statement and say the housing sector is not as important to the broad economy. Of course this is folly. Any first year econ student knows that the housing and automobile sectors are the two main drivers of the economy. Yellen is providing a lot of tap dancing and smoke and mirrors. Yellen rightfully calls out Congress to take action with fiscal policies to help the economy.

At 3:25 PM, the SPX drops to 1987; the luster is off the rose. The wealthy are screaming at television sets and computer screens telling Yellen to speak more dovishly. The SPX and Dow are negative and the Nasdaq and Russell 2000 are positive.

The Fed press conference ends at 3:28 PM. Yellen quickly gathers her papers and exits stage left looking relieved that the event is over. The most important concept from the Fed meeting is that the worries over the global economy especially China are impacting the rate hike decision. The Federal Reserve expands its mandate while no one was looking. Said satirically, Yellen is now claiming by her words that the US Federal Reserve bank is the ‘world’s central bank’. It is a very sick game.

At 3:35 PM, the SPX is up 3 points, +0.1%, to 1998. The Dow is down 8 points, -0.1%, to 16732. The Nasdaq is up 15 points, +0.3%, to 4904. The RUT is up 6 points, +0.5%, to 1181. VIX 21.15. Euro 1.1431. Dollar/yen 119.95. USD 94.57. 2-year yield 0.69%. Gold 1131. WTIC oil 47.00 Brent oil 49.19.

Stocks give up the ghost into the closing bell ending with mixed markets. The SPX is down 5 points, -0.3%, to 1990 the top of the strong 1985-1990 price support/resistance level. The Dow is down 65 points, -0.4%, to 16675. HOD 16933.

The Nasdaq gains 5 points, +0.1%, to 4894 and continues to battle at the 200-day MA resistance at 4918 and 50-day MA resistance at 4959. The HOD is 4961 so price was rejected from the 50-day MA ceiling. The Russell 2000 is up 5 points, +0.5%, to 1181. VIX 21.88.

Euro 1.1423. ECB President Draghi calls Fed Chair Yellen on the telephone and says, “Janet, come on, you are killing me.” The higher euro will stifle European exports that are already lackluster sans Germany. Dollar/yen 119.99. Pound 1.558. USD 94.48. WTIC oil 46.81. Brent oil 49.12. Natty 2.653. Gold 1132. Silver 15.125. Copper 2.463. US Treasury yields are; 2-year 0.686%, 5-year 1.48%, 10-year 2.197%, 30-year 3.012%. Japan 10-year yield 0.371%. German bund 0.775%.

The main takeaway from the Federal Reserve is that no rate hike is announced and the FOMC is now factoring in China and other foreign markets into their analysis, a new mandate if you will. The Fed’s two mandates are maintaining price stability (via rates) and full employment in the United States. Apparently, a new self-imposed third mandate now exists for the Fed to become the “central banker to the world.” This should create concern by all Americans. The Fed and all global central bankers are out of control.

Analysts, traders and investors are surprised not so much by the Fed not hiking but rather that Yellen is presenting a ‘dovish hold’ rather than a ‘hawkish hold’ perspective. The assumption was that if the Fed did not provide the first rate hike it would at least talk hawkishly saying that the hike is coming soon. This is not the case. The economy is lackluster and weak by Yellen’s own account.

Market participants ponder ‘if not now, then when will the Fed hike rates’? If a recession occurs, the US and entire world is in deep trouble since there is no ammunition available to stop an economic slide (the key Fed rate is already at zero and cannot be lowered more unless rates go negative an outcome that is summarily dismissed by Yellen).

It is shameful that the FOMC started this Keynesian path with QE 1 in March 2009 and 6-1/2 years later has only succeeded in making the wealthy filthy rich since they own large stock portfolios. The central bankers should be ashamed of themselves but instead perform the bidding of the large investment banks since Fed members will be rewarded with lucrative speaking engagements once they leave office.

(as always, the daily price action in markets is explained in detail by Keystone the Scribe)

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