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