Big day in FED WORLD. Jay Powell gives his first ever press conference and (probably) raises the fed effective rate. This is good, but it’s important to remember that the market continues to be fueled by easy money. The rate itself isn’t so important to watch, rather we should focus on the language of the statement. Market participants are likely hoping for a relatively dovish tone from the new chief, indicating that refinancing rates will continue to be subdued and debt will continue to be cheap.
My current position is relatively modest heading into the meeting. I’m long SPX MAR21 2670/2645 put spread. I entered into this position during the Cambridge Analytica / Facebook selloff. Down 160 bp from the open is certainly possible, especially if there are particularly hawkish phrases used in the press conference. The history of Fed voting suggests that he’s not likely to over-commit to anything … because the Fed tries to never over-commit to anything.
- The Fed probably won’t talk about trade wars (CNBC) – This is smart … I try not to mention too much political stuff on here, but it seems to me like President Trump throws a lot of stuff on the wall just to see what sticks. Commenting on hypothetical trade wars is a fool’s errand for the Fed that can only damage market sentiment.
- Powell might strike a hawkish tone (Bloomberg) – I expect a certain level of hawkishness because the data have been good lately! The question is, how much of the market reaction has already been priced in? It strikes me that a decent amount of positioning probably occurred during the Facebook situation.
- Also, the ECB might start raising rates (Reuters) – This is an interesting question … do US Central Bankers use the stock market as a heuristic for thinking about economic health more than their European counterparts? Is Europe more concerned with the strength of the Euro, say? An interesting potential wrinkle.
There isn’t much going on today. All the breathless excitement from the Mueller investigation came yesterday, the president of Catalonia escaped to Brussels, and Trump is dragging out the Fed Chair announcement. I’m going to do a quick write up with the Taylor Rule and the assumptions made by the San Francisco Federal Reserve (I’ll post it later), but see if you can win!
- See if you can set monetary policy better than the Fed. I got 4.49% unemployment and 2.36% inflation. SF Federal Reserve
- Tyler Cowen, my favorite economist, on Trump and the Fed decision. Bloomberg
- Despite additional PBOC measures, Chinese treasuries down. Yields highest since 2014. Nasdaq
- As much as we love the Powell/Yellen/Taylor race, the succession at the PBOC may be infinitely more important. Nikkei Asian Review
- Long form interview with ECB Executive Board Member Benoît Cœuré. ECB
Tuesday, 2017.10.31 (all times Central)
I’ve been talking a lot about Taylor and his eponymous rule lately. I’ve made a point of saying all along that I think Yellen gets renominated for Fed Chair, but those arguments all basically apply to Powell also. I’ve been looking at FOMC voting patterns to see if Powell is even a hair more hawkish or dovish than Yellen, and I found something interesting. No Fed Governor has dissented since the June 2012 meeting (Powell’s first).
Continue reading “The Board of Governors voted unanimously”
Political Risk on the agenda today: Paul Manafort being charged with stuff, Bundesbank is annoyed about QE, and Catalonian independence marches on.
- Former Trump campaign manager, Paul Manafort, told to turn himself in. This is a bit of style drift, but it’s important. CNN
- The most interesting thing about BOJ meetings is how many different ways they can talk about not doing anything. ForexLive
- I can’t believe they don’t throw a press conference at the end of every Fed meeting … although I also run a website about the FOMC. MarketWatch
- Cracks in Europe. Catalan officials only face 30 years in jail for Rebellion … not bad. BBC
- Cracks in Europe. Germany says they hate open-ended quantitative easing. Seattle Times
What should interest rates be now?
stir = π+ r* + 0.5(π – 2%) + 0.5(y – y*)
Continue reading “The Taylor Rule, part 2”
Here’s another instance of institutions pushing out the risk curve.
Banks once owned the majority of credit assets, leaving institutional investors with limited access to these markets. Although the financial crisis accelerated the banks’ exit from many of these investments, the process had begun earlier in the decade.
Continue reading “Private Debt”
Good piece in the FT about Jack Bogle (Vanguard) saying that ETFs and index tracking mutual funds could become 90% of the equity market. At some point, you must reach “peak passive”, right?
Passive funds, and their long term returns, work because there are active managers pricing stocks.
Continue reading “Passive investing”
Big day for Catalonia. I don’t know how we got to this place in Spain. It seems like the Catalans have been threatening to leave for as long as I can remember. Spanish bonds are down (obviously) and yet the ECB is continuing to tighten. Political risk is a real thing, guys.
- Catalonia parliament votes to become independent. CNBC
- Trump gets to fill more FOMC seats than any president since Woodrow Wilson. Daily Reckoning
- PBOC testing demand for more easy money. Bloomberg
- Mnuchin talking about the tax plan. FT
- The Euro and European bonds are getting smushed. Reuters
I keep referencing an old blog where I broke out the pieces of the Taylor Rule … poorly. This will be the new one that I point to, and I think that this is pretty interesting so far. The media is kind of fetishizing the Taylor Rule because it makes the race more interesting: “Will it be Super Dove Janet Yellen who plays fast and loose with the rules or Super Hawk John Taylor whose decisions are super predictable because they’re all based on a perfect model?”
Continue reading “The Taylor Rule, part 1”