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Can the market really be this complacent heading into a Fed decision?
On September 18, the Fed burned many market watchers with a surprise decision not to taper. Six weeks later many traders plan to sleep through today’s FOMC decision, believing it will be similar to the previous statement. What is the risk of a surprise? In September, the Fed explained the decision not to taper like this:
Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.
The Fed also said it will closely monitor incoming information:
Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
After the meeting, many Fed members said the decision was a ‘close call’ and Bullard said today’s meeting would be a ‘live meeting’. That all changed when the government shutdown for 17 days and flirted with the debt ceiling. The move sapped confidence, led to downgraded growth forecasts and pushed out tapering expectations. In addition, data like today’s ADP report has been soft.
The Fed could leave the statement unchanged, letting market watchers continue to guess when the taper will be based on incoming data. That’s priced in.
[b]
Here are the outliers:[/b]
The Fed gives some sort of hint when it will taper to curb QEfinity talk and balance sheet risks. More yet, they say the taper framework to tapering laid out at June FOMC is still intact, or mostly intact.
The reaction: Put yourself in the shoes of a Fed hawk. Sure there’s been a shutdown but the stock market is at a record high and you’re probably sick of bailout out Washington. Any kind of signal the Fed is eager to taper will kick start a dollar rally, crushing gold and stocks. It’s a low percentage possibility but it’s more likely than the market anticipates.
Best bet on this outcome:
AUD/JPY shorts The Fed acknowledges that the economy is no longer accelerating and acknowledges downside risks to inflation (like the BOC did this week). What’s more, in an effort to boost confidence they hint more stimulus is possible.
The reaction: There has only been one time in the past six years where you lost money by betting on Bernanke being dovish; that was the June FOMC and he ultimately backed down anyway. Bernanke is a dove to the core, he doesn’t care how he’s viewed, he doesn’t worry about the Fed balance sheet and he believes printing more will help the economy.
Best bet on this outcome: USD/JPY shorts, AUD/USD longs or sell USD against everything.
On September 18, the Fed burned many market watchers with a surprise decision not to taper. Six weeks later many traders plan to sleep through today’s FOMC decision, believing it will be similar to the previous statement. What is the risk of a surprise? In September, the Fed explained the decision not to taper like this:
Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.
The Fed also said it will closely monitor incoming information:
Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
After the meeting, many Fed members said the decision was a ‘close call’ and Bullard said today’s meeting would be a ‘live meeting’. That all changed when the government shutdown for 17 days and flirted with the debt ceiling. The move sapped confidence, led to downgraded growth forecasts and pushed out tapering expectations. In addition, data like today’s ADP report has been soft.
The Fed could leave the statement unchanged, letting market watchers continue to guess when the taper will be based on incoming data. That’s priced in.
[b]
Here are the outliers:[/b]
The Fed gives some sort of hint when it will taper to curb QEfinity talk and balance sheet risks. More yet, they say the taper framework to tapering laid out at June FOMC is still intact, or mostly intact.
The reaction: Put yourself in the shoes of a Fed hawk. Sure there’s been a shutdown but the stock market is at a record high and you’re probably sick of bailout out Washington. Any kind of signal the Fed is eager to taper will kick start a dollar rally, crushing gold and stocks. It’s a low percentage possibility but it’s more likely than the market anticipates.
Best bet on this outcome:
AUD/JPY shorts The Fed acknowledges that the economy is no longer accelerating and acknowledges downside risks to inflation (like the BOC did this week). What’s more, in an effort to boost confidence they hint more stimulus is possible.
The reaction: There has only been one time in the past six years where you lost money by betting on Bernanke being dovish; that was the June FOMC and he ultimately backed down anyway. Bernanke is a dove to the core, he doesn’t care how he’s viewed, he doesn’t worry about the Fed balance sheet and he believes printing more will help the economy.
Best bet on this outcome: USD/JPY shorts, AUD/USD longs or sell USD against everything.