Over the last 4-5 years the market has shown appreciation for F_E_D free-beeis with the $USD sinking, gold and Treasuries rising, not yesterday, the exact opposite happened. From my notes which are substantial and time marks on them to review the market action, the first major misstep was to remove thresholds like the 6.4% unemployment rate which would have signaled a F_E_D funds rate hike, but we are too close to that level as the labor participation rate drops with the end of extended benefits as Congress didn't renew them, this means no matter what happens in the labor market, the UE rate will fall because the labor pool is smaller as people fall off extended claims and are no longer counted as part of the labor force.
The F_E_D instead went for "Qualitative Guidance" which is the same as saying, "We'll see how it goes and adjust from there" which is a perfectly reasonable stance, but don't tell the market that!
The market HATES uncertainty and qualitative guidance, especially the three measures she laid out are just about as vague as you could possibly make it. The market can't discount without way points, instead it has to wait on F_E_D guidance at each meeting which means intermitting volatility is going to shoot up sky high. WHAT WAS THE F_E_D THINKING?
While removing economic thresholds and replacing them with arbitrary qualitative guidance, the F_E_D at least tried to make up for it by promising "Highly accommodative policy " would remain in place long after the period in which normal policy should be in place, this was the dovish part of the statement, but everyone knows what the F_E_D says and projects today will not look at all the same two years from now.
RIGHT AROUND 3 P.M. THE MARKET DROPPED DEAD BECAUSE OF THE "CONSIDERABLE PERIOD" LANGUAGE in which Yellen dithered and stumbled like Obama on what he's going to do to Putin if he doesn't "Stop". This was disastrous as she dithered and said it was probably around 6 months, this meant that she was suggesting a mid-2015 rate hike which is just about on track with the F_E_D's long term guidance that there would be a rate hike somewhere around 6 months after the end of QE (as it wraps up), this is exactly what sent the market reeling last summer when the QE discussion first popped up and we asked, "What is the F_E_D so afraid of" as they quickly dropped the discussion or any hint of it from subsequent meetings, it was the bond market flipping out and the 10-year yield passing 3% on that news, not the taper, but the 6 month rate hike when they were saying during the initial meeting that QE should be phased out by the end of 2013 or in 2014.
Now we have a rate hike and a seemingly considerable set of hikes in sequence, ENTER THE DOTS...
What's the big deal about the DOTS? First of all what are the dots? They are the median forecast of all voting and non-voting committee members of where the F_E_D Funds rate will be (in this case at the end of 2016).
THE PROBLEM WAS THE MEDIAN FORECAST WAS 1.75% AT THE DECEMBER MEETING AND JUMPED TO 2.25% THIS MEETING.
Making it worse, Yellen again dithered on the dots and the best she came up with was that she "Didn't know why people write what they write". This may not sound like much, but that's a difference of a 50 basis point hike over 1 meeting, this was a disaster at the presser.
At the same time Yellen said they see GDP forecasts for 2014 dropping .1% to 3.1% and by .5% for 2016 at 2.75%, yet at the same time the rate forecasts were up by what she said was a minimal amount, 50 basis points is not minimal, wait until you see a 50 basis point hike and what it does to the market, AGAIN YELLEN HAD NO ANSWERS, SERIOUSLY WOMAN, LIE TO THE MARKET, IT WOULD HAVE BEEN BETTER.
At first I thought Yellen was being purposefully vague, such as Alan Greenspan use to be with his "Greenspeak", but I think now looking back, the market doesn't feel she was purposefully vague, they feel like she was a disaster.
In conclusion, the F_O_M_C removed any type of certainty with "Qualitative Guidance", the median rate F_E_D funds forecasted jumped 50 basis points between meeting with no explanation while GDP was lowered and nothing changed on the first rate hike being 6 months after the end of QE, any one of those could have sent the market reeling, the removal of threshold guidance was the first to slam the market, then those damn dots (I'm sure that's what Yellen is saying to herself this morning, "Those damn dots"....
Overnight all correlation algos were turned off as the $USD trounced every pair, the USD/JPY should have sent the market flying higher, but the big algo firms shut them down and are probably re-callibrating them or spent all night doing so as all correlations are dead.
The USD/JPY is still elevated, EUR/JPY is down because of the EUR/USD getting crushed.
The Nikkei overnight saw a 400+ plunge to lows of 14170.
In other news in China as we talked about yesterday the Yuan is down .5%, all of the trading desks running highly leveraged bets the CNY would keep appreciating are likely going to be carried out feet first, don't be surprised to hear it over the weekend as China has ANOTHER DEFAULT, Highsee Group, the largest private steel makers in Shanxi province has defaulted on CNY3 billion of debt, unable to repay its bonds on time.
THE TIDAL WAVE OF DEFAULTS IS JUST OVER THE HORIZON, commodities for cash is seeing commodities slammed, add steel to the list, this is why I want to get out front with aluminum as it will be coming. In the end, WHAT HAPPENED IN CHINA OVERNIGHT IS A MUCH BIGGER STORY OVER THE LONG RUN THAN THE F_E_D.
While Russia took a backseat overnight, they weren't quiet, the Deputy Prime Minister hinted that Russia may change its stance on Iran's nuclear program in response to sanctions and even worse...
RUSSIA IS NOW SIGNALING CONCERN FOR ETHNIC RUSSIANS IN ESTONIA, GUESS WHO'S NEXT AFTER THEY'VE WRAPPED UP THE UKRAINE?
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