Some of what caused the F_E_D policy statement to come off hawkishly included the rephrasing of "Solid job gains" to "Strong Job gains"; the market's unhealthy obsession with the, "Considerable time" wording was dropped completely, I believe I even posted today or yesterday that if that were removed, the market would not take it well. Additionally the economy was upgraded as they replaced "Moderate pace" of economic activity to "Solid pace" . Additionally the new phrase, "Inflation is anticipated to DECLINE FURTHER in the near term" was added to the policy statement rather than the "transitory" language that essentially brushed off deflation in the near term.
Additionally the F_E_D repeated it Can be patient in starting to raise rates.
The market's initial response was...
From there it didn't take long for the market to realize hat this was a hawkish F_E_D statement that was unanimous, no dissents so how or why the typical hawk dissenters kept quite is an interesting subject to ponder. Perhaps they were told or given what would amount to a deal on the timing of rate hikes. The language would certainly seem to be meant to be taken as upping the ante on rate hikes as the market has been consistently pricing them out further in to the future. In fact the WSJ's Jon Hilsenrath, the unofficial mouthpiece of the F_E_D suggested a June hike today.
While I was listening to the statement on CNBC, which I NEVER watch unless it's a F_E_D announcement, I heard talk of commentators saying they didn't see rate hikes at all this year (2015).
The lows in 10-year yield is typically taken as investors' opinion on inflation and the low yields would normally indicate a lack of expected inflation pressures much like the purchasing of gold indicates expectations of increased inflation pressure. The F_E_D has said they'd need to feel comfortable about inflation moving toward the 2% target rate before they'd hike rates, BUT they would hike rates before inflation hit the target level so long as they feel reasonably assured they are headed that direction.
In addition, the market has discounted inflation expectations to what is now the lowest level since the post-Lehman plunge.
And the upgrade by the F_O_M_C of economic activity to "Solid Pace" from "Moderate Pace" seems disingenuous at best.
As posted last night in the Daily Wrap, the US Macro Economics have seen the worst start of the year in over a decade according to the Bloomberg Macroeconomic Surprise Index...
So while the F_E_D admitted that inflation headwinds will be subdued above and beyond the last policy statement (near term) with the updated phrase, "Inflation is anticipated to DECLINE FURTHER in the near term" as oil is definitely has proven itself not to be a blessing at lower prices and ended that argument definitively, one must wonder why the F_E_D decided to upgrade economic activity from, "MODERATE PACE" to "SOLID PACE" when the macro-data that has been coming in has been essentially for lack of a better word, HORRIBLE and if you haven't been following every release (I haven't), the data above from Bloomberg is telling us that "This is the worst start for the year in over a decade as far as economic data goes".
Standing back, you might smell something a little out of place, a sour smell when looking at all of this.
Macro economic data hardly deserved an upgrade from the F_O_M_C as it's starting the year at the worst pace in over a decade. While I can't take issue with employment right now, we have seen more than a few mass lay-offs, especially in the in the Energy sector due to OPEC and the Saudi's with their foot on the neck of the US shale industry and just Monday the Dallas F_E_D collapsed to a 20-month low with every sub-index declining EXCEPT INVENTORIES and 11% of respondents reporting lay-offs as wage pressures eased.
With numerous companies warning in their earnings about the effect (detrimental) of the strong dollar on earnings including just recently MCD, UTX, JNJ and MSFT, this can hardly get better with ECB and BOJ QE.
So in a nutshell, the strong dollar likely making a bad set of earnings for US multinationals even worse (potentially causing more lay-offs) and no end in sight to that problem (strong $USD), the inflation expectations at lows not seen since post-Lehman lows when the F_E_D has made clear they would hike before they reach their 2% target inflation, but had to feel secure that inflation was headed that way, which apparently the market couldn't disagree more, then the US economic activity which the F_E_D (in using the arbitrary "Quantitative Analysis"that I warned about around 2 years ago when Bernanke first mentioned it as being "arbitrary" and wide open to manipulation and interpretation) and the F_O_M_C clearly choosing to see what they want as they describe economic activity as moving at a "Solid Pace" (an upgrade from the last policy statement) as opposed to a "Moderate pace".
You look at all of this and you can see why different components of the market (whether 10 year bond yields or traders or F_E_D funds) are moving expectations for the first rate hike our further and further.
However at the same time, the F_E_D just unleashed a very hawkish policy statement as if to get the market ready for an impending rate hike as they have upgraded a lot of their language. It doesn't really make sense on the whole.
Remember though, the first rate hike was expected around 2013, then it got moved back and the 6 month guidance was in effect (the first rate hike 6 months after the end of QE) shelved which was replaced from quantitative guidance to the more arbitrary "Qualitative Guidance" which you can see is arbitrary as the F_E_D just described the economy in upgraded terms when in fact it's seeing some of the worst negative data surprises in over a decade. The point being was at the last F_O_M_C, Yellen herself said that she didn't envision the first rate hike for a couple of meetings which she defined as 2 with numerous caveats that would allow hikes before or later. If "A couple" or "Two" is synonymous with "patience", that would put us at the March 17/18th meeting, which is inline with Bullard's guidance at two different occasions separated by 9 months. The Bullard statements which were very odd considering how much he has said, 9 months after a little remembered Bloomberg radio interview, he repeats the same rate expectations of 4+% by 2016 when he rotates in as a F_O_M_C voting member and rate hikes starting the 1st quarter of this year. That's not to say other F_E_D speakers haven't contradicted that, it just seems strange that the F_E_D is saying they are data dependent, but in Bullard's view of policy, essentially nothing has changed in 9 months and his forecast from a little known radio interview is exactly the same as his forecast last week for the F_E_D funds rate in 2016 and when the first hike would occur, forecast almost a year before and reiterated despite numerous variations in the interim period, just last week.
I'D SAY, AS I HAVE... that the F_E_D is already on a course that was laid out a while ago, thus Bullard's nearly identical guidance for the same period with 9 months of data dependency in between having zero effect to forward guidance with 9 months in between and numerous flip-flops as early as 1 month and before any data could be released to support said flip flop.
It's my opinion that as the BIS warned, the F_E_D is stretched so thin that they likely don't have the ability to respond to even a garden variety economic downturn as they sit at ZIRP. Thus it has been my suspicion for some time that this is one of the reasons, to give themselves some elbow room as they have painted themselves in to a corner. However while I don't know what it is, I think there's something more to it and something probably more important, something the F_E_D is worried about that is causing their hawkish language which diverges from almost all known facts.
In any case, the bond market didn't see an imminent interest rate hike earlier today before the F_O_M_C as the Treasury auctioned off $2.6 billion in 2 year notes at a very strong 3.73 bid to cover (meaning $3.73 bid for every $1 of Treasuries available for auction. In addition, the high yield came in at .54%, below the previous of .703% just a month earlier and at .54% , below the .544% when issued, in other words a VERY strong 2 year auction meaning participants didn't see a rate hike as being imminent. I showed these charts earlier today before the F_O_M_C, in fact I showed the specific strength in the 3C charts of 2 year Treasury futures today before the F_O_M_C!
Also as I posted in yesterday's and today's Leading Indicators, I showed both the longer term and the near term 5, 10 and 30 year yields which were all leading the market lower and this BEFORE the F_O_M_C, in fact at 1:26 p.m.
In addition, I included what I thought was some of the most telling data of the day, numerous 3C charts showing HYG distribution, the 1 asset that is a real giveaway as to what the market has planned near term; you may recall the charts, all in very deteriorated condition. We'll come back to this in a moment, first the day's action.
First the market moved exactly as expected based on yesterday's internals, I posted on it early today, Why Internals and Volume Matter which likely would have seen the market close green had it not been for the fundamental data / Wild card of the F_E_D.
However on the day, the major averages looked like this...
This put the Dow at a 400 point loss from overnight highs with both the Dow and S&P breaking below their 100-day moving average. The Russell 2k was the worst performer on the day, also as shown the only of the major averages that moved enough this week to see distribution which it did in size as posted earlier in today's post, Futures... BEFORE the F_O_M_C. The R2K was down -1.64%, the Dow -20 Transports at -1.46%, the SPX at -1.35%, the Dow 30 at -1.13% and the NDX at -.60%.
We are now red in all of the averages on a Year to date basis...
Additionally, since QE3 ended...almost all averages are in the red now.
On the day, Treasury Yields were blasted lower after the F_O_M_C.
I'll show you how they closed, but the 30 year set a new record low yield today as a record number of Spec. Treasury Shorts on the long end were forced to unwind their positions. This may indeed be what I was seeing in TLT in the intermediate charts that I said have been bothering me, it may have been the record number of spec shorts moving in, we'll take a closer look, but I suspect we'll need a couple of days of data to sort out the new dynamic after today's slaughter.
USO was taken out on the F_O_M_C, but I don't think it is necessarily out of the game. Volume was significantly higher, which may be the short term capitulation we needed with a positive signal still in place for a potential head fake move.
The $USD did head higher after the F_O_M_C as forecast based on the charts alone, but given a hawkish statement, the move would not be surprising in retrospect, although we were forecasting the move before the F_O_M_C was out based on the Yen and Euro futures.
The idea was that a falling Yen / Euro would send the $USD higher and the Yen obviously lower, sending the USD/JPY higher, which typically would pull the Index futures higher. While the Euro did move lower and the $USD higher, the Yen did not cooperate and in fact the reason for the $USD's move higher was the hawkish F_O_M_C.
$USDX after the F_O_M_C.
Despite any of that, the strongest signals were still coming from the negative divegrence in HYG, the positive divergence in short term VIX futures, the leading negative Yields and the leading negative Index futures, that really trumped the USD/JPY's
One of the interesting spots has been MCP, which was just covered as setting up a head fake move with positive charts, MCP Update. Since the lows of January 23rd, the day after this post (see linked) was up, MCP has now moved over +46% in 3 days. It still has a ways to go and I'll likely update it again tomorrow.
As for the averages, they all ended the day in line and to the down side...
As for futures,
As for other Leading Indicators, I'd urge you to check out the posts from today and last night's Daily Wrap for some context, but I believe there are still some bumps in the road, not so much because there's gas in the tank from the original base, but because other than the IWM, the other averages didn't get a chance to make a move that could be sold in to and that is reflecting on the 3C charts so while I believe we are headed in the right direction, I think there was a reason for this mini cycle that retried after it failed after 2 days in early January, Wall St. rarely does anything without a reason and I don't think the reason (being able to sell/short in to some price strength), has been fulfilled for the other averages, thus the reason the IWM went from looking like a strong relative leader to having some of the worst distribution signals.
Internals are very interesting and also suggest an oversold bounce on a short term (1-day) basis.
There's not a Dominant Price/Volume Relationship in the Dow, it's split so we'll pass, but in the Russell 2000, SPX and NDX, there is with 1084 stocks, 325 stocks and 69 stocks respectively, this is a VERY strong Dominant Price/Volume Relationship and guess what it is...?
Price Down/Volume up, which is essentially like seeing a Hammer candlestick on a daily chart on 3x average volume, it's a 1-day short term deeply oversold condition that suggests the next day close green, similar to last night's which was on track until the F_O_M_C.
Additionally making it even stronger, of the 9 S&P sectors, all 9 closed red, that's Dominant. Tech which was just the laggard a day or so ago led at -.17% and Energy which was the leader just a day or so ago was the laggard at a deep -3.94%, I think the only reason it led a day or so ago was the short squeeze which was primarily in Energy names.
Making the relationship even more potent is the 238 Morningstar Industry and sub-industry groups, only 15 of 238 closed green!!!! AGAIN, A HUGE OVERSOLD SIGNAL, SO I EXPECT THERE TO BE SOME BOUNCE TOMORROW PERHAPS AFTER SOME EARLY MORNING WEAKNESS, MAYBE WE CAN FIND SOME INTERESTING OPPORTUNITIES TO TAKE ADVANTAGE OF THIS SIGNAL THAT'S STANDING OUT.
That will do it for tonight. I'll update TLT, but before I spend hours doing so, I want to see if anything changed after today's short squeeze in the long end of Treasuries, if not, then we have something big on our hands that may just give us the best guess as to when the F_E_D hikes rates.
Have a great night. I'll report if I see anything strange in futures.
