Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

BoJ, FOMC and Where To Now?

Interest-Rates / Central Banks Sep 26, 2016 - 12:23 PM GMT

By: Gary_Tanashian

Interest-Rates

The Bank of Japan gave us a glimpse as to just how far down the rabbit hole we may have to follow global policy makers as we try to make sense of ever more complex and shall we say, innovative ‘tools’ being used in the effort to engineer individual economies and asset markets within the global financial system. BoJ announced it would conduct “JGB purchase operations” in order to “prevent the yield curve from deviating substantially from the current levels”.

The market initially interpreted this to mean BoJ stood in support of a rising yield curve, which would for example, help the banks (ref. MTU and SMFG, which exploded higher off of the support levels we had projected), but by the end of the week the Japanese Yield Curve had eased substantially and there seemed to be confusion about what the policy’s intent, or would-be effects, actually were. I wonder if the BoJ even fully knows what it is doing now. Lots of moving parts in a complex system.


As for the FOMC, it was non-business as usual. For all the pomp and bluster of the August-September Jawbone blitzkrieg we’ve been subjected to, the damn committee simply rolled over again, admonishing through hints that they really, really mean it when they imply a rate hike is still coming in 2016. But for now and to the surprise of very few, they did what they have done for the last 8 years; obfuscate and delay.

This time we even saw renowned dove Eric Rosengren rightly (in my opinion) shifting to the hawk side of the table as he observes a landscape of cranes to nowhere in Boston and extrapolates… ‘hmmm, I think we are blowing an asset bubble’. Yet still, the committee chaired by Janet Yellen – she of the hawk-tinged Jackson Hole Jawbone (with handy QE “tools” in her back pocket) went on to vote NO HIKE despite elevating CPI and soaring real estate, healthcare and services costs. Also, let’s not forget the ‘near all-time highs’ stock market, which unsurprisingly got an across the board price surge in response.

Where to now? Speaking as a lowly participant, I gave my stance in Friday’s in-day market update (profit retention). As you will see in this week’s report, weekly US stock market charts remain just fine, as we have noted for months now. But the daily charts of NDX and SPX used in the update gave some parameters to shorter-term correction potentials. What’s more, the global macro is a confusing mess. Japan took confusion to a new level last week, but the US is also a Wonderland of its own, post-2008.

The chart above asks whether we are at a time like 1993/94 and 2003/04 or a time like 2000/01 and 2007/08. The interplay between the Fed Funds Rate (FFR) and the 2 year Treasury yield is – in my opinion, due to unprecedented bond market meddling under the Bernanke Fed – now dysfunctional.

Declining in 2016, the 2 year has been acting like it does at important economic and stock market tops, but Fed policy has not caught up to and exceeded the 2 year. We have long noted that the Fed decides nothing; the bond market makes the decisions. Yet the 2 year has been rising since 2013 and only in December of 2015 did the Fed decide to start to get in line with the message. Ever since then the 2 year yield has been declining, as it does at market tops, and this assuredly factors into the FOMC’s dovish rollovers.

Yet the starting point of this process is unlike any that came before. In 2000 the process began with yields above 6%. In 2007, above 5%. Today? 1% on the 2 year and .5% on the FFR. Those data points are lower than even the bombed out post-recession levels of 1992/93 and 2003, which preceded new cyclical bull markets.

Did someone say “confusing”? Did someone imply that even the likes of the Fed and the BoJ are confused? Did someone name a market report and associated service after the story of Alice in Wonderland during the lead-in to Q4 2008, when so many of the distortions built into the system were first introduced? I make a big deal about “playing it straight”, i.e. using the indicators and market signals for what they tell us, not what our most closely held views (biases) want them to tell us. But there is a highly technical term we can use for the chart above; it’s all screwed up.

Now there is little going on in macro markets that is conventional, and because of that it is difficult if not impossible for conventional analysts, quants and various other data miners to extrapolate forward in any accurate way. If the process noted above were coming from, say, 3.5% to 4% yield levels it would be easy to call it a ‘high risk, sell stocks’ atmosphere because all the ducks would be lined up and we would be believing the Fed when it poops rising interest rates talk out of its orifice. We could then expect the typical over shoot and ensuing bear market. I think that is what is coming, but the timing – in line with continual ‘obfuscate and delay’ of the Fed, is what is in question.

The chart above shows the ongoing 2016 downtrend in the 2 year yield. That is the plan that the Fed is following. Notice the big spike in October/November 2015? Notice the single Fed Funds Rate hike in December of 2015? Ever since then the 2 year has trended down and so the Fed has stood down. They ramp up the tough talk however when the dupes on the long end of the curve begin to get unruly. As noted recently, the 10 year yield broke its downtrend. About the only ones who would like that are the Banks, pigs that some of them are [insert Stumpf photo and time-wasting belly aching here].

A rising yield curve is not what is happening yet, however. But if it were to happen confidence in the Federal Reserve would take another hit. So for now they ‘tough talk’ the bond market, holding that massive would-be .25% rate hike over our heads.

I think they’ll probably raise in December if the markets do not fall apart in the interim. They do have a bit of wiggle room before they overshoot the 2 year per the first chart above. Another hike would give them a second little nugget of credibility. But if long-term yields resume climbing at any point, the message would be inflationary and the Fed may have to chase the curve higher. If on the other hand, yields do not resume upward we’ll have seen the last rate hike in a long while. Here’s the daily yield curve; it is no wonder Fed sensitivities got stoked in September. Last week it was tamped back down.

Subscribe to NFTRH Premium for your 25-35 page weekly report, interim updates (including Key ETF charts) and NFTRH+ chart and trade ideas or the free eLetter for an introduction to our work. Or simply keep up to date with plenty of public content at NFTRH.com and Biiwii.com.

By Gary Tanashian

http://biiwii.com

© 2016 Copyright  Gary Tanashian - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Gary Tanashian Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in