The Surprising Death Of “Surprise”

“The period of peak liquidity will remain in place for the foreseeable future,” suggest Brown Brothers Harriman in a recent note, and as Reuters reports, for all the fevered speculation about when the Federal Reserve will begin scaling back its monetary stimulus, market volatility has been taking a leisurely nap, suggesting investors see no major shocks on the horizon to derail their bets. “We’re not trying to follow the twists and turns of the very short-term investment cycle,” confirms one wealth manager who will only change his strategy if the Fed “dramatically changed,” its policies. The market’s apparent ignorance of the ebb and flow of data surprises – both positive and negative – is clear as it has virtually no bearing on short-term yields, which have remained at historic lows thanks to the trillions of dollars of liquidity and zero interest rates from the Fed. “Fear not the Fed,” advises BofAML, as the Fed’s $85 billion-a-month asset purchase program trumps everything.

Via Reuters,

Low market volatility is a sign markets expect no “taper” any time soon, or that they are steeled for a reduction in the pace of the Fed’s bond-buying if it comes.

The sting of the taper has been gradually sucked out of markets since the Fed’s surprise decision not to start withdrawing stimulus in September.

…

But the Fed’s $85 billion-a-month asset purchase program trumps everything, and as long as the liquidity taps are open, the economic data will only have a real impact on markets if it changes the Fed’s thinking.

…

The following chart shows that since mid-2011, the correlation between U.S. economic surprises and two-year Treasury yields has completely broken down:

The ebb and flow of data surprises – both positive and negative – has had virtually no bearing on yields, which have remained at historic lows thanks to the trillions of dollars of liquidity and zero interest rates from the Fed.

But it is not just interest rate volatility that have succumbed to the Fed’s heavy and visible finger (and thumb)…

So there it is – no news is bad news ever again… or as we have repeatedly noted “bad news is good news, and good news is great news.” What could possibly go wrong?

As the Reuters headline proclaims: “Forget data and rhetoric, Fed liquidity’s the only show in town.”