It all started with a speech by the Atlanta Fed’s Dennis Lockhart and San Francisco Fed’s John Williams yesterday who said that two rate hikes may be warranted this year. Both Fed presidents suggested that they continue to see two to three rate hikes this year. Lockhart also added that markets are currently more pessimistic than he is, while Williams made mention of June being a live meeting and even went as far as to say that his view of gradual hikes also means 3-4 hikes in 2017.
That promptly led a notable repricing in the implied probability of a June and July rate hike, as well as a steep drop in both stocks and equities, bust most importantly Eurodollar futures which were quick spooked by the sudden shift in Fed rhetoric.
And with the (already quite stale) Fed minutes due later today, as well as all important speeches by Yellen’s right hand men, Fischer and Dudlely tomorrow, the market is clearly on edge. But is there really a risk of Yellen slamming the breaks on the Fed’s relent so soon after the Fed’s April announcement which once again reiterated “global” issues as a stumbling block for further tightening?
Here is the take of CitiFX’ Brent Donnelly who, while skeptical of a surprising U-turn by the Fed admits he has “squared up” all his trades, and is waiting for guidance from both the minutes, but especiall Fischer.
Fool me n times
There is decent downside momentum in the US front end, equities and EM as various advisers, CNBC and the market in general pile on the belief that the Fed has begun a coordinated effort to get June or July priced in so they can hike. There is particular focus on the following events:
Today 14:00 FOMC Minutes
5/19 09:15 Fischer delivers remarks at an event in NYC
5/19 10:30 Dudley remarks on macroeconomic trends at press briefing
6/3 03:45 Evans speaks on Economy and Policy in London
6/6 12:30 Yellen to address World Affairs Council at a luncheon
As ridiculous as I feel getting dragged into yet another round of Fed hype after so many past failures to launch, it is hard to deny that there seems to be something going on here. It could either be a bored market triggering a momentum trade that feeds the narrative or it could be the market has sniffed out a change of tone from the Fed as these new Fed events get scheduled. The idea that the Fed would leak info to the advisers is particularly hard to swallow given the Fed is already under investigation by the Justice Department because of possible adviser-related leaks in 2012. So my best guess is that this is just a bunch of people taking a punt and the more the front end moves, the more the story seems credible. Either way, the five events listed above should give us a clear idea pretty soon.
I squared up all my trades and I’m going to see how the Minutes and Fischer go. There is plenty of room for disappointment and plenty of room for these USD and rates moves to follow through depending on the outcomes so I think the trade is to go into these events flat with an open mind and trade aggressively in either direction. With the Yellen speech not coming until June 6, and the UK Referendum a week after the FOMC, I can’t see much logic to a June hike. Hiking a week before the UK vote seems like a totally unnecessary risk that this extremely risk-averse Fed would never take. But July makes perfect sense if they want to get a hike out of the way before election mania.
If the Fed decides to ratify this new theme, this chart could matter:
US 10-year yield vs. oil since mid-2015
via http://ift.tt/1Tfu6Op Tyler Durden