For the past few weeks, the bond market has been in frenzy. After sitting listless for months, U.S. yields have shot up sending the benchmark 10-year rate above the 2.5% mark on Monday. Just a few months ago, that same rate stood at 1.75% so we‘ve basically made a 40% plus gain in yields in less than eight weeks.
What caused such massive change of sentiment? Trump of course. The election of Donald Trump has created one of the greatest capital outflows in history, as investors dumped bonds and poured money into equities on the assumption that we are about to enter Reaganomics 2.0.
Whether Mr. Trump can juice the economy remains to be seen. He has yet to even take the reins of power, but the market is now so far ahead of itself that I think the Fed will step in and stop the party before it gets out of control.
The conventional wisdom is that finally, (finally!) after all these years, after pouring trillions and trillions of dollars into the bond market to liquefy the system, the Fed will begin to normalize monetary policy and start raising rates in a predictable manner.
Don‘t hold your breath.
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| Experts expect the Federal Reserve to raise rates tomorrow.. |
Don‘t get me wrong. There is almost no doubt that the FOMC will hike rates by 25 basis points tomorrow. In fact, the Fed funds markets are forecasting 100% chance of that event happening. But that move is already well priced in. The rally in yields is all about the next year and Fed‘s return to a once-a-quarter rate–hike schedule.
This is where I believe the markets will be sorely disappointed tomorrow. While speculators have been in a giddy frenzy shorting bonds, the Fed officials are starting to panic. Their plan to normalize rates depends on a slow, steady trickle of tightening credit that does not strangle the economic recovery.
With rates already well ahead of where the Fed wants them, the housing market is starting to suffer as mortgages and refinancing are no longer that attractive. Although rates are low in the absolute sense, in the financial markets it‘s always the relative basis that matters most. Since election day, 30-year mortgage rates are up by more than 20%. That kind of shock to the system bodes badly for housing demand in 2017 especially as wage growth remains anemic.
Which brings me to my second point. With all the hoopla about growth and recovery, one statistic glaringly stands out — wage growth remains depressingly weak. In the last NFP report, average hourly earnings actually fell by -0.1% despite the economy adding another 178K jobs. The Fed is clearly mindful of that fact, and it will resume “business as usual” until wage growth shows a clear and definitive uptrend.
Little wonder then that even a well–known Fed hawk such as St. Louis President James Bullard thinks that one–and–done may be enough for now. Last week he stated that in the absence of any change in policy, the U.S. economy will need only one rate hike through 2019 to reach a neutral rate given that inflation and unemployment are close to the Fed‘s target.
| We believe that market expectations are grossly misaligned with the Fed‘s policy intentions. |
We believe that market expectations are grossly misaligned with the Fed‘s policy intentions. We‘ll be trading the FOMC meeting with our Calendar Profits Trader members tomorrow, and it will no doubt be yet another massively volatile day in the markets.
But while the majority of market opinion thinks that we are just months away from “normalcy“, we disagree. As someone on Twitter recently noted, tongue planted firmly in cheek, “The Fed is in the business of raising rates once per year.“
Happy Trading,
Boris
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Its all manipulation, I don’t believe in anything being said. We already know the Feds employment numbers are bogus and the books are cooked. The Stock Market? It’s most likely rigged to protect the retirement accounts. Plain and simple, its all smoke an mirrors.
Devalue true money, precious metals, heaven forbid the currencies be pegged to anything of real worth….
As a new member of ‘Calendar Profits Trader’ I dearly hope you are right. Having placed my first trade today on the above expectation — i mean yours, not the market’s, it would be great to start off with a “win” (though I also realize there will be some losses along the way) Your logic is always well supported by facts and indications.
Totally different subject: You commented in another article that Ducati Motorcycles were near perfect. I agree!
You’ve been asking what is holding me up from comiting to Calendar Trading. Need to open trading account and it is not possible in this little town of Waxahachie Tx. In contact now with broker in Dallas and should be ready in 10 to 15 days
If earnings actually fell by -0.1%, it means that they rose by 0.1%. Basic math – multiply two negatives and you get a positive.
It would be a real hoot if the Fed did nothing tomorrow. One good turn deserves another, right?
Yes, an increase has been priced in, but the really interesting part is in debt financing. Why should the tax payers pay for government debt? Corporate debt yes, but government debt is no risk or cost to the banks that make up the fed. Why should tax payers be burdened down with eight years of increased unfunded debt financing from the Obama administration? Also consider imaginative ways the returning capital from other countries could be used to finance public works.
Because if the tax payers don’t then the government can’t send social security checks each month since Reagan and Greenspan replaced the SS fund with IOUs. Most of Obamas budget deficit was due to fixed costs of SS, Medicare, Medicaid, etc. that can’t be eliminated because people paid into these things during their careers and it is their money. Just because Reagan and Bush decided to cut taxes and create budget deficits that caused these funds to get used does not mean people should not be entitled to their own money when they retire. Where should Obama have cut spending. Even if he cut welfare completely out of the budget it would not be enough to offset the budget deficit. Most of the deficit is due to SS, Medicare, and military spending. Blame Reagan and Bush for tax cuts we could not afford. Look at pie charts of where our tax dollars are spent and look at historical charts of the budget and deficit of before and after Reagans tax cuts if you are not convinced. Spending more than you collect in taxes then hiding it by stealing from the social security fund is voodo economics invented by Greenspan and Reagan.
The missed opportunities have been in economic growth above 3%. Our economy is desperate for this change.
Agree that “market opinion” is as cuckoo as usual, but using “someone on Twitter” as verification is even more stupid.
Trump is not President yet, nor have the Electors voted.Massive overbuilding of residential and commercial properties is happening where I live, fueled by cheap printed money and cheap phantom jobs, like 2008 never happened. Shiny new unaffordable real estate will sit empty until speculators go broke again. Looks more like China every day.
The markets never learn and the Fed will always find a way to cough up whatever they want to hear.
The FED has rendered itself useless except when there is a major financial explosion. And then it will still be useless because 1998 and 2008 have been swept under the carpet. There is still a deep coagulation of debt, derivatives and interconnectedness that courses through the world’s financial system. The major banks have become even bigger and they have learned nothing because they have every right to expect that when they fail, they will be bailed out.
anyone know how to find this symbol??please…kiran
There’s likely to be no rate hikes at all next year. The Fed can’t raise rates beyond 1/2% without shrinking its gigantic balance sheet, not without creating a lot of serious repo and money market problems.
When they start shrinking their balance sheet, then you’ll know normalization is here. (And I hear nothing about it.) Until then, rates are going to stay low for more years to come.