After a wild Fed decision trading day yesterday, what is happening behind the scenes is very worrying.
From Art Cashin, Head of Floor Operations at UBS: On this day (+2) in 1831, Saturday strollers failed to notice two men who stood quietly on the steps of the National City Bank main office on Wall Street. But in the drizzling rain who would have noticed. The building (still standing) was originally the Merchants Exchange and dominated Wall Street with its grand classical columns like something out of ancient Rome.
So, even though they looked like Cassius and Casca (without the togas), they seemed to blend in. While they didn’t have the keys to the city, these two did have the keys to the bank. And they used them. They used them to withdraw over $245,000 from the bank without benefit of teller (or even an ATM).
Thus an Englishman named Edward Smith, alias Edgar Jones, alias James Smith, alias Jay Honeywell performed the first bank robbery in U.S. history. While his associate was never found, Smith was caught, indicted and sentenced by the General Sessions Court to five years of hard labor at Sing Sing. (Even though over $190,000 of the loot was recovered.)
The bulls did not get robbed yesterday. Instead, the Fed gave them a smile and a wink and the bulls celebrated as if school was closed.
Firm Oil And “Gradual” Fed Nearly Lead To New Highs – Stocks opened higher Wednesday, primarily on a rebound in crude, which in turn seemed to be inspired by a clear drop in inventories in the API report.
The opening bump was also helped by markets in Europe who showed very mild gains but gains nonetheless.
Interestingly, stocks held the opening gains through the morning.
They got a very mild bump around 10:30, when the DOE appeared to confirm the drop in crude inventories indicated by API.
Once Europe closed, the bulls tried for a second leg but, after some minor success, around 1:00, they decided to regroup in front of the FOMC.
At 2:00, the FOMC statement hit. The key here was that they retained the word “gradual” in describing future rate hikes.
Secondly, the “Dot plot” seemed to indicate only two more hikes not the three or four hikes that some commentators had speculated on.
That one/two punch sent bonds rallying, taking yields on the five, ten and longer down smartly.
The stock rally paused slightly just before Yellen spoke. It shouldn’t have. She was at the top of her game. Here’s a bit from Bloomberg:
Federal Reserve Chair Janet Yellen sought to reassure investors that the central bank’s latest interest- rate increase wasn’t a paradigm shift to a trigger-happy policy driven by fears of faster inflation.
Speaking to reporters after the Fed’s quarter percentage-point move on Wednesday, Yellen said the central bank was willing to tolerate inflation temporarily overshooting its 2 percent goal and that it intended to keep its policy accommodative for “some time.”
“The simple message is the economy’s doing well. We have confidence in the robustness of the economy and its resilience to shocks,” she said.
As a result, the Fed is sticking with its policy of gradually raising interest rates, Yellen said. In their first forecasts in three months, Fed policy makers penciled in two more quarter-point rate increases this year and three in 2018, unchanged from their projections in December.
Today’s decision “does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy,” the Fed chief said.
Speculation of a more aggressive Fed had mounted in recent days after a host of central bank officials, including Yellen herself, went out of their way to telegraph to financial markets that a rate hike was imminent. The expectations were further fueled by news of rising inflation.
Yellen’s tour de force took stocks to the day’s highs and markets only shaved a little off the top when she finished. Advances beat declines 6 to 1. A nicely broad rally.
Another Pair Of Eyes – My good friend, the very savvy Peter Boockvar of the Lindsay Group put out a piece with some thoughts on recent action. Here’s a bit:
The stock market got excited that the FOMC repeated that 3 hikes in total this year is their goal instead of something more but the Fed assumes right now no economic improvement from fiscal policy. The stock market of course has celebrated since the election that we will see large fiscal reform that will lead to faster growth which if we get, we have to assume we’ll get more than 3 hikes this year or a quicker pace next year as the Fed readjusts their forecasts. Yes, the inherent contradictions but that’s what emotional driven markets are for.
As for the dollar and all the talk of how rate hikes and central bank divergence will be good for it, the dollar index stands at 100.62 vs 100.17 on November 30th 2015, two weeks before the Fed started their rate hike cycle. I’ll say what I said earlier this week, it’s all about real rates. The 5 yr real rate fell 17 bps yesterday to -.13% vs +.30% on that day back in 2015. I continue to fade the dollar and remain bullish on gold.
For the 10th straight month foreigners were net sellers of US notes and bonds in January. Central bank selling offset private buying by $6.9b and this follows total net selling of $343b in 2016 and $20.3b in 2015. Foreigners bought over $400b in each of 2011 and 2012. For the first month in many, China was a net buyer of notes and bonds but by a modest $1.3b. They were large sellers though of bills (or let them mature) which reduced their holdings of US Treasuries by $7b to just off a 7 yr low. Japan, the largest holder of Treasuries, sold $4.4b of notes and bonds but were buyers of bills that offset that. Germany ended up being the largest net seller in January so all the talk of a yield pick up just isn’t happening most likely because of the high cost of FX hedging.
Bottom line, the natural foreign flow of reserve money into the US Treasury market essentially stopped in the middle of 2015 and I don’t see any signs that this will reverse any time soon. The Chinese are dealing with its reserve shrinkage and yuan stabilization attempts, OPEC is facing a cash crunch and the Japanese and others have a high cost of hedging. This doesn’t matter much for US yields while we have other large buyers but if it continues when it comes time for the Fed to start shrinking their balance sheet, it will likely start to matter.
Overnight And Overseas – Lots of action. The BOJ and the SNB stood pat on policy. Dutch election leans pre- EU. Trump budget proposal causes a stir. BOE still to be heard from. In Asia, Japan was up a smidge, Hong Kong roared while Shanghai and India saw modest rallies. In Europe, equities see solid gains. The euro is down a smidge against the dollar. Gold continues its post-Yellen rally and WTI is just north of $49.
Consensus – Bonds and oil are center stage. This is the Thursday before a quadruple witch. That has a history of volatility. Stick with the drill – stay wary, alert and very, very nimble.
***KWN has now released the remarkable audio interview with legendary James Dines and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***ALSO JUST RELEASED: Major Moves In Gold, Silver, Dollar, Oil And Stocks As Rates Hike, But This Could Be The Big Surprise CLICK HERE.
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