The Kremlinologists turned out to be right, and the Federal Reserve left its “considerable time” language in its statement to assure the markets that it would be around for a while longer with rock bottom rates. It’s the divergent (to a point) reaction out of the markets themselves that is interesting to parse, and will be key to watch in coming weeks and months. The action in the stock market was to suggest the entire exercise was a snooze-fest, with stocks ending marginally higher (yes, the Dow at a new record) but not too far from where the major averages were trading just before the news. Which is to say the equity market, always the most optimistic of U.S. markets, has it in mind that low rates stay for now, and until “now” is “then,” it’s time to party.
It’s all over but the dissection of the Fed statement, due later today, which will follow with a Janet Yellen press conference after the U.S. markets get word of whether the Fed did or did not eliminate the “considerable time” bit from its statement that saw markets go into a tizzy all of Tuesday. At this point the market believes that phrase now may *not* be eliminated, which marks the second reversal in about a week on this point. No matter what, somebody is going to be caught leaning in the wrong direction, but if the latest intelligence is that the Fed’s statement won’t change materially until the October meeting, then the freshest bets are probably in the direction of those betting on that much. So if the statement does cut out that language or modifies it in any way, you could see a selloff in equities, the dollar and bonds.
Something has changed in the bond market in some ways – but it’s a bit difficult to tease out when you’re talking about yields still near very low levels. But there’s a sense that the San Francisco Fed’s paper on the way in which economists are underestimating the Fed’s own view of interest rates is a game-changer, or maybe it’s just that people are waking up to the idea that the Fed really does have to raise rates eventually, or even more so, that it’s an overreaction to a previous overreaction: backlash to the idea that the August jobs report was so lousy that the Fed was still firmly in “not doing anything ever” mode.
Global ructions are dominating asset flows right now, and we’re not even talking about violent events such as the ongoing Russia-Ukraine conflict, the rise of Islamic State in Iraq and Syria, or the Israel-Palestine situation. Right now smaller events – yet uncertain ones – seem to be affecting the larger markets a bit more, contributing to a decided shift in factors that U.S. assets are reacting to.
The unemployment report occupies a unique position as a bit of a lagging indicator (especially when it comes to wage growth) and yet the most important economic figure that markets look at on a monthly basis. Various indicators point to the likelihood of another strong report come Friday that should accelerate recent trends in markets – more gains in the stock market (with a helping of the “this means the Fed is going to cut us off from the punch bowl blah-blah” stuff) and more strength in the dollar, regardless of whatever incipient gains the euro can muster after the European Central Bank meeting.
Never say the Europeans aren’t cautious. The dollar has been on a roll of late, in part because of the market’s growing expectation for more stimulus from the European Central Bank before long that would include some kind of larger-scale quantitative easing program after a speech last week from Mario Draghi that European markets seem to still be reacting to several days later. Reuters, however, reported that the ECB isn’t quite likely to do move quite so fast (heard this one before) and that took some of the wind out of the dollar’s sails and boosted the euro a bit.
The markets ease into a traditionally slow period with not much to look forward to other than the Federal Reserve’s Jackson Hole conference due next week, where the highlight, naturally, will be anything Janet Yellen says regarding the state of the labor markets. The chances of the Fed signaling a new shift when it comes to policy are slim – Yellen has proved to be a cautious speaker thus far, interested in furthering Ben Bernanke’s way of telegraphing as much as possible when it comes to policy alterations, and Yellen is more so, her “six months” comment from a few months ago notwithstanding. As Jonathan Spicer and Howard Schneider reported a few days ago, Yellen is much more interested in fighting an inflation war than dealing with a persistent deflationary/lousy economic environment to dominate the headlines, so the expectation should be for lower rates for longer, and not to expect a lot of surprises out of Wyoming next week.
The bond market remains pretty much tethered to the 2.50 percent to 2.60 percent range that’s prevailed for the 10-year note for quite some time now, with the primary catalyst being today’s release of the Federal Reserve’s minutes from its most recent meeting. The relevant data that investors are probably paying most attention to – the jobs report last week, the JOLTS jobs survey, shows some more things that is meant to keep the Fed engaged rather than moving toward an imminent increase in rates. The quit rate – the rate at which people leave jobs for others – is still historically a bit on the low side, not at a level that would make the Fed more comfortable that the kind of labor-market dynamism needed for the Fed to shift to raising interest rates. Fact is, the central bank just isn’t there yet.
Details on the sale of about 30,000 bitcoin have been spare, but what can be inferred by reading through the lines is that the sale of about $18 million went a lot better than many expected – particularly those who expected to get the coins on the cheap somehow. The prevailing market rate at the end of Monday was about $639, according to Coindesk, currently the leader in the pricing world, and the chatter trickling out was that the unsuccessful bidders – including hedge fund Pantera and SecondMarket’s Barry Silber, who put together a consortium of more than 40 bidders – aimed too low in one of those “Price is Right” moves but without the warmth of Bob Barker to confront you when you lose on these things.