Wednesday, 16 December 2015

Financial Orbit wrap special: 16/12/15

It is all about the Federal Reserve today's wrap special is all about that decision and what it means.  

1. Well...they did it.

Key line IMO: 'The Committee currently expects that, with gradual adjustments in the stance of monetary policy'. Rate of ups won't be quick

Well you can see this not just in the formal FOMC views...but more importantly on what the Fed Funds future profile aka what the market thinks.

(h/t @jbjakobsen)

In my view highly unlikely that the Obama administration is highly unlikely to see a sharp change in its Taylor Rule adjusted positioning:  

(h/t @valuewalk)

2. And other initial thoughts from the formal statement?

Hardly rampant growth: kept 2015 at 2.1% and raised 2016 to 2.4% from 2.3%. '16 inflation at 1.6% vs 1.7% prev. Not a lot '16 action reqd

And the unemployment rate direction still positive. Doesn't sound like a horrible wage growth environment.  

‘labour market has shown improvement...wage growth has yet to show a sustained pickup

3. So into the press conference.  A couple of tweets from me: 

Energy prices and the 'transitory influences' re US inflation. I agree...

'we have expectations about how inflation is to behave'. Sounds like curve balls factors e.g. energy prices. Chilled re domestic inflation

In short the Fed appeared comfortable that if core inflation did pop above the 2% level due to oil prices 'stabilising', they would not worry. So faster/looser generally? And hence oil up, dollar down etc.

(h/t @dee_bosa)

 4. But...look what happened: oil down, dollar up and the US markets up/happy.  Now the question is whether this subverts the above chart completely or not.  In short whether the lack of a real and overt rapid monetary policy tightening cycle changes such historical experiences.  As I noted:

flirting with negative on the day now. Am surprised by that. Wish someone would ask more explicitly re the FX/geopolitics of it

Of course someone eventually did...and it appears that there was awareness of some of the spillover effects judging by Janet Yellen's comments. For me this is the real medium-term meat. As I also noted on Twitter:

spillovers/distortions for the world ex-US already apparent from strong . Another bout leads to overt global vol...earnings trend nicely reflective of strong problems. Nice lack of value vicious circle building unless FX fade

5. So where do we go from here?  Yes fair to acknowledge that it is easy to over-interpret...

Yellen: “I think it’s important not to overblow the significance of this first move.”

(h/t @qz)

...however for me there are plenty of unanswered questions.  For me the key remains the level of the US dollar and what this implies for the global risk backdrop and hence asset class balance and volatility.  Maybe the moves we noted above just reflected short-term position covering and even some year-end neutralisation.  

Big picture I still see value in the below...commodities and the euro cheap and the US dollar overloved. 

All to play for looking into 2016.  

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