Markets and the FOMC – the Game of Chicken Continues


The Most Non-Surprising FOMC Statement Ever

Kremlinologists were probably a bit baffled by the brevity and complete lack of surprises in yesterday’s press release by the preeminent US central economic planning agency. What else was supposed to happen though?

Readers can compare the statement with the previous one with the help of the WSJ’s trusty statement tracker. Try not to fall asleep while reading it. However, the Fed has taken steps to enable the broadcasting of timely information by testing a new internal teleconference system with reporters. You know, just in case something more interesting happens, like a rate hike. Or an emergency intra-meeting meeting (possibly shortly after the rate hike). Why would there be an emergency you ask? Isn’t everything just hunky-dory? Well…before we get to that, here are the handful of sentences from the statement that are worth knowing:


16 trillion womanWhat, $16 trillion? Is it? My, we seem to have lost count …



“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.”


(emphasis added)

We actually have a modest proposal with respect to the wording that could help to inject even more to the point brevity into the statement:


“In spite of lots of “incoming information”, we still haven’t the foggiest clue what we are doing or what any of it means. We’re all praying that this sucker doesn’t blow up into our faces before we’ve sailed off into retirement. As to us ever shrinking the balance sheet again or actually doing something that might be remotely reminiscent of tightening, forget it dude. Do you think we want to be blamed for another crash?”


OK, maybe we’re not giving them enough credit for the rate hike box they have talked themselves into. In fact, we believe there is very little awareness at the Fed of how dangerous a bubble it and other central banks have blown in the meantime. The associated wake-up call is unlikely to be expected when it eventually arrives.


Market Action Surrounding the FOMC Meeting

We always look closely at what the markets are doing just before and after the FOMC meeting. Certain patterns have developed in recent months and even years in some cases, and any deviations from either shorter term or longer term patterns are worth noting.

Readers may recall that we have previously discussed the dollar, which everybody was convinced could only go higher. Only, lately it hasn’t. We last discussed the extremely one-sided dollar positioning data in January (see “Frenzied Dollar Speculation” and “How Much Further Will the Dollar Rally”). As we noted at the time, one must be careful with positioning and sentiment extremes in currencies, because currency trends have proved to be extremely persistent. However, that doesn’t mean one should completely ignore such information.

In recent weeks, US economic data have weakened and euro area data have strengthened somewhat (not that they’re much to write home about). This prospectively endangers the premise on which the dollar rally rests: namely, that there is a growing monetary policy divergence. We are adding the term “growing” here, because the current divergence (the ECB and the BoJ are actively printing, the Fed isn’t) isn’t all that great, given the recent acceleration in credit expansion by commercial banks in the US.

And so the dollar has begun to correct after hitting the century mark on the dollar index (obviously, a nigh irresistible technical target; numbers don’t get much rounder). This may be due to a reassessment of the probability that the Fed will indeed hike rates anytime soon. Yesterday’s soggy GDP report may help the dollar to put in a short term low of the “buy the news” type, and if a bounce ensues, it will have to be watched closely for its quality and durability. As we said, currency trends can be very persistent once the market becomes convinced of some sort of reasoning, regardless of how dubious it is.


1-DXYThe dollar index (cash) – a tad oversold in the short term, but not extremely oversold. It may just be a short term correction, but the violation of the 50 dma could be a sign that it is not over yet – click to enlarge.


It was also mildly noteworthy that gold actually went up during the two trading days preceding the FOMC meeting. That hasn’t happened very often in recent years, and when it has, gold has tended to decline after the meeting. Sometimes it has declined both before and after the meeting. If it resumes its recent climb soon (obviously, on the very day the statement is released, it would be considered very impolite of gold to rise), it would presumably be meaningful. One thing is already meaningful: it just doesn’t want to stay below $1,200 for any extended time period so far.

Naturally, that might change, but here is something we know from experience: if a market stops going down, it will eventually turn around and move the other way for a while. Also, gold stocks continue to be slightly more perky as well. So far no really big moves have happened, so presumably things could still go either way. Next Friday the jobs report is due, and it usually dampens gold and gold stocks for the entire week preceding its release. This is another opportunity though to see whether the market’s character has changed. Another mildly positive sign is that the HUI-gold ratio keeps rising at the moment.

Naturally, the usual caveats apply. The only sector that has tortured believers and bottom fishers even more in recent years is the coal sector. However, as we always point out, patience usually gets rewarded, and this is a sector one needs to keep an eye on for signs of a turn – not least because the leverage offered by gold miners with their by now cleaned up balance sheets and slimmed down and more cost-effective operations is huge. If one buys a mid tier miner at slightly above $2 per share and the stock loses 30 or 40 cents, the percentage loss will be daunting, but considering that the same stock has probably traded in double digits in 2010/11, the potential reward in the event of a turn in gold prices seems to be sufficiently enticing to make it worth one’s while to weather any short term storms that may be lying in store yet (and said storms may actually not materialize at all). The technical situation is summarized in the chart below:


2-Gold and HUIGold going up on the two days preceding the FOMC meeting is generally considered legally dubious. The “tentative signs of life” remain in evidence so far  – click to enlarge.


Lastly, a word on the seemingly unbreakable stock market. It seems to us it might be in danger of losing one of its recent leaders – the Russell 2000 Index. To be sure, the technical evidence supporting this statement is scant as you can see below, but it isn’t non-existent. We have added a chart of the SPX in order to demonstrate that a large move is likely to happen soon as volatility tightens up ever more – but the direction of the move is uncertain from a technical perspective alone. All we really have here are the price/momentum divergences in the Russell and its very recent (just a few trading days really…) tendency to look weakish.


3-RUT-SPXRussell 2000 and the SPX – some bigger move seems to be dead ahead – click to enlarge.


The “playing chicken” metaphor in the title of this post, which we have appropriated from Bill Fleckenstein, refers to the fact that bulls seem to believe that the Fed a) has everything under control, and b) won’t do anything that could upset the party. Hence the party is widely expected to continue and we admit that it might. In terms of the stock market’s usual post FOMC behavior, it seems to go up most of the time in short order, so a change in character would involve the market doing something different.

Consider also the following: In recent months many people have wondered why stock markets have ceased to react to bad economic data (in fact, their reaction to economic data releases always seems to be the same, regardless of whether they are good or bad). The answer could be that market participants are becoming convinced that the inflationary policies that have been set in train all over the world will never end. The bet is probably that by the time the ECB winds down QE, the Fed will have enough reasons again to restart its version of QE. The BoJ will probably just continue with the policy until it all blows up, and who knows when that will be?

However, we would note here that if this guess about the thought processes of market participants is correct, then we are already at a quite advanced and dangerous stage of the game. Possibly not at the very peak of enthusiasm, but very close. If a sharp correction were to occur, it might well reset the clock, but that is not certain. It could lead to a failing rally as well, but that is a bridge we will cross when the time comes.



The recent quietude in the markets has our attention. Quietude in markets nearly always leads to unexpected increases in volatility. We use the term volatility not necessarily only in the sense of “must go down”, but rather in the sense that the quiet period will soon end. It could just as well result in a blow-off move (in the case of stocks) as in a sharp decline – at least from a purely technical perspective. The currency markets seem a bit more unsettled and have been making big moves for quite some time, which curiously haven’t altered the trajectory of “risk assets” much.

Sometimes FOMC meetings provide turning points in the short term, so this is a good time to be remain alert. Besides, there is something in the wind, so to speak. We leave you with a chart of the Bund yield (10 yr. German treasury bond). It has more than tripled in just a few trading days. To be sure, a 0.32 percent yield on a ten year bond seems just as meaningless as a 0.08 percent yield, but the swiftness and relative size of the move is nonetheless remarkable.

It is actually no secret where some of the biggest vulnerabilities of the system are located these days. Corporate debt and bond markets in general are definitely on the list, as market depth and liquidity have disappeared due to the combination of new regulations and central bank asset purchases. This has left yield-chasing investors loaded to their gills with bonds that offer almost no creditor protection, are incredibly risky and have no yield even remotely compensating them for the risk. At least that is our impression. These flaws of the new allegedly new and safe system are occasionally mentioned by those who have created the situation, but obviously nothing is done to remedy them. We mention this as a reminder that there are many potential sources of trouble out there.


4-German BundYields on German Bunds more than triple in a few trading days – click to enlarge.


Charts by: StockCharts, BigCharts


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