Glass Half-Full Or Half-Empty? Previewing Today’s Big Event

You might recall a post I penned a couple of days ago that highlighted commentary from Morgan Stanley, whose economists suggested the market’s interpretation of Yellen’s testimony on Capitol Hill was a case of “selective hearing.”

Well since last Tuesday, the market has had multiple chances to interpret Fedspeak and I think it’s fair to say that everyone kind of “wants to believe” in the hawkish narrative.

But that’s kind of odd, when you think about it. After all, it wasn’t four weeks ago when markets were basically instructing the FOMC to interpret the January jobs number (and specifically the underwhelming average hourly earnings print) as a signal that March should in fact not be a live meeting.

The bottom line: is a hawkish Fed good because it reinforces the reflation narrative or is a hawkish Fed bad because it increases the chances of a policy shock and attendant risk-off behavior in otherwise buoyant equities?

Who the f*ck knows. But former FX trader turned Bloomberg contributor Richard Breslow has some good color for you to consider ahead of the Fed Minutes which we’ll get this afternoon.

Via Bloomberg

Later today, we get to see the minutes from the February FOMC meeting. It’s unclear to me how we get from the dovish statement released three weeks ago to a hawkish retelling of the event. But that’s what seems to be on people’s minds. There seems to be an uncanny belief that the actual discussion was a lot more forward-looking and prescient than they let on at the time.

• Or perhaps it has to do with a nagging belief that the statement was too cautious, even then. That the lack of making March explicitly “live” left the wrong impression. And needs to be re-interpreted in light of subsequent news. There’s no question, traders are looking for glass half-full nuance, rather than the other way around

• The statement was indeed dovish. USD/JPY traded above 113.60 just before the statement was released and went as low as 112.83, before bouncing. The dollar index gave up half of one percent on the news. The Treasury curve bull steepened with 5s30s widening 4bps after 2pm. That was the traders’ reaction

• Analysts mostly chose not to change their March odds, but at about 30%, going lower would have been implicitly writing it off all together

• Since then on bullish economic news and hawkish speeches, futures have risen to price 38%, the dollar has bounced and equities have continued their remarkable run

• Interestingly, and maybe importantly, the dollar made its year-to-date low the day after the meeting and has been doing all right since. And CFTC data shows no diminution of traders’ desire to build large shorts in front-end rates

• We don’t have any concrete details on potential fiscal policies. But what has changed is both Gary Cohn and Steve Mnuchin are now in place. By all accounts Cohn has established himself as a potent force within the administration’s inner sanctum. And he and his thinking are hardly unknown quantities to the members of the Committee

• One thing we do know in advance is that the data has to continue to cooperate, the importance of the speeches next week by Fischer and Yellen can’t be over-emphasized and markets are trying, bravely, to catch up to Fed rhetoric