Well, the message from Yellen was heard loud and clear and amusingly, so was the message from Stephen Poloz.
In fact, you’d be forgiven for thinking they coordinated to make sure one offset the other.
The BoC hiked, as expected, but “expected” is a relative term here. Because the whole abrupt shift in rhetoric that culminated in Wednesday’s hike was, well, abrupt. All of this came to together over the past two weeks.
So with every DM central banker seemingly ready to “look through” purportedly “transitory” weakness in inflation, it doesn’t seem like a coincidence that Yellen came out dovish on Capitol Hill.
Today was classic “good cop/ bad cop.”
“Fed Chair Yellen’s congressional testimony was consistent with the more cautious tone evident in her prepared statement to the House of Representatives panel; absent any sense of urgency, Yellen’s comments supported the idea that balance sheet normalization will likely start in September and another rate increase won’t come until at least December,” Bloomberg wrote this afternoon, recapping the day’s events.
“Yellen’s acknowledgment of inflation as a concern pushes the next rate increase to December at best,” BNY Mellon strategist Marvin Loh said. The “market is now more comfortable under-pricing the three Fed dots in 2018,” Credit Agricole’s Vassili Serebriakov added.
Here’s Goldman’s take, for what it’s worth:
In the Q&A portion of her Congressional testimony, Fed Chair Janet Yellen said that balance sheet normalization would begin “relatively soon,” but offered no explicit hints about a July announcement. As a result, we now think that there is a 10% (vs. 20% previously) probability that the next rate hike will come in September, a 5% probability that it will come in November, and a 55% (vs. 50% previously) probability that it will come in December. Cumulatively, this implies a 70% probability (vs. 75% previously) of at least three hikes this year.
The reaction in markets was consistent with the “good cop” characterization, as yields fell (there was a so-so auction in there too)…
… stocks rose (with the Dow hitting a record high)…
…the VIX dipped…
…and the dollar came under pressure…
Meanwhile, European stocks soared into the close, rallying the most in 11 weeks.
There was plenty of interest in upside protection on the 10Y, and notably, at least one person is betting that shit’s about the get wild.
“Someone ponied up almost $10 million to buy out-of-the-money put and call options simultaneously on 10-year Treasury futures,” Bloomberg notes, adding that “the position caught the market’s attention because it involved block sizes of about 63,500.”
That’s one hell of a trade. “A strangle of that magnitude is rare, and possibly unprecedented”, a couple of traders remarked.
Obviously, that’s a pretty ballsy move given suppressed rates vol.
In any event, Wednesday’s headliners (Yellen and the BoC) didn’t disappoint in terms of triggering notable market moves.
The only question now is what it will be going forward: good cop or bad cop?