Thursday’s Big Story Wasn’t WSJ’s Fed ‘Scoop’ – It Was The Short-End Circuit Breaker

I’m not sure it says much for what the Fed thinks of the market’s collective intelligence that they (the Fed) apparently felt the need to compel the Wall Street Journal to write a “November Fed Minutes For Dummies” article and ask Nick Timiraos to timestamp that sucker at 3:26 PM following two consecutive sessions of steep losses for U.S. stocks.

Nick’s 492-word non-tome is basically just a rewrite of the November meeting minutes with a paraphrased version of Donald Trump’s infamous “are you listening Fed!” tweet thrown in as the anchor. Here are some excerpts:

[As the Fed] push[es] up their benchmark, they are becoming less sure how fast they will need to act or how far they will need to go and want to assess how the economy is holding up under moves they’ve already made.

How they manage this new, less-predictable approach will depend in large part on the performance of the economy and markets in the weeks ahead.

Under the evolving “data dependent” strategy, the Fed could step back from the predictable path of quarterly hikes it’s been on for most of the past two years, raising the possibility it might delay rate increases at some upcoming meetings, according to recent interviews and statements.

Now then – I would absolutely love for someone to read that and tell me what they hear in there that you can’t get from the November minutes. Seriously, give it a shot and let me know.

Read more

Fed Minutes Tip Support For Modifying Hike Commitment, Presage Imminent IOER Tweak

Spoiler alert: There’s nothing new in that WSJ article. It is, full stop, a summary of the Fed’s new “flexible” approach as communicated and detailed extensively in the November minutes.

In the minutes, some officials expressed support for emphasizing data dependence in the statements going forward and as we’ve been keen to note, emphasizing data dependence when the data continues to come in hot is hawkish, but when the data starts to roll over, the Fed can lean on data dependence as an excuse for being dovish. And that’s precisely what the November meeting minutes tipped.

“Under the old pattern, the Fed would raise rates again in March, but officials now don’t know when their next rate move will be after December”, the Journal goes on to say, before delivering the following expanded version of Trump’s oil/inflation tweet:

Recent market turbulence for now hasn’t much dented the Fed’s view that the U.S. economy is on solid footing, with growth strong and unemployment low. But inflation has softened in recent months and falling oil prices portend further declines, reducing the Fed’s sense of urgency about raising rates to prevent the economy from overheating.

You could have gotten that from Timiraos or – and I’m just spitballing here – you could have checked out the following chart which shows that at one point on Thursday, 5Y breakevens dove by the most since June of 2017:

(Bloomberg)

And look, here’s the thing you guys, that Journal article obviously helped trigger a knee-jerk higher into the close, but anybody who was paying attention on Thursday knows that we tripped the short-end circuit breaker. I don’t mean “circuit breaker” literally. Rather, I mean that if what you were waiting on was that fateful day when traders finally showed some conviction in the Fed pause narrative or, if you like, figuratively “instructed” the Fed to pause, you got it today in the front end.

Look at the 2-year on the day – yields were lower there by 10bps at one juncture.

(Bloomberg)

We broke through the 100-DMA average:

(Bloomberg)

And then here’s the dollar:

(Bloomberg)

That is the market repricing the Fed path, plain and simple. And if that’s not enough evidence for you, look at volumes in eurodollars and fed funds. EDZ8-9 hit a cycle low, flattening inside of 15bps.

(Bloomberg)

And look at EDZ9-0, where folks are increasingly convinced of Fed easing in 2020:

(Bloomberg)

The point is, maybe the “dumb” money in equities just wasn’t getting the message and as such, needed to have the Wall Street Journal summarize the November Fed minutes and blast out an executive summary 34 minutes before the close.

But real traders needed no such CliffsNotes. On Thursday, they were busy effectively telling the Fed that in light of the ongoing slide in equities, they (bond and STIR traders) fully expect that the plan, as outlined in the November minutes, will be implemented as communicated and on schedule.

And in case it isn’t clear enough from the last two charts shown above, some traders have decided that from here on out, they will be doing the scheduling – not Jerome Powell.

---