Sometimes you wish that you could just forget that initial reaction, and have another go......

Thursday 28th July 2016

Sometimes you wish that you could just forget that initial reaction, and have another go ......

ref :- "Fed door open to second rate rise", The Financial Times , front page story

ref :- "Rate rise back on the cards as Fed shrugs off Brexit" The Times, Business leading story

                                             VERSUS

ref :- "Dollar Slumps as US Rate-Hike Wagers Subside on Fed Patience", Bloomberg online

Listen, we've all done it and probably more frequently than we'd care to admit. Besides, the FT and the Times aren't WRONG to suggest that since the Fed statement referred obliquely to the successful navigation through surprisingly calm post-Brexit waters and to robust US data, that must mean that a rate hike is a real possibility this year. If you like, they focused on the positive element as far as implications for interest rates go. Financial news channels are constantly talking of the "takeaway" from this or that event, as in "what was your takeaway from what Hiram J. Rottweiler had to say about the price of eggs?". It's just about the most irritating of many assaults on the English language all too prevalent in market-speak (see, there's another). But if we had to, we could say that for both these two fine organs, the takeaway was a bullish one for US rates.

That's the trouble with having to give pretty immediate reactions to news or data that might look a bit wide of the mark once there's been a bit more time for digestion. It's a particular problem for print media, and remember that the Fed statement was released at 19.00hrs UK time. In this instance, the market took the prevailing message (or takeaway, ugh!) coming out of the Fed to be not that a rate cut was possible before year-end (tell us something new), but that the Fed's language suggested that there isn't likely to be two of them. Too much talk of a gradual and cautious approach for that. 

Unpopular though it may be in some quarters, it's not as though there aren't plenty of reasons (geopolitical and economic, domestic and global) for the Fed to be wary if that's the way they feel about it. But that's not the point. The point is that action by the Fed, bold action that is, is now seen to be marginally less likely than it was before the statement. In fact, according to Fed Funds futures markets, the chance of just ONE hike this year is now seen as 45%, down from 49% two days ago. Instinctively, and very unscientifically, it seems a little more probable than that but there's no arguing against the fact that all kinds of things could go wrong over the next five months.

Anyway, market reaction to the Fed statement was to push both Treasury yields and the Dollar lower, which is not what you might have expected from reading those two early reports. USD / JPY has weakened from about 106.00 to currently about 104.75. In the greater scheme of things, this is not a huge move but the volatility levels do catch the eye  --  at times the highest since the financial crisis. This of course has less to do with the Fed than it does with what the Bank of Japan announces early tomorrow. Frankly, this has always been the more interesting of the two central bank meetings this week, but the volatility in USD / JPY is being driven by a unique combination of drivers. Yes of course by the BoJ, but over the last couple of days even more so the FISCAL package to be announced by the government (maybe early next week?).

When it was suggested on Tuesday that the size of the package had not even been decided, USD / JPY reacted on the downside, then news that the package would be a whopping JY28 trillion the pair move higher again only for the less-than-hawkish Fed statement (as it's now perceived) to encourage Yen buying once again. How could it not be volatile in these circumstances?

Have a care, though ..... this JY28trn figure is an all-inclusive number. It is still not clear how much of it will be NEW stimulus, certainly a lot less than 23trn and the breakdown will be studied very carefully. Now that really will be an occasion not to go to print before getting the full picture.