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Tag Archives: Federal Reserve

D Day – Decision Day for FOMC?!

The buzz in the media has started.  Some are saying that the FOMC event is fully priced in the marketplace and others are saying that high volatility is expected in this impending event.

Bernanke was interviewed last night and he was quoted saying that the Federal Reserve needs to entertain ‘negative interest rates’.

90% of all economists interviewed by Bloomberg and 95% of Wall Street all believe that Janet Yellen will pull the trigger at 3am Singapore time and 3pm NY time.

Will Janet pull out a surprise from her hat and not raise interest rates?!  She has every reason to raise interest rates and also every reason not to raise interest rates.

Wall Street is debating whether she is a traditional economist that needs empirical data to line up like the stars before she tightens monetary policy of will she act more from her ‘gut feel’ of where the economy is going.

The world today is different, inflation in many developed countries is almost non existent, way way below the 1% or low 1%.  We will not see 2% for a long time, simply because there is a real threat that the developed countries may go into a deflationary phase.  Oil below $40/- per barrel with fears that it will go to $20/- is unfounded.  The world was buzzing with strong economic growth in the late 90s and oil was at $20/- per barrel.  Demand will always be there no matter how much OPEC pumps out of the ground or Big Texas Oil.  The world has a fascination for the internal combustion engine for fast cars ,luxury cars and basic transportation.  Be it recession or not, people will fill up their petrol or diesel tanks and drive their vehicles proudly.

So why does a falling oil price be of such a concern?  Well, why did oil go up to $140/- per barrel in the first place?  I believe it was speculation, I believe it was more and more producers getting into the game and with high capex, they needed to sell it at the elevated prices, I believe it was oil sands or shale oil.  The cost of extracting oil went from $12/- per barrel to an average of $68/- per barrel.  Should Big Oil profiteer from the general public?

Real estate prices has been escalating in all developed countries from the UK to the US to Australia and Europe.  Every developed country is excluding food and real estate from the CPI basket, however, if you were to include real estate into the basket, then, we will not be looking at the current 1% inflation rate but something in the region of 10%.

So are we playing around with numbers?  Isn’t real estate or more appropriately, dwelling homes an important component to be included in the CPI basket as it affects the wallet of all consumers as in the ability to pay their mortgage payments and the fact that it is a long term financial commitment.

If we look at the EURUSD and the GBPUSD hourly charts with Fibonacci overlayed, it appears that the EUR is trading at its near high and GBP at its near bottom.

gbpusd_hourly

eurusd_hourly_fibo

If volatility is going to happen at the FOMC, will the two european currencies swing in opposite direction?

There so many permutations: –

Raise rates + dovish press conference

Raise rates + strong press conference

Rates stay put + dovish press conference

Rates stay put + strong press conference

In all 4 permutations, it can be argued for both a case of strong USD and a case for weak USD, why?  It is because the US is in a precarious economic position.  The truth is that the economy is not growing strong enough, moderate growth with some fragility, yes!

As time draws nearer, I am sure we will see more noise in the media.

17 Nov @ The FOMC Minutes!

Since the October FOMC rate decision did not come with a press conference, the entire financial markets was looking towards the minutes to garner an idea of what happened in the closed door meeting among the Fed governors and Yellen.

There was a fair amount of noise in the media though, it seemed somewhat muted.

In any case, I stayed up and at 2:55am, I placed the following trades: –

GBPUSD   –   1.5197   –   1.5217   –   1.5237

EURUSD   –   1.0618   –   1.0638   –   1.0658

USDJPY   –   123.27   –   123.47   –   123.67

As it turned out, the minutes lacked luster, rates did not move anywhere.

10 minutes after 3am, I decided to withdraw the three straddle trades.

What a disappointment!!!

 

Thoughts after FOMC no hike decision

Up to the last hour before 2am last Friday, noise was abundant in the media; CNN interviewed FIs and 76% said ‘no rate hike’, Bloomberg interviewed FIs and 78% said ‘rate hike’.  What perfect opposing views!

As we all know how, Janet Yellen decided not to hike rates.  So what does this mean for the USA?  What does it mean for the rest of the world?  What does it mean for the financial markets?

Granted Janet has been talking about a rate hike since May this year and respectfully, she has managed the financial markets very well through the past 4 months.  Of course, we had the great Greek distraction in the middle of the year, thanks to Tripras and the ECB and the EU and Merkel and Draghi.

In life I suppose there is always something to be said when a leader is a woman and when a leader is a man.  I am not trying to be a racist here, however, it is generally known that women are more prudent, then again, if you observe how Angela Merkel works and now Janet Yellen, it is clear that Prudence is a trademark of the fairer sex.  In the uncertain economic times we live in now and the divergent interest rate cycles of different economies around the world, Janet Yellen has the unenviable task of holding the stone and wondering whether she should through it into the pond and create ripples or tsunamis.

The world uses the US Dollar as a trading currency base or a settlement currency or a partial reserve currency, any rate hike in the US, will certainly have a large negative impact to Europe and other OECD countries.  More importantly, it may destroy smaller Asian emerging countries, and BRICs.

Globality means that the world has grown smaller, trade borders have evaporated, which means that financial impacts will become like tsunamis and not small ripples.  We saw it recently with the partial crash in the Shanghai and Shenzhen equity markets and how it affected the rest of the worlds’ financial markets.  We saw how the world didn’t take kindly to China’s central government interference with the equity markets, with the banking system and with the currency.

Frankly, if I was Janet Yellen and I was faced with two options; 1) do a rate hike and run the risk of choking the economy or 2) let the economy continue to gain more momentum in growth and jobs and inflation, then, hike rates then, as a strategy of reining in the economy before excesses begin.  Prudence would dictate that we should select option 2.

Let’s not forget we are talking about the United States of America, a very mature economy, highly domestic with little to export, a ballooning social welfare crisis, a runaway immigration problem and a widening wealth gap.  So, even on the best quarter, economic growth as spectacular as it cld be, can be, will never be higher than 3% p.a.  Since after the millennium or for that fact the past 10 years, the average growth rates has been below 2%, in the 70s and 80s, the average was about 3%.

So truly speaking, where is the concern that growth may run away and that we need to get ahead of the curve???

Noise has begun again with the media saying that Janet Yellen will raise interest rates in December.  Why?  Doesn’t the Chairman of the Federal Reserve know that, that is the worse time of the year do effect any interest rate decisions as liquidity is very low and volatility is very high.  Remember how George Soros broke the Bank of England in 1992……….Black Wednesday?!

Prudence will dictate that Janet Yellen will only make an interest rate liftoff in March 2016, that is, towards the end of winter.  Traditionally, in the U.S., jobs takes a significant dip during the winter and employment only starts picking up in spring.

What do I know?  This is just me sharing my thoughts with the world and to whomever is interested to read my trading blog.

 

FOMC Tonight! Any surprise from Janet Yellen?!

Alot of buzz in the media about Janet Yellen and FOMC tonight or rather 2am Singapore time.

Is she going to surprise with a rate hike?!

Market talk is July…………….September……………November………….take a dart and throw it on the board!

Personally, I don’t think she will surprise the market by hiking rates, although, I do believe she will shed some light on how she is going to access the US economic and interpret its projections going forward.  This should provide some clues as to when?!

Recently, she has been spending time talking about the world economy and how it’s not doing too well. While non farm payrolls has been trending above 200K, the last two months has been showing a slight downward movement despite the stronger number last month of 280K versus forecasts of 222K.

Housing is still a mixed bag of information.  Retail sales as well.

However, whatever Janet is going to say will provide CLARITY and that in itself will be USD positive.

Just checked to do a put option till Friday GBP and EUR averages about 80bps.  Am I prepared to gamble 80bps?

Let me think about it in the next few hours and update all of you.

USD this week……………..

We are sitting on Thursday night Singapore time and the morning of the US session.  Since just before London went for lunch, the market was seeing USD sellers bidding up the majors; EUR, GBP, JPY and AUD up all across the board.  And it is still grinding upwards, though it appears that it may be losing some momentum.

This week has been a challenging week for the US.  All data were either softer or lower.

Retail sales turned in another negative month for two negative consecutive months.

Industrial production also negative, which could also partly explain why Q1 corporate earnings has been showing misses on a number of consumable stocks; Walgreen, Walmat, Target, Home Depot.

Unemployment claims edged slightly higher to 294K but below the 300K level.

So it looks like the Fed Reserve and Yellen needs to see more convincing numbers before initiating the first interest rate hike.

Last week, RBA surprised the market by not cutting interest rates which was highly expected by the market.  For the first time, in the RBA minutes, they are now expressing some concerns about the real estate market.  It is definitely bubbling and against an economy that is not growing plus requiring structural changes……………..hmmmm…………not looking good.

ECB this week and Draghi maintained a neutral stance to monetary policy and an accommodating tone to QE.

The previous week, BOE, Carney also mentioned about keeping the status quo, though, he too, is concern about the bubbling real estate market in London.

So, on balance, the whole world is still in limbo!

And, let’s not forget there is the irritation call Greece!

Post Bernanke………..gunz blazing…………markets still haemorrhaging………..

Was the FOMC statement and thereafter the press conference by Bernanke………..staged?!

Why was the FOMC statement so lethargic and uninspiring, and then, the monumental statement by Bernanke where he for the first time announced timelines for the tapering of the QE; beginning year end and into 2014 with full withdrawal by mid 2014.

Wow………what an aggressive statement by the Fed Chairman when all previous times, he was skirting the issue.  Of course, he tried to culture the statement by saying that it is all data dependent.  Kind of like shooting someone first and then saying, let’s send him to the hospital so that he may or may not have a chance to live.

What is interesting is that the Fed also decided to change their two loved targets of inflation and unemployment.  Previously, the Fed had definitive targets of 2% for inflation and 6% unemployment rate before triggering tapering QE.

Now, they have changed specific targets to range targets; inflation has changed to 1.4% to 2% and unemployment rate 6.5% to 7%.  Let’s not forget that inflation is now at 1.1% and unemployment at 7.6%, so we are not so far from the range targets.

Is the Federal Reserve orchestrating the imminent tapering of QE because they are now worried about the fact that liquidity is not sufficiently moving into the real economy but instead is fueling real estate, equities and bond markets.

If the last three days was not a taste of the carnage to happen when the first installment of the cut in QE happens in October, we will definitely see widespread bloodshed at that time.