Sept 18. The Fed takes a pass
–Not only did the Fed pass on a rate hike, but the press conference was quite dovish, with Yellen at one point saying it might take years to reach the inflation target. From the statement, “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad.” Tightened financial conditions and international turmoil not only stopped the Fed from hiking, but prompted one member (Kocherlakota) to register his vote for an even more accommodative policy with a negative dot at -12.5 bps. On the whole, the the dot plot (where the 17 members of the FOMC identify the FF target they think is appropriate at year end) averaged about 30 bps lower in yield for the end of 2016 and 2017 from the last plot in June. Lacker was a dissenter, preferring a rate increase.
–About a month ago, I saw a piece of research (GS?) which highlighted a question that several clients had posed about the possibility of a near term recession. The authors emphatically said that a recession was NOT on their radar. Obviously though, there has been concern about slowing growth globally, which was reflected by the Fed yesterday.
–The two year yield, which had been pushing to higher yields, plunged 11 bps yesterday to 69.8. Tens fell 8.4 bps to 221.5. The curve steepened, with both 2/10 and 5/30 making new highs, +2.5 to 151.7 and +5.9 to 153.7. Implied vol was immediately offered, for example, 0EZ 9887 straddle which had settled 30.5 on Wed, was instantly 28.5 offer after the announcement. TYZ vol went from 5.5 to 5.1, probably too cheap here.
–Interestingly, the Oct/Nov FF spread, which had been trading 4.5 prior to the Fed, remained 4 bid even after the announcement, though late in the day it was 3.0/4.0. This spread reflects odds of an October 28 FOMC rate hike. All it would take is a 350k+ NFP on October 2nd to renew the focus on a Fed hike. However, the failed rally in stocks late afternoon may portend more weakness over the near term. Equity option expiration today. Nikkei was down 2%.
–Leading indicators today expected +0.2%.
