Yesterday’s markets were ‘interesting’. Oil made new recent highs, equities made new recent highs and then the FOMC came out and the party stopped. Well it did in equities whilst oil is still looking pretty buoyant. This may be the first crack in that oil/stock correlation mentioned yesterday that has had so many markets excited for a while.
So, the FOMC minutes. What was that dump on them all about? To be honest when I heard the commentary I thought ‘fair enough’ that's about as neutral and nondisruptive as I was expecting and the half hour pause before things started moving was, in my mind, an indication that the market thought likewise. But this probably isn’t about stripping down the wording from the statement as much an indication of what the market was expecting in a realistic or unrealistic way.
The problem is that we have pretty bimodal distribution of opinion as to what the Fed should do. Those with the Fed are still pointing to a series of rate rises that the market has not yet discounted, so the FOMC are themselves pretty much one extreme, and then there are those who cite the recent market turmoil as reason enough to hold off for quite a while. Perhaps we should note that the recent market moves are a derivative of expectations of global, basically Chinese, growth (not US) and as such we should ask if the assumption that the Fed react to correct unstable markets still applies if those market moves are being generated by exogenous functions (at this point I suggest we rename China ‘Exogenia’ because when we are talking about exogenous shocks we all know what we really mean). The markets have moved because of China, the Fed is expected to act to quell markets but the Fed is not going to act to counter Chinese problems especially if it is not sure they are actually there. Whilst Warren Soros (yes, that is a deliberate renaming to highlight the over-citing of anyone who has made money in the past) has declared a hard landing is imminent, others at WEF have said this will not be the case.
So I fall back to thinking that the FOMC were pretty balanced but the market wanted more. They are not as concerned about a massive slowdown as the market is but that is a double edged sword. Edge one, great things aren’t as bad as the market thinks - buy stuff. Edge two, Oh heck, the Fed don’t get it, we are all screwed, sell stuff.
I am somewhere in the middle. I still think that the markets are over pricing recession and that the Fed is not blind and will act should it need. With this feeling that doom is still over priced and positions in big money are weighted towards cash then the next move will again be higher risk assets though I imagine that by the time this is read Asia will have sold off making it a pretty hard European open to counter.