Since the last FOMC statement (and press conference) on Sept 22nd, when the ‘t-word’ was first uttered with malice, stocks have soared higher, bonds are ugly and gold and dollar are barely changed…
Source: Bloomberg
But, in what Peter Thiel calls “the most honest market we have,” bitcoin has soared to new record highs since the last Fed statement…
Source: Bloomberg
As the market has ripped extremely hawkishly, implying more than 2 rate-hikes by the end of next year and pulling forward the first rate-hike expectations to June…
Source: Bloomberg
Dramatically more hawkish than The Fed’s dot-plot would suggest…
Source: Bloomberg
But the market is also beginning to price in a policy error (which can be seen in the chart above also) as the yield ruve has collapsed since the last Fed statement
Source: Bloomberg
Which is something many are watching to see if Powell jawbones that down while tapering today, offering a ‘bullish’ reason for buying moar stonks after all.
The trajectory of the taper is widely expected to be as follows ($15 billion per month split 5/10 between MBS and TSY)…
Which fits with the market’s pricing a 70% chance of a hike by June 2022 and a 97% chance of a hike by July.
And The Fed delivered with taper starting in November at $15 billion per month:
The statement says that the Committee “decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities..”
The pace of tapering “will likely be appropriate each month,” but the board “is prepared to adjust the pace of purchases if warranted by changes in the economic outlook,” the statement says.
The Fed seems less confident in its transitory view, changing the statement from:
“Inflation is elevated, largely reflecting transitory factors”
…to
“Inflation is elevated, largely reflecting factors that are expected to be transitory.”
Offering some explanation for inflation also:
“Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”
All of which suggests a more hawkish/concerned bias on inflation.
So will the aggression of dip-buyers slow somewhat as the trajectory of the Fed balance sheet shows…
And now to the press conference, how many times will Powell proclaim “tapering is not tightening”?
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Full Redline below:
