Fed Moves, will they Go or Back Away?

Join our Larry McDonald on CNBC’s Trading Nation, Tuesday May 24, at 2pm.

Pick up our latest Bear Traps Report here.

“The risk-reward in betting on Fed action in the July – September time frame is the most attractive in three months. Global credit and economic risks shot the March and June rate hikes right between the eyes, took the steering wheel out of Janet’s hands. This will position the Fed to start signaling for a July hike, sometime in the next 45 days. That would be a dollar positive; gold / commodities / EM negative. She’ll likely try and get back in the driver’s seat. In recent years, the rebound in Q2 vs Q1 GDP has been meaningful, north of positive 1%.”

The Bear Traps Report; May 2, 2016

As we witnessed last July and again in November, Fed governors are starting to prepare the market for a rate hike.

Why Should You Care?

2008-15

Average stock market returns on days around when the Federal Reserve meets were over 20x the average trading day, per Bear Traps Report analysis.

The Road Ahead

As we trade and invest around the all important Federal Reserve policy moves, a key distinction must be made. Will they prepare the market and then “back away” or will they prepare the market and then “go.”

In 2015

Last September: Prepared the Market, then Backed Away

Last December: Prepared the Market, then Hikes Rates

Beware of No Skin in the Game!

It blows my mind as to how many people focus on the latter, while ignore the former. Too many economists espousing on Fed policy have NEVER taken professional risk. Their dribble is couched in “no skin in the game.” Thus, the crucial reality of the situation is often ignored. There are colossal trades in both scenarios, see our latest Bear Traps report here.

In measuring the efficacy of Fedspeak, its far more important to watch for changes in a Fed Governor’s language, than Fed regional bank Presidents. In order to trade stock, bond or currency markets around central bank positioning, we must all be aware of who’s in Janet Yellen’s inner circle.

FOMC Governors (Voters) in 2016:

-Janet Yellen, Board of Governors, Chair
-William Dudley – New York
-Lael Brainard, Board of Governors
-Stanley Fischer, Board of Governors
-Jerome Powell, Board of Governors
-Daniel Tarullo, Board of Governors

Regional Bank President Voters in 2016

-Loretta Mester – Cleveland

-Eric Rosengren – Boston

-James Bullard – St. Louis

-Esther George – Kansas City

Futures Bets

In the futures market, something funny happened on the way to the June Federal Reserve rate hike.

In recent days, June’s chances have stalled at 31% since May 18th, while July’s chances have continued their surge onward to 45%, see below.

Catalysts

June 2: ECB Decision

June 15: Fed Decision

June 16: Bank of Japan Decision

June 23: Brexit Vote

Fed Fund Futures Probability

July

“If I’m convinced my own forecast is on track, then I think tightening in the June-July time frame is reasonable”

Fed Governor Dudley, May 21

“I think the incoming data have actually been quite good and reassuring in terms of policy decisions, so, in my view, June is a live meeting”

Fed Williams, May 17, 2016

“The most recent data are encouraging and consistent with the Fed policy committee’s view that inflation will gradually move back to target over time.”

Regional Bank President, Mester, May 12, 2016

“I wouldn’t take it off the table, markets are more pessimistic than I am.”

Regional Bank President, Lochhart, May 18, 2016

Voters Mester, Rosengren and George all spoke May 12, 2016.

All the recent Fedspeak is:

“telling us one thing, the market is still underestimating the expectation of a rate hike this summer.

Mohammed El-Erian

Bottom Line: Fortunes will be made or lost in getting this summer right, join us here.