Wednesday, September 16, 2015

Fed Will Be Doves

The big Fed decision is on Thursday.  Yesterday, the highlight was not the stock market strength but the notable bond market weakness.  10 year yields hit 2.28% and the 30 year yield hit 3.07%.  Contrary to what many believe, the bond market wants a Fed rate hike to slow down the economy.  So if as expected, the Fed doesn't raise rates, the bond market will counter intuitively selloff.  This is why you had such weakness in the bond market yesterday, especially the long end.

I am hearing a lot of opinions on what the market will do if the Fed raises or doesn't raise rates.  First of all, on the slim chance that the Fed raises rates, no, the market will not go up on that.  If it does, it would be a slam dunk short.  That would be the worst thing possible for the market to have a hawkish Fed with a weakening emerging markets.  No, a rate hike and dovish words will not be what the market wants.  The markets wants no hike and could care less about the wording because the Fed will backtrack on whatever hawkish things they say anyway.

There are many right now who believe no rate hike is bad for the markets, because it continues the uncertainty.  What is so uncertain about ZIRP and delaying rate hikes?  It is what has been happening for 7 years!  The more uncertain scenario is how the financial markets handles higher short term interest rates.

I don't think this choppiness is over but I get a feeling that there are a lot of bears now.  We had a big rally yesterday and the put/call ratios stayed high.   It doesn't mean that we will go up, but any down move will likely be short and quick.

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