Pricing in Less Aggressive CBs

So what has changed from this summer to this fall?  Other than a 50 point drop in the ES, not much right?  The rhetoric has changed.  The central banks are no longer talking dovish and placating the markets like they have been for the last several years.  They don't want the market to go down, but they also don't want to build up an asset bubble in stocks, bonds, and real estate.

You are actually seeing tough talk now (still no tough action) even though the economic data is only mediocre, at best.  It just reinforces their focus on the stock market, specifically the S&P 500.  They don't seem to care too much about the global equities, just US equities which is their proxy for the health of the US and global economy.

Remember this:  Central banks act immediately when there is economic and market weakness.  There is almost no lag to their actions when the economy is tanking.  But, and this is important to remember:  central banks act with about a 2 to 3 months lag when there is market strength.  The strength in July post Brexit made the Fed more hawkish in September.  It didn't make them more hawkish in July or August.

Now if we continue to get market weakness this month, and crack 2100, and go down to test 2060, the Fed tough talk will disappear like a fart in the wind.  They are only tough guys when the S&P is flat to up.  When the S&P starts dropping, the tough talk suddenly turns to doves chirping.

I found it interesting that the Fed in their minutes yesterday talked about their credibility and why it was important for them to hike rates soon.  They talk about data dependency and yet in their minutes, they are talking about losing credibility with what they promised the market with all these rate hikes which they totally failed to deliver.  They have lost their credibility a long time ago, yet their words still move markets because while their statements end up about 80% wrong, there is still the 20% where their promises are actually kept and that keeps the market on its toes and still believing.

So this is one of those times that the market is believing that the ECB, BOJ, and Fed will refrain from expanding their monetary stimulus unless things get worse.  There stimulus is now conditional upon things getting worse economically.  Let's see if that remains the case if the market goes down despite the economy remaining stable. Sometime in 2017, the market will go down hard and test the central banks to see if they really are going to stick with their game plan of less stimulus (BOJ, ECB) and more rate hikes (Fed).   A little birdie tells me that they flinch and bring out the big guns at the first sign of trouble, like they always do.

Getting one of those rare continuations to the downside this morning (after one day Fed minutes pause) after Tuesday's sudden drop.  Market still feels lower from here, but not worth playing the short side from a risk/reward perspective.  Not really interested in buying dips till I see more panicky downside action also.  So mostly waiting, like most of this year.