Wednesday, March 1, 2017

Trump Passes But Fed Looms

For those who have been at this game a long time, you have to think along with the crowd, and put yourself in their shoes.  Even though I usually think differently, you always have to be thinking about the motivations of others, not your own motivations.  Once you can game their actions based on those motivations, then you can be one step ahead, and "mentally" front run their orders, so to speak.

The crowd was a bit nervous about this State of the Union address by Donald Trump to Congress.  You could see it in the mid day pullback yesterday.  But when you set expectations so low for an event, and a fairly meaningless event at that, then it usually becomes a buy the news event.

Trump managed to jump over a midget hurdle last night.  Many were expecting a repeat of his gloomy inauguration speech, but he was more election night Trump than inauguration Trump.  It is all meaningless in the long run.  But in the short run, stocks run on sentiment, and overall, he beat those low expectations I mentioned yesterday, and equity investors have one less thing to worry about.  Thus the higher prices in pre market.

But what really caught my eye yesterday was what happened ahead of the speech.  Bill Dudley came out and basically told the market that you should price in a March rate hike.  He was trying to communicate that barring some really weak economic data or a crash in the S&P, you will get a rate hike in March.  Fed funds futures show March rate hike odds of 80% now.  That is almost automatic rate hike territory.  With the S&P 500 surging higher recently, that was the last straw as far as the Fed was concerned for March.  Look for Yellen and Fischer to come out hawkish on Friday to set the market up for a March rate hike.

On the one hand, it does surprise me a bit that the Fed is trying to beat analyst expectations, most of which were predicting a June rate hike, by hiking in March.  They almost NEVER do that.  They have almost always lagged market expectations, tapering slower than expected, hiking slower than expected.  This is maybe the first time since 1994 that they have actually tried to get ahead of market rate hike expectations.

This has caught some bond market bulls off sides today.  You can see it in the short end of the yield curve, taking a pounding today.  The 5-30 yr spread is flattening now down to 105 bps, which is near the lows since 2008.  While one rate hike in March is not going to make a big difference in the long run, it does show a new side of the Fed that we haven't seen in over 20 years!  A Fed that wants to show the market that it is no longer going to sit back and let the stock market rip higher.  Also, it would be a subtle FU to Trump, who wants the stock bubble to get bigger.  That is if the Fed hikes in March.  I think they will now, just because of how strong the S&P is.

We are getting closer to a good spot to short, now that we have the scarecrows back in the pool after the Trump speech.  The growing probability of a Fed rate hike in March is going to keep a lid on the market for the next couple of weeks.  It is very possible to see stocks and bonds go down together later this week / early next week.

No comments: