All eyes are on the FOMC’s policy statement due out this afternoon and if you were to read the financial press over the last few days you would think that the fate of the entire bull market hinges on whether two words are lifted from the policy statement. These statements from John Hilsenrath of the WSJ yesterday lit a fire under the market’s ass:
In a webcast Tuesday, I explained why I thought the Federal Reserve would stick with, but qualify, an important phrase in its policy statement Wednesday which assures near-zero interest rates for a “considerable time.” This was simply my best analysis of where I think the Fed is going based on what we have been reporting and what officials have said in the past.
Last night on CNBC’s Fast Money program, we had Nomura’s Jens Nordvig, top ranked FX strategist at Nomura Securities, who took the opposite stance. He suggested that the Fed would surprise complacent investors who think that the probability of rate hikes as soon as March 2015 are too low. Watch here:
I guess that’s what makes a market. For those looking to place a wager on who is probably right, at least on the language part (not the market reaction), my esteemed Fast Money colleague Brian Kelly made the point that Hilsenrath, who was long thought to be Bernanke’s go to “Trial Balloon Floater” in the media, likely got the news straight from the horse’s mouth.
It didn’t surprise me that equities rallied on the thought that the Fed, despite nearing the end of QE, would continue to jawbone rates lower for “considerable time.” What did surprise me is that bonds (measured by the TLT) closed on the lows of the day, down 40 bps. As I write, the TLT is up about 50 bps, so maybe yesterday’s price action was just a short lived dislocation, but I would guess that the bond market’s reaction today will be the one to watch for broader market implications.
We have made this point on more than one occasion in the last couple months – the S&P 500 appears to be one of the few risk assets lacking movement over this time period. We have seen fairly dramatic (at least on a relative basis to U.S. equities) volatility in currencies, commodities, bonds, and even European equities, but the SPX remains the stalwart.
I would add one more point heading into the Fed’s statement. While no mention of stretched valuations is likely in the statement, investors should listen keenly during the 2:30pm press conference for some hints. Will Chair Yellen be asked her opinion on current equity market valuations? Will she update her views on biotech and social media? Those are the two sectors Chair Yellen singled out in her July testimony to Congress and caused a short term panic.
In that sense, the press conference is probably more important than the statement itself, whether “considerable time” is in there or not. The press conference will be the platform for Chair Yellen to guide the market towards the Fed’s expected action path, while allowing for some wiggle room if the circumstances change in the interim. While there will be plenty of trigger happy traders who are quick to react to the 2:00 pm EDT statement, we’d rather wait until the tone and language of the press conference to get a better sense for any changes in the macro landscape.